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.
The following table summarizes DTE Energy's financial results:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||||||
| Net Income Attributable to DTE Energy Company | $ | 201 | $ | 37 | $ | 646 | $ | 431 | |||||||||||||||
| Diluted Earnings per Common Share | $ | 0.97 | $ | 0.19 | $ | 3.13 | $ | 2.22 |
The increases in Net Income Attributable to DTE Energy Company for both the three and six months ended June 30, 2023 were primarily due to higher earnings in the Energy Trading segment. The increase for the six-month period was also due to higher earnings in the DTE Vantage and Corporate and Other segments, partially offset by lower earnings in the Electric and Gas segments.
STRATEGY
DTE Energy's strategy is to achieve long-term earnings per share 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 plans to reduce the carbon emissions of its electric utility operations by 32% by the end of 2023, 65% in 2028, 85% in 2032, and 90% by 2040 from 2005 carbon emissions levels. DTE Energy plans to end its use of coal-fired power plants in 2032, pending approval by the MPSC, and is committed to a net zero carbon emissions goal by 2050 for its electric and gas utility operations.
To achieve the targeted carbon reduction goals at the electric utility, DTE Energy will continue its transition away from coal-powered energy sources and is replacing or offsetting the generation from these facilities with renewable energy, natural gas, battery storage, 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 advancement of emerging technologies such as long-duration storage, modular nuclear reactors, and carbon capture and sequestration, and how these technologies may support clean, reliable generation and customer affordability.
For the gas utility, DTE Energy aims to cut carbon emissions across the entire value chain. DTE Energy plans to reduce the carbon emissions from its gas utility operations by 65% by 2030 and 80% by 2040, and is committed to a goal of net zero emissions by 2050 from internal gas operations and gas suppliers. To achieve net zero, 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 also aims to help DTE Gas customers reduce their emissions by approximately 35% by 2040 by increasing energy efficiency, pursuing advanced technologies such as hydrogen and carbon capture and sequestration, 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 expects its goals for customer affordability to be aided by operational efficiencies and new opportunities resulting from the Inflation Reduction Act enacted in August 2022. Such opportunities include tax credits for renewable energy, nuclear generation, energy storage, and carbon capture and sequestration, which are expected to reduce the cost of owning related assets and reduce customer rate impacts from any future cost recoveries. 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 attractive returns and 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 financing. 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 will 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 achieve goals for carbon emission reductions. Capital plans may be regularly updated as these requirements and goals evolve and may be subject to regulatory approval.
DTE Electric's capital investments over the 2023-2027 period are estimated at $18 billion, comprised of $9 billion for distribution infrastructure, $4 billion for base infrastructure, and $5 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 and has announced plans to retire its remaining six coal-fired generating units. DTE Electric plans to convert the two units at the Belle River facility from a base load coal plant to a natural gas peaking resource in 2025-2026. The four units at the Monroe facility are expected to be retired in two stages in 2028 and 2032. Generation from the retired facilities will continue to be replaced or offset with a combination of renewables, energy waste reduction, demand response, battery storage, and natural gas fueled generation.
DTE Gas' capital investments over the 2023-2027 period are estimated at $3.6 billion, comprised of $2.0 billion for base infrastructure and $1.6 billion for the gas renewal program, which includes main and service renewals, meter move-out, and pipeline integrity projects.
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 $1.0 billion to $1.5 billion from 2023-2027 for renewable energy projects and custom energy solutions, while expanding into carbon capture and sequestration.
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.
For further discussion of environmental matters, see Note 12 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 and storage;
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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 wellbeing, 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
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Net Income (Loss) Attributable to DTE Energy by Segment | |||||||||||||||||||||||
| Electric | $ | 178 | $ | 186 | $ | 279 | $ | 387 | |||||||||||||||
| Gas | 24 | 6 | 195 | 202 | |||||||||||||||||||
| DTE Vantage | 26 | 28 | 53 | 42 | |||||||||||||||||||
| Energy Trading | 31 | (127) | 169 | (136) | |||||||||||||||||||
| Corporate and Other | (58) | (56) | (50) | (64) | |||||||||||||||||||
| Net Income Attributable to DTE Energy Company | $ | 201 | $ | 37 | $ | 646 | $ | 431 |
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Operating Revenues | |||||||||||||||||||||||
| Utility operations | $ | 1,326 | $ | 1,566 | $ | 2,701 | $ | 3,052 | |||||||||||||||
| Non-utility operations | 3 | 4 | 7 | 8 | |||||||||||||||||||
| 1,329 | 1,570 | 2,708 | 3,060 | ||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel and purchased power — utility | 313 | 513 | 675 | 950 | |||||||||||||||||||
| Operation and maintenance | 313 | 391 | 723 | 779 | |||||||||||||||||||
| Depreciation and amortization | 332 | 305 | 652 | 602 | |||||||||||||||||||
| Taxes other than income | 83 | 84 | 168 | 172 | |||||||||||||||||||
| 1,041 | 1,293 | 2,218 | 2,503 | ||||||||||||||||||||
| Operating Income | 288 | 277 | 490 | 557 | |||||||||||||||||||
| Other (Income) and Deductions | 91 | 88 | 175 | 164 | |||||||||||||||||||
| Income Tax Expense | 19 | 3 | 36 | 6 | |||||||||||||||||||
| Net Income Attributable to DTE Energy Company | $ | 178 | $ | 186 | $ | 279 | $ | 387 | |||||||||||||||
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 (some of which includes intra-segment activity that is eliminated in consolidation) and the classification of certain benefit costs. Refer to Note 13 to the Consolidated Financial Statements, "Retirement Benefits and Trusteed Assets" for additional information.
Operating Revenues decreased $241 million and $352 million in the three and six months ended June 30, 2023, respectively. Revenues associated with certain mechanisms and surcharges, including recovery of fuel and purchased power, are offset by related expenses elsewhere in the Registrants' Consolidated Statements of Operations. The decrease in both periods was due to the following:
| Three Months | Six Months | ||||||||||
| (In millions) | |||||||||||
| Power Supply Cost Recovery | $ | (144) | $ | (232) | |||||||
| Weather | (68) | (117) | |||||||||
| Base sales | (27) | (57) | |||||||||
| COVID-19 voluntary refund amortization in 2022 | (8) | (16) | |||||||||
| Interconnection sales volumes and rates | (32) | (3) | |||||||||
| Rate mix | (5) | 10 | |||||||||
| Implementation of new rates | 7 | 15 | |||||||||
| Regulatory mechanism - RPS | 22 | 25 | |||||||||
| Other regulatory mechanisms and other(a) | 14 | 23 | |||||||||
| $ | (241) | $ | (352) |
(a)Primarily includes regulatory mechanisms relating to DTE Securitization and EWR.
Revenue results are impacted by changes in sales volumes, which are summarized in the table below:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands of MWh) | |||||||||||||||||||||||
| DTE Electric Sales | |||||||||||||||||||||||
| Residential | 3,314 | 3,751 | 6,778 | 7,590 | |||||||||||||||||||
| Commercial | 3,884 | 4,010 | 7,730 | 7,960 | |||||||||||||||||||
| Industrial | 2,159 | 2,139 | 4,275 | 4,193 | |||||||||||||||||||
| Other | 44 | 46 | 100 | 103 | |||||||||||||||||||
| 9,401 | 9,946 | 18,883 | 19,846 | ||||||||||||||||||||
| Interconnection sales | 1,320 | 1,191 | 2,915 | 1,785 | |||||||||||||||||||
| Total DTE Electric Sales | 10,721 | 11,137 | 21,798 | 21,631 | |||||||||||||||||||
| DTE Electric Deliveries | |||||||||||||||||||||||
| Retail and wholesale | 9,401 | 9,946 | 18,883 | 19,846 | |||||||||||||||||||
| Electric retail access, including self-generators(a) | 1,098 | 1,126 | 2,140 | 2,216 | |||||||||||||||||||
| Total DTE Electric Sales and Deliveries | 10,499 | 11,072 | 21,023 | 22,062 |
(a)Represents deliveries for self-generators that have purchased power from alternative energy suppliers to supplement their power requirements.
Fuel and purchased power — utility expense decreased $200 million and $275 million in the three and six months ended June 30, 2023, respectively. The decrease in both periods was due to the following:
| Three Months | Six Months | ||||||||||
| (In millions) | |||||||||||
| Purchased power - lower market prices and lower purchase volumes due to lower demand | $ | (114) | $ | (245) | |||||||
| Coal - lower consumption due to coal plant retirements, partially offset by higher prices | (60) | (71) | |||||||||
| Nuclear fuel - higher amortization due to refueling outage in 2022 | 9 | 21 | |||||||||
| Gas - higher consumption primarily due to Blue Water Energy Center, offset by lower prices | (20) | 30 | |||||||||
| Other | (15) | (10) | |||||||||
| $ | (200) | $ | (275) |
Operation and maintenance expense decreased $78 million and $56 million in the three and six months ended June 30, 2023, respectively. The decrease in the second quarter was primarily due to lower plant generation expense of $44 million, lower corporate support costs of $11 million, lower legal expense of $11 million, and lower benefits and other compensation expense of $10 million. The decrease in the six-month period was primarily due to lower plant generation expense of $94 million, lower benefits and other compensation expense of $30 million, lower corporate support costs of $15 million, and lower legal expense of $8 million. These decreases were partially offset by higher distribution operations expense of $81 million (primarily due to higher storm restoration costs), higher EWR expense of $5 million, and higher RPS expense of $5 million. For both the second quarter and six-month period, the lower plant generation expense was primarily due to lower outage costs and coal plant retirements, and the lower benefits and other compensation expense was primarily due to the deferral of pension costs authorized in the November 2022 rate order from the MPSC.
Depreciation and amortization expense increased $27 million and $50 million in the three and six months ended June 30, 2023, respectively. The increase in both periods was primarily due to a higher depreciable base.
Taxes other than income decreased $1 million and $4 million in the three and six months ended June 30, 2023, respectively. The decrease in both periods was primarily due to lower payroll taxes.
Other (Income) and Deductions increased $3 million and $11 million in the three and six months ended June 30, 2023, respectively. The increase in the second quarter was primarily due to higher non-operating retirement benefits expense of $9 million and higher net interest expense of $7 million, partially offset by a favorable change in investment earnings of $11 million and higher AFUDC equity of $3 million. The increase in the six-month period was primarily due to higher non-operating benefits expense of $17 million and higher net interest expense of $16 million, partially offset by a favorable change in investment earnings of $17 million and higher AFUDC equity of $5 million.
Income Tax Expense increased $16 million and $30 million in the three and six months ended June 30, 2023, respectively. The increase in the second quarter was primarily due to lower amortization of the TCJA regulatory liability, partially offset by state tax benefits resulting from the settlement of a state tax audit. The increase in the six-month period was primarily due to lower amortization of the TCJA regulatory liability, partially offset by lower taxes resulting from lower earnings and the state tax audit settlement.
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, 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 February 10, 2023 requesting an increase in base rates of $622 million based on a projected twelve-month period ending November 30, 2024, and an increase in return on equity from 9.9% to 10.25%. The requested increase in base rates is primarily due to increased investments in plant involving generation and the electric distribution system, as well as related increases to depreciation and property tax expenses. These investments will support DTE Energy's goals to reduce carbon emissions and improve power reliability. The requested increase in base rates is also due to a projected sales decline from the level included in current rates and inflationary impacts on operating and interest costs. A final MPSC order in this case is expected in December 2023.
On April 3, 2023, DTE Electric filed an application with the MPSC requesting a financing order to approve the securitization of $496 million of qualified costs related to the net book value of the St. Clair and Trenton Channel generation plants. The filing requested recovery of these qualifying costs from DTE Electric's customers. The MPSC issued a financing order on June 22, 2023 authorizing DTE Electric to proceed with the issuance of Securitization bonds for qualified costs up to $602 million, increased for the inclusion of deferred income taxes. The financing order further authorized customer charges for the timely recovery of debt service costs on the Securitization bonds and other ongoing qualified costs. Securitization financing is expected to occur in the fourth quarter 2023.
In November 2022, DTE Electric filed an Integrated Resource Plan (IRP) with the MPSC, a comprehensive plan to meet the electricity needs of customers over the next 20 years. The IRP included details on planned coal plant retirements and replacement generation, including investments in renewables and battery storage, with a focus on providing increasingly clean, reliable, and affordable electricity to customers. On July 12, 2023, DTE Energy announced that DTE Electric reached a settlement agreement with the various stakeholders involved in the IRP. The MPSC issued an order approving the settlement agreement on July 26, 2023. DTE Electric is currently assessing the impacts from the settlement agreement on the consolidated financial statements for the third quarter 2023, including regulatory treatment for the recovery of plant-related costs at the Belle River and Monroe power plants. As a result of the settlement agreement, DTE Electric is also expecting to securitize a portion of these plant-related costs in future periods.
GAS
The Gas segment consists principally of DTE Gas. Gas results and outlook are discussed below:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Operating Revenues — Utility operations | $ | 311 | $ | 362 | $ | 1,018 | $ | 1,128 | |||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Cost of gas — utility | 54 | 117 | 308 | 397 | |||||||||||||||||||
| Operation and maintenance | 126 | 140 | 251 | 275 | |||||||||||||||||||
| Depreciation and amortization | 51 | 46 | 102 | 93 | |||||||||||||||||||
| Taxes other than income | 28 | 27 | 59 | 55 | |||||||||||||||||||
| Asset (gains) losses and impairments, net | — | — | (1) | — | |||||||||||||||||||
| 259 | 330 | 719 | 820 | ||||||||||||||||||||
| Operating Income | 52 | 32 | 299 | 308 | |||||||||||||||||||
| Other (Income) and Deductions | 19 | 23 | 41 | 43 | |||||||||||||||||||
| Income Tax Expense | 9 | 3 | 63 | 63 | |||||||||||||||||||
| Net Income Attributable to DTE Energy Company | $ | 24 | $ | 6 | $ | 195 | $ | 202 |
Operating Revenues — Utility operations decreased $51 million and $110 million in the three and six months ended June 30, 2023, respectively. Revenues associated with certain mechanisms and surcharges, including recovery of the cost of gas, are offset by related expenses elsewhere in DTE Energy's Consolidated Statements of Operations. The decrease in both periods was due to the following:
| Three Months | Six Months | ||||||||||
| (In millions) | |||||||||||
| Gas Cost Recovery | $ | (63) | $ | (89) | |||||||
| Weather | (7) | (62) | |||||||||
| Voluntary refund | 2 | 2 | |||||||||
| Regulatory mechanism - EWR | 3 | 3 | |||||||||
| Base sales | 1 | 7 | |||||||||
| Infrastructure recovery mechanism | 9 | 19 | |||||||||
| Other | 4 | 10 | |||||||||
| $ | (51) | $ | (110) |
Revenue results are impacted by changes in sales volumes, which are summarized in the table below:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In Bcf) | |||||||||||||||||||||||
| Gas Markets | |||||||||||||||||||||||
| Gas sales | 19 | 21 | 81 | 92 | |||||||||||||||||||
| End-user transportation | 39 | 36 | 89 | 91 | |||||||||||||||||||
| 58 | 57 | 170 | 183 | ||||||||||||||||||||
| Intermediate transportation | 132 | 129 | 280 | 279 | |||||||||||||||||||
| Total Gas sales | 190 | 186 | 450 | 462 |
Cost of gas — utility expense decreased $63 million and $89 million in the three and six months ended June 30, 2023, respectively. The decrease in the second quarter was primarily due to a lower cost of gas of $49 million and lower sales volumes of $14 million. The decrease in the six-month period was primarily due to lower sales volumes of $57 million and a lower cost of gas of $32 million.
Operation and maintenance expense decreased $14 million and $24 million in the three and six months ended June 30, 2023, respectively. The decrease in the second quarter was primarily due to lower gas operations expense of $13 million and lower corporate support costs of $5 million, partially offset by higher legal expense of $3 million and higher benefits and other compensation expense of $2 million. The decrease in the six-month period was primarily due to lower gas operations expense of $19 million and lower corporate support costs of $9 million, partially offset by higher legal expense of $3 million and higher uncollectible expense of $2 million.
Depreciation and amortization expense increased $5 million and $9 million in the three and six months ended June 30, 2023, respectively. The increase in both periods was primarily due to a higher depreciable base.
Taxes other than income expense increased $1 million and $4 million in the three and six months ended June 30, 2023, respectively. The increase in both periods was primarily due to higher property taxes.
Other (Income) and Deductions decreased $4 million and $2 million in the three and six months ended June 30, 2023, respectively. The decrease in the second quarter was primarily due to a favorable change in investment earnings of $5 million. The decrease in the six-month period was primarily due to a favorable change in investment earnings of $8 million, partially offset by higher net interest expense of $5 million.
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, and benefit plan design changes. 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 custom energy solutions to industrial, commercial, and institutional customers. DTE Vantage results and outlook are discussed below:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Operating Revenues — Non-utility operations | $ | 189 | $ | 220 | $ | 373 | $ | 399 | |||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel, purchased power, and gas — non-utility | 96 | 113 | 190 | 193 | |||||||||||||||||||
| Operation and maintenance | 63 | 65 | 121 | 130 | |||||||||||||||||||
| Depreciation and amortization | 12 | 13 | 25 | 26 | |||||||||||||||||||
| Taxes other than income | 2 | 1 | 5 | 5 | |||||||||||||||||||
| Asset (gains) losses and impairments, net | 3 | (5) | 3 | (5) | |||||||||||||||||||
| 176 | 187 | 344 | 349 | ||||||||||||||||||||
| Operating Income | 13 | 33 | 29 | 50 | |||||||||||||||||||
| Other (Income) and Deductions | (9) | (2) | (18) | (1) | |||||||||||||||||||
| Income Taxes | |||||||||||||||||||||||
| Expense | 6 | 8 | 13 | 12 | |||||||||||||||||||
| Tax credits | (10) | (1) | (19) | (3) | |||||||||||||||||||
| (4) | 7 | (6) | 9 | ||||||||||||||||||||
| Net Income Attributable to DTE Energy Company | $ | 26 | $ | 28 | $ | 53 | $ | 42 |
Operating Revenues — Non-utility operations decreased $31 million and $26 million in the three and six months ended June 30, 2023, respectively. The decrease in both periods was due to the following:
| Three Months | Six Months | ||||||||||
| (In millions) | |||||||||||
| Lower sales and prices in the Renewables business | $ | (9) | $ | (26) | |||||||
| Lower demand and prices in the On-site business | (13) | (18) | |||||||||
| Sale of project in the On-site business | (5) | (10) | |||||||||
| Demand and prices in the Steel business | (6) | 29 | |||||||||
| Other | 2 | (1) | |||||||||
| $ | (31) | $ | (26) |
Fuel, purchased power, and gas — non-utility expense decreased $17 million and $3 million in the three and six months ended June 30, 2023, respectively. The decrease in both periods was due to the following:
| Three Months | Six Months | ||||||||||
| (In millions) | |||||||||||
| Lower demand and prices in the On-site business | $ | (13) | $ | (18) | |||||||
| Sale of project in the On-site business | — | (2) | |||||||||
| Demand and prices in the Steel business | (4) | 19 | |||||||||
| Other | — | (2) | |||||||||
| $ | (17) | $ | (3) |
Operation and maintenance expense decreased $2 million and $9 million in the three and six months ended June 30, 2023, respectively. The decrease in both periods was primarily due to the sale of a project in the On-site business, which decreased expense by $3 million in the second quarter and $6 million for the six-month period.
Asset (gains) losses and impairments, net changed $8 million in the three and six months ended June 30, 2023. The change was primarily due to the settlement of contingent consideration relating to a 2017 acquisition in the Renewables business. The settlement resulted in a loss of $2 million in the second quarter 2023 compared to a gain of $3 million recorded in the second quarter 2022.
Other (Income) and Deductions increased $7 million and $17 million in the three and six months ended June 30, 2023, respectively. The increase in the second quarter was primarily due to $3 million higher equity investment earnings in the Renewables business and $2 million higher interest income associated with a new project in the Steel business. The increase in the six-month period was primarily due to $11 million higher equity investment earnings in the Renewables business and $4 million higher interest income associated with a new project in the Steel business.
Income Taxes — Tax credits increased $9 million and $16 million in the three and six months ended June 30, 2023, respectively. The increase in the second quarter was primarily due to investment tax credits related to a new project in the On-site business. The increase in the six-month period was primarily due to investment tax credits related to new projects in the On-site and Renewables businesses.
Outlook — DTE Vantage will continue to leverage its extensive energy-related operating experience and project management capability to develop additional renewable natural gas projects and other projects that will provide customer specific energy solutions. DTE Vantage is also developing decarbonization opportunities relating to carbon capture and sequestration 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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Operating Revenues — Non-utility operations | $ | 904 | $ | 2,832 | $ | 2,472 | $ | 5,035 | |||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Purchased power, gas, and other — non-utility | 839 | 2,969 | 2,195 | 5,159 | |||||||||||||||||||
| Operation and maintenance | 18 | 16 | 39 | 35 | |||||||||||||||||||
| Depreciation and amortization | 1 | 1 | 2 | 2 | |||||||||||||||||||
| Taxes other than income | 1 | 2 | 4 | 5 | |||||||||||||||||||
| 859 | 2,988 | 2,240 | 5,201 | ||||||||||||||||||||
| Operating Income (Loss) | 45 | (156) | 232 | (166) | |||||||||||||||||||
| Other (Income) and Deductions | 4 | 13 | 7 | 15 | |||||||||||||||||||
| Income Tax Expense (Benefit) | 10 | (42) | 56 | (45) | |||||||||||||||||||
| Net Income (Loss) Attributable to DTE Energy Company | $ | 31 | $ | (127) | $ | 169 | $ | (136) |
Operating Revenues — Non-utility operations decreased $1,928 million and $2,563 million in the three and six months ended June 30, 2023, respectively. The following tables detail changes relative to comparable prior periods:
| Three Months | |||||
| (In millions) | |||||
| Gas structured and gas transportation strategies - ($1,891) primarily due to lower gas prices, ($46) settled financial hedges | $ | (1,937) | |||
| Unrealized MTM - $88 gains compared to $25 gains in the prior period | 63 | ||||
| Other realized gain (loss) | (54) | ||||
| $ | (1,928) |
| Six Months | |||||
| (In millions) | |||||
| Gas structured and gas transportation strategies - ($2,626) primarily due to lower gas prices, ($16) settled financial hedges | $ | (2,642) | |||
| Unrealized MTM - $84 gains compared to ($103) losses in the prior period | 187 | ||||
| Other realized gain (loss) | (108) | ||||
| $ | (2,563) |
Purchased power, gas, and other — non-utility expense decreased $2,130 million and $2,964 million in the three and six months ended June 30, 2023, respectively. The following tables detail changes relative to comparable prior periods:
| Three Months | |||||
| (In millions) | |||||
| Gas structured and gas transportation strategies - primarily lower gas prices | $ | (1,933) | |||
| Unrealized MTM - $64 losses compared to $165 losses in the prior period | (101) | ||||
| Other realized (gain) loss | (96) | ||||
| $ | (2,130) |
| Six Months | |||||
| (In millions) | |||||
| Gas structured and gas transportation strategies - primarily lower gas prices | $ | (2,658) | |||
| Unrealized MTM - ($83) gains compared to $100 losses in the prior period | (183) | ||||
| Other realized (gain) loss | (123) | ||||
| $ | (2,964) |
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.
Operating Income (Loss) increased $201 million for the three months ended June 30, 2023, which includes $168 million of timing related gains primarily related to gas strategies that will reverse in future periods as the underlying contracts settle. The increase also includes $4 million of timing related losses primarily related to gas strategies that were recognized in previous periods and reversed in the current period as the underlying contracts settled.
Operating Income (Loss) increased $398 million for the six months ended June 30, 2023, which includes $438 million of timing related gains primarily related to gas strategies that will reverse in future periods as the underlying contracts settle. The increase also includes $26 million of timing related losses primarily related to gas strategies that were recognized in previous periods that reversed in the current period as the underlying contracts settled.
Other (Income) and Deductions decreased $9 million and $8 million in the three and six months ended June 30, 2023, respectively. The decrease in both periods was primarily due to $10 million 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 7 and 8 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 $58 million and $50 million for the three and six months ended June 30, 2023, respectively, represents an increase of $2 million and a decrease of $14 million from the net loss of $56 million and $64 million in the comparable 2022 periods. The increase in the second quarter was primarily due to higher net interest expense, partially offset by effective income tax rate adjustments and lower state income taxes. The decrease in the six-month period was primarily due to effective income tax rate adjustments, lower equity investment losses, lower corporate overhead costs, and lower state income taxes, partially offset by higher net interest expense.
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 2023 will be approximately $3.2 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 $4.2 billion in 2023. 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.
| Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | $ | 43 | $ | 35 | |||||||
| Net cash from operating activities | 1,759 | 1,136 | |||||||||
| Net cash used for investing activities | (1,958) | (1,568) | |||||||||
| Net cash from financing activities | 197 | 479 | |||||||||
| Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | (2) | 47 | |||||||||
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 41 | $ | 82 |
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 increased by $623 million in 2023. The increase was primarily due to increases in Net Income, Depreciation and amortization, Deferred income taxes, and cash from working capital items.
The change in working capital items in 2023 was primarily due to increases in cash related to Accounts receivable and Regulatory assets and liabilities, partially offset by decreases in cash related to Accounts payable, Derivative assets and liabilities, and Other current and noncurrent assets and liabilities.
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 goals.
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 increased by $390 million in 2023 primarily due to an increase in utility plant and equipment expenditures.
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 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 decreased by $282 million in 2023 primarily due to decreases in cash related to Redemption of long-term debt and Short-term borrowings, net, partially offset by increases in cash related to the Issuance of long-term debt, net of issuance costs and Repurchase of common stock.
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. DTE Energy expects long-term growth in sales related to vehicle electrification, but no significant impacts in the near-term. Non-utility growth is expected from additional investments in the DTE Vantage segment, primarily related to renewable energy and custom energy solutions, while expanding into carbon capture and sequestration. DTE Vantage expects enhanced growth opportunities in decarbonization as a result of the Inflation Reduction Act enacted in August 2022, including tax credits for renewable natural gas and carbon capture projects.
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.
At the discretion of management and depending upon economic and financial market conditions, DTE Energy expects to issue up to $100 million of equity in 2023. DTE Energy anticipates these discretionary equity issuances to be made through contributions to the dividend reinvestment plan and/or employee benefit plans.
Over the long-term, DTE Energy does not have any equity commitments 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 $697 million in long-term debt, including securitization bonds and finance leases, maturing within twelve months. Repayment of the debt is expected to be made through internally generated funds and the issuance of short-term and/or long-term debt.
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 $0.8 billion in 2023. 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 derivative and non-derivative 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 environmental) and the provisions and maturities of the underlying transactions. As of June 30, 2023, 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 $448 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 | |||||||
| 5 | Regulatory Matters | |||||||
| 8 | Financial and Other Derivative Instruments | |||||||
| 9 | Long-Term Debt | |||||||
| 10 | Short-Term Credit Arrangements and Borrowings | |||||||
| 12 | Commitments and Contingencies | |||||||
| 13 | 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, 2022.
Liquidity
DTE Energy has approximately $2.4 billion of available liquidity at June 30, 2023, consisting primarily of cash and cash equivalents and amounts available under unsecured revolving credit agreements.
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 7 and 8 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 7 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, 2022 | $ | (224) | |||
| Reclassified to realized upon settlement | 9 | ||||
| Changes in fair value recorded to income | 157 | ||||
| Amounts recorded to unrealized income | 166 | ||||
| Changes in fair value recorded in Regulatory liabilities | 5 | ||||
| Amounts recorded in other comprehensive income, pre-tax | 3 | ||||
| Change in collateral | 43 | ||||
| MTM at June 30, 2023 | $ | (7) |
The table below shows the maturity of DTE Energy's MTM positions. The positions from 2026 and beyond principally represent longer tenor gas structured transactions:
| Source of Fair Value | 2023 | 2024 | 2025 | 2026 and Beyond | Total Fair Value | |||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||
| Level 1 | $ | (17) | $ | 18 | $ | 7 | $ | (1) | $ | 7 | ||||||||||||||||||||||
| Level 2 | 13 | (34) | 1 | (18) | (38) | |||||||||||||||||||||||||||
| Level 3 | (25) | 40 | 3 | (60) | (42) | |||||||||||||||||||||||||||
| MTM before collateral adjustments | $ | (29) | $ | 24 | $ | 11 | $ | (79) | (73) | |||||||||||||||||||||||
| Collateral adjustments | 66 | |||||||||||||||||||||||||||||||
| MTM at June 30, 2023 | $ | (7) |
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