DTE ENERGY COMPANY The following combined discussion is separately filed byDTE Energy andDTE Electric . However,DTE Electric does not make any representations as to information related solely toDTE Energy or the subsidiaries ofDTE Energy other than itself. EXECUTIVE OVERVIEWDTE Energy is a diversified energy company and is the parent company ofDTE Electric andDTE Gas , regulated electric and natural gas utilities engaged primarily in the business of providing electricity and natural gas sales, distribution, and storage services throughoutMichigan .DTE Energy also operates three energy-related non-utility segments with operations throughoutthe United States . The following table summarizesDTE Energy's financial results: Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 (In millions, except per share amounts) Net Income Attributable to DTE Energy Company$ 277 $ 182 $ 617 $ 583 Diluted Earnings per Common Share$ 1.44 $ 0.99
The increase in Net Income for the three months endedJune 30, 2020 was primarily due to higher earnings in the Electric, Gas Storage and Pipelines, and Corporate and Other segments, partially offset by lower earnings in the Gas segment. The increase in Net Income for the six months endedJune 30, 2020 was primarily due to higher earnings in the Gas Storage and Pipelines and Corporate and Other segments, partially offset by lower earnings in the Gas segment. During the first quarter 2020, the COVID-19 pandemic began impactingMichigan and the other service territories throughoutthe United States in which the Registrants operate.DTE Energy took certain safety precautions including directing employees to work remotely whenever possible and pausing all non-critical business activities. The spread of COVID-19 and efforts to contain the virus resulted in closures and reduced operations of businesses, governmental agencies, and other institutions. Beginning in May and continuing intoJune 2020 ,DTE Energy resumed business activities that had been temporarily suspended. Local businesses and other institutions also resumed operations as new cases of COVID-19 began to decline and government restrictions were reduced. The uncertainty around COVID-19 and its impact has contributed to volatility in financial markets, generally including significant losses in the first quarter 2020 and gains in the second quarter 2020. For certain non-qualified benefit plan trusts for which gains and losses affect earnings, the impacts to financial markets resulted in pre-tax investment losses of$9 million for the Electric segment and$1 millions for the Gas segment for the six months endedJune 30, 2020 . For the three months endedJune 30, 2020 , the Electric and Gas segments recognized pre-tax investment gains of$22 million and$2 million , respectively. Other impacts from the COVID-19 pandemic have included a reduction in sales volumes from commercial and industrial customers and an increase in sales volumes from residential customers within the Electric segment. COVID-19 has also impacted the Power and Industrial Projects segment, contributing to lower production in the REF business and lower demand in the Steel business. Operation and maintenance expense has been impacted by COVID-19,primarily in the Electric segment, due to higher costs for personal protective equipment and other health and safety related costs, including shift premiums and related expenses associated with the sequestration of certain employees critical to continued operations. Please see detailed explanations of segment performance in the following "Results of Operations" section. 58 --------------------------------------------------------------------------------
STRATEGY
DTE Energy's strategy is to achieve long-term earnings growth, a strong balance sheet, and an attractive dividend yield.DTE Energy's utilities are investing capital to improve customer reliability through investments in base infrastructure and new generation, and to comply with environmental requirements.DTE Energy expects that planned significant capital investments will result in earnings growth.DTE Energy is focused on executing plans to achieve operational excellence and customer satisfaction with a focus on customer affordability.DTE Energy operates in a constructive regulatory environment and has solid relationships with its regulators.DTE Energy is committed to reduce the carbon emissions of its electric utility operations by 32% by the early 2020s, 50% by 2030, and 80% by 2040 from the 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 reduction goals in the near term,DTE Energy will transition away from coal-powered sources and incorporate more renewable energy, energy waste reduction projects, demand response, and natural gas fueled generation.DTE Energy has already begun the transition in the way it produces power through the continued retirement of its aging coal-fired plants. Refer to the "Capital Investments" section below for further discussion.DTE Energy has significant investments in non-utility businesses.DTE Energy employs disciplined investment criteria when assessing growth opportunities that leverage its assets, skills, and expertise, and provides diversity in earnings and geography. Specifically,DTE Energy invests in targeted energy markets with attractive competitive dynamics where meaningful scale is in alignment with its risk profile.DTE Energy expects growth opportunities in the Gas Storage and Pipelines and Power and Industrial Projects segments. A key priority forDTE 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 INVESTMENTSDTE Energy's utility businesses require significant capital investments to maintain and improve the electric generation and electric and natural gas distribution infrastructure and to comply with environmental regulations and renewable energy requirements.DTE Electric's capital investments over the 2020-2024 period are estimated at$12.0 billion comprised of$4.0 billion for capital replacements and other projects,$5.0 billion for distribution infrastructure, and$3.0 billion for new generation.DTE Electric has retired five coal-fired generation units at the Trenton Channel,River Rouge , andSt. Clair facilities and has announced plans to retire its remaining twelve coal-fired generating units.River Rouge's final unit will retire in 2021 and five additional coal-fired generating units at Trenton Channel andSt. Clair will be retired in 2022. The remaining coal-fired generating units at theBelle River and Monroe facilities are expected to be retired by 2040. The retired facilities will be replaced with renewables, energy waste reduction, demand response, and natural gas fueled generation.DTE Gas' capital investments over the 2020-2024 period are estimated at$3.0 billion comprised of$1.4 billion for base infrastructure, and$1.6 billion for gas main renewal, meter move out, and pipeline integrity programs.DTE Electric andDTE 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. Gas Storage and Pipelines' capital investments over the 2020-2024 period are estimated at$2.2 billion to$2.7 billion for gathering and pipeline investments and expansions. Power and Industrial Projects' capital investments over the 2020-2024 period are estimated at$1.0 billion to$1.4 billion for industrial energy services and RNG projects. 59 -------------------------------------------------------------------------------- ENVIRONMENTAL MATTERS The Registrants are subject to extensive environmental regulations. 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 forDTE 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 forDTE Energy and for the energy industry.DTE Energy's strong utility base, combined with its integrated non-utility operations, position it well for long-term growth. Looking forward,DTE Energy will focus on several areas that are expected to improve future performance: •electric and gas customer satisfaction; •electric distribution system reliability; •new electric generation; •gas distribution system renewal; •rate competitiveness and affordability; •regulatory stability and investment recovery for the electric and gas utilities; •employee safety and engagement; •cost structure optimization across all business segments; •cash, capital, and liquidity to maintain or improve financial strength; and •investments that integrate assets and leverage skills and expertise.DTE Energy will continue to pursue opportunities to grow its businesses in a disciplined manner if it can secure opportunities that meet its strategic, financial, and risk criteria. In the near term,DTE Energy will continue to monitor the impact of the COVID-19 pandemic on supply chains, markets, counterparties, and customers, and any related impacts on the operating costs, customer demand, and recoverability of assets in our business segments that could materially impact the Registrants' financial results.DTE Energy expects the reduction in electric demand from commercial and industrial customers and increased demand from residential customers to continue in the near term. Operation and maintenance expenses will also continue to be impacted by the need for personal protective equipment and other safety-related costs.DTE Energy will continue to review the allowance for doubtful accounts for any additional risk related to COVID-19 and will monitor any ongoing challenges to production and demand in the Power and Industrial Projects segment.DTE Energy will also continue to monitor and evaluate the impact of any regulatory and legislative activities related to the COVID-19 pandemic. Refer to Note 6 to the Consolidated Financial Statements, "Regulatory Matters," for further information on current regulatory issues. 60 --------------------------------------------------------------------------------
The Registrants cannot predict the ultimate impact of these factors to our Consolidated Financial Statements as future developments involving COVID-19 and related impacts on economic and operating conditions are highly uncertain.
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, whichDTE 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 Power and Industrial Projects and Energy Trading segments. For the Power and Industrial Projects segment, Non-utility Margin primarily includes Operating Revenues net of Fuel, purchased power, and gas expenses. Operating Revenues include sales of refined coal to third parties and the affiliated Electric utility, metallurgical coke and related by-products, petroleum coke, renewable natural gas, and electricity, as well as rental income and revenues from utility-type consulting, management, and operational services. For the Energy Trading segment, Non-utility Margin includes revenue and realized and unrealized gains and losses from physical and financial power and gas marketing, optimization, and trading activities, net of Purchased power and gas related to these activities.DTE Energy evaluates its operating performance of these non-utility businesses using the measure of Operating Revenues net of Fuel, purchased power, and gas expenses. Utility Margin and Non-utility Margin are not measures calculated in accordance with GAAP and should be viewed as a supplement to and not a substitute for the results of operations presented in accordance with GAAP. Utility Margin and Non-utility Margin do not intend to represent operating income, the most comparable GAAP measure, as an indicator of operating performance and are not necessarily comparable to similarly titled measures reported by other companies. The following sections provide a detailed discussion of the operating performance and future outlook ofDTE 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, 2020 2019 2020 2019 (In millions) Net Income (Loss) Attributable toDTE Energy by Segment Electric$ 183 $ 133 $ 277 $ 280 Gas 1 8 122 159 Gas Storage and Pipelines 70 50 142 98 Power and Industrial Projects 25 29 55 55 Energy Trading (1) (6) 33 26 Corporate and Other (1) (32) (12) (35) Net Income Attributable to DTE Energy Company$ 277 $ 182 $ 617 $ 583 61
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ELECTRIC
The Results of Operations discussion forDTE Electric is presented in a reduced disclosure format in accordance with General Instruction H(2) of Form 10-Q.The Electric segment consists principally ofDTE Electric . Electric results are discussed below: Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 (In millions) Operating Revenues - Utility operations$ 1,309 $ 1,190 $ 2,521 $ 2,425 Fuel and purchased power - utility 340 322 634 668 Utility Margin 969 868 1,887 1,757 Operating Revenues - Non-utility operations 3 - 7 - Operation and maintenance 349 330 705 682 Depreciation and amortization 256 229 517 450 Taxes other than income 58 69 141 153 Asset (gains) losses and impairments, net 41 13 41 13 Operating Income 268 227 490 459 Other (Income) and Deductions 60 69 175 125 Income Tax Expense 25 25 38 54 Net Income Attributable to DTE Energy Company $ 183 $
133
Three Months Six Months
(In millions)
Implementation of new rates $ 53 $ 121
Weather 44 11
Base sales 15 10
Regulatory mechanism - TRM (2) (15)
Other regulatory mechanisms and other (9) 3
Increase in Utility Margin $ 101 $ 130
62
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Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(In thousands of MWh)
DTE Electric Sales
Residential 3,922 3,209 7,492 6,897
Commercial 3,520 4,068 7,429 8,145
Industrial 1,582 2,498 3,884 4,958
Other 48 48 108 111
9,072 9,823 18,913 20,111
Interconnection sales(a) 120 711 528 1,741
Total DTE Electric Sales 9,192 10,534 19,441 21,852
DTE Electric Deliveries
Retail and wholesale 9,072 9,823 18,913 20,111
Electric retail access, including
self-generators(b) 792 1,114 1,835 2,234
Total DTE Electric Sales and Deliveries 9,864 10,937 20,748 22,345
______________________________
(a)Represents power that is not distributed byDTE Electric . (b)Represents deliveries for self-generators that have purchased power from alternative energy suppliers to supplement their power requirements. Operating Revenues - Non-utility operations increased$3 million and$7 million in the three and six months endedJune 30, 2020 , respectively. The increase in both periods was due to renewable energy projects acquired by DTE Sustainable Generation inSeptember 2019 andJanuary 2020 . Operation and maintenance expense increased$19 million and$23 million in the three and six months endedJune 30, 2020 , respectively. The increase in the second quarter was primarily due to COVID-19 related expenses of$29 million associated with the health and safety of employees, and a deferral in 2019 of previously accrued expenses for the customer billing system allowed in theMay 2019 order in rate proceeding U-20162 of$11 million , partially offset by lower generation expense of$12 million , lower distribution operations expense of$9 million , and lower benefit expense of$1 million . The increase in the six-month period was primarily due to COVID-19 related expenses of$34 million associated with the health and safety of employees, and a deferral in 2019 of previously accrued expenses for the customer billing system allowed in theMay 2019 order in rate proceeding U-20162 of$11 million , partially offset by lower benefit expense of$7 million , lower distribution operations expense of$8 million , lower energy waste reduction expense of$4 million , and lower generation expense of$3 million . Depreciation and amortization expense increased$27 million and$67 million in the three and six months endedJune 30, 2020 , respectively. The increase in the second quarter was primarily due to a$25 million increase resulting from a higher depreciable base atDTE Electric and a$4 million increase resulting from new non-utility assets at DTE Sustainable Generation, partially offset by a decrease of$2 million associated with the TRM. The increase in the six-month period was primarily due to a$72 million increase resulting from a higher depreciable base atDTE Electric and a$7 million increase resulting from new non-utility assets at DTE Sustainable Generation, partially offset by a decrease of$12 million associated with the TRM Taxes other than income decreased$11 million and$12 million in the three and six months endedJune 30, 2020 , respectively. The decrease in the second quarter was primarily due to lower property taxes of$10 million as a result of a property tax settlement and lower payroll taxes of$2 million , which was primarily attributable to employee retention credits recognized pursuant to the CARES Act. The decrease in the six-month period was primarily due to lower property taxes of$9 million as a result of a property tax settlement and lower payroll taxes of$2 million , which was primarily attributable to employee retention credits recognized pursuant to the CARES Act. Asset (gains) losses and impairments, net increased$28 million in the three and six months endedJune 30, 2020 , respectively. The increase in both periods was due to a$41 million write-off of capital expenditures related to incentive compensation, which were disallowed in theMay 8, 2020 rate order from the MPSC, compared to a loss of$13 million for disallowance of other capital expenditures in 2019. 63 -------------------------------------------------------------------------------- Other (Income) and Deductions decreased$9 million and increased$50 million in the three and six months endedJune 30, 2020 , respectively. The decrease in the second quarter was primarily due to an increase in investment earnings (gain of$22 million in 2020 compared to a gain of$7 million in 2019), partially offset by$9 million of higher interest expense. The increase in the six-month period was primarily due to a change in investment earnings (loss of$9 million in 2020 compared to a gain of$24 million in 2019) and$15 million of higher interest expense. Income Tax Expense did not change and decreased$16 million in the three and six months endedJune 30, 2020 , respectively. For the second quarter, increases due to higher earnings were offset by amortization of the TCJA regulatory liability and higher production tax credits. The decrease in the six-month period was primarily due to lower earnings, amortization of the TCJA regulatory liability, and higher production tax credits. 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. OnJuly 9, 2020 , the MPSC approvedDTE Electric's request to accelerate amortization of the regulatory liability for non-plant-related accumulated deferred income tax balances that resulted from the TCJA.DTE Electric will increase amortization by$102 million beginning inMay 2021 , which will fully amortize this regulatory liability by the end of 2021 instead ofApril 2033 . The accelerated amortization will not impact customer rates and will allowDTE Electric to defer its next rate case filing previously set forJuly 2020 to at leastMarch 1, 2021 . Refer to Note 6 to the Consolidated Financial Statements, "Regulatory Matters" for additional information.DTE Electric is also monitoring the impacts of the COVID-19 pandemic on future operations and financial results. Refer to the "Executive Overview" and "Outlook" sections above forDTE Energy's consideration of COVID-19 impacts on our business segments.
GAS
The Gas segment consists principally ofDTE Gas . Gas results are discussed below: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (In millions) Operating Revenues - Utility operations$ 251 $ 243 $ 791 $ 888 Cost of gas - utility 42 43 220 284 Utility Margin 209 200 571 604 Operation and maintenance 120 118 241 246 Depreciation and amortization 38 34 75 69 Taxes other than income 19 19 44 43 Asset (gains) losses and impairments, net 14 - 14 - Operating Income 18 29 197 246 Other (Income) and Deductions 16 17 38 33 Income Tax Expense 1 4 37 54 Net Income Attributable to DTE Energy Company $ 1 $
8
Utility Margin increased$9 million and decreased$33 million in the three and six months endedJune 30, 2020 , respectively. Revenues associated with certain mechanisms and surcharges are offset by related expenses elsewhere inDTE Energy's Consolidated Statements of Operations. 64 --------------------------------------------------------------------------------
The following table details changes in various Utility Margin components relative to the comparable prior period:
Three Months Six Months
(In millions)
Infrastructure recovery mechanism 7 15
TCJA rate reduction (2) (8)
Weather 9 (34)
Other regulatory mechanisms and other (5) (6)
Increase (decrease) in Utility Margin
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(In Bcf)
Gas Markets
Gas sales 20 19 78 88
End-user transportation 38 38 95 96
58 57 173 184
Intermediate transportation 111 106 239 233
Total Gas sales 169 163 412 417
Operation and maintenance expense increased $2 million and decreased $5 million
in the three and six months ended June 30, 2020 , respectively. The increase in
the second quarter was primarily due to a $6 million adjustment in 2019 to defer
expenses previously accrued for a new customer billing system, partially offset
by lower gas operations expenses of $3 million in 2020. The decrease in the
six-month period was primarily due to lower gas operations expenses of $10
million , partially offset by the $6 million adjustment in 2019 to defer new
customer billing system expenses.
Depreciation and amortization expense increased $4 million and $6 million in the
three and six months ended June 30, 2020 , respectively. The increase in both
periods was primarily due to higher depreciable base.
Asset (gains) losses and impairments, net increased $14 million in both the
three and six months ended June 30, 2020 . The increase in both periods was
primarily due to the write-off of capital expenditures related to incentive
compensation that were determined to be probable of disallowance.
Other (Income) and Deductions decreased $1 million and increased $5 million in
the three and six months ended June 30, 2020 , respectively. The decrease in the
second quarter was primarily due to higher investment earnings of $2 million ,
partially offset by higher interest expense of $1 million . The increase in the
six-month period was primarily due to change in investment earnings (loss of $1
million in 2020 compared to a gain of $2 million in 2019) and higher interest
expense of $2 million .
Income Tax Expense decreased $3 million and $17 million in the three and six
months ended June 30, 2020 , respectively. The decrease in the second quarter was
primarily due to lower earnings and amortization of the TCJA regulatory
liability. The decrease in the six-month period was primarily due to lower
earnings and 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 Gas filed a rate case with the MPSC on November 25, 2019 requesting an
increase in base rates of $204 million based on a projected twelve-month period
ending September 30, 2021 . The requested increase in base rates is primarily
due to
65-------------------------------------------------------------------------------- an increase in net plant resulting from infrastructure investments and operating and maintenance expenses. The rate filing also requested an increase in return on equity from 10.0% to 10.5% and included projected changes in sales and working capital. OnJuly 17, 2020 ,DTE Gas reached a settlement with all intervening parties in the case and filed a settlement agreement authorizing the company to increase base rates by$110 million , reflecting a return on equity of 9.9%. The resulting rates are a net increase to customers of$51 million as an existing Infrastructure Recovery Mechanism (IRM) surcharge will be rolled into the new base rates. The settlement agreement also approved a$20 million annual increase to amortization of the regulatory liability for non-plant accumulated deferred income tax balances resulting from the TCJA. This increased amortization will cease uponDTE Gas receiving its next rate order. Pending MPSC approval of the settlement agreement, which is expected bySeptember 2020 ,DTE Gas will implement the increases to rates and amortization effectiveOctober 1, 2020 . Refer to Note 6 to the Consolidated Financial Statements, "Regulatory Matters" for additional information.DTE Gas is also monitoring the impacts of the COVID-19 pandemic on future operations and financial results. Refer to the "Executive Overview" and "Outlook" sections above forDTE Energy's consideration of COVID-19 impacts on our business segments. GAS STORAGE AND PIPELINES The Gas Storage and Pipelines segment consists of the non-utility gas pipelines and storage businesses. Gas Storage and Pipelines results are discussed below: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (In millions) Operating Revenues - Non-utility operations$ 172 $ 121 $ 342 $ 237 Cost of sales - Non-utility 4 1 8 1 Operation and maintenance 27 25 55 50 Depreciation and amortization 36 22 72 44 Taxes other than income 4 2 9 5 Operating Income 101 71 198 137 Other (Income) and Deductions 1 (3) (2) (9) Income Tax Expense 27 19 53 37 Net Income 73 55 147 109 Less: Net Income Attributable to Noncontrolling Interests 3 5 5 11 Net Income Attributable to DTE Energy Company $ 70 $
50
Operating Revenues - Non-utility operations increased$51 million and$105 million in the three and six months endedJune 30, 2020 , respectively. The increase in both periods was primarily due to the acquisition ofBlue Union . Cost of sales - Non-utility increased$3 million and$7 million in the three and six months endedJune 30, 2020 , respectively. The increase in both periods was primarily due to the acquisition ofBlue Union . Operation and maintenance expense increased$2 million and$5 million in the three and six months endedJune 30, 2020 , respectively. The increase in both periods was primarily due to the acquisition ofBlue Union , partially offset by cost savings initiatives. Taxes other than income increased$2 million and$4 million in the three and six months endedJune 30, 2020 , respectively. The increase in both periods was primarily due to the acquisition ofBlue Union . Depreciation and amortization expense increased$14 million and$28 million in the three and six months endedJune 30, 2020 , respectively. The increase in both periods was primarily due to the acquisition ofBlue Union . Other (Income) and Deductions decreased$4 million and$7 million in the three and six months endedJune 30, 2020 , respectively. The decrease in both periods was primarily due to interest expense related to theBlue Union acquisition, partially offset by higher earnings from pipeline investments. 66 -------------------------------------------------------------------------------- Income Tax Expense increased$8 million and$16 million in the three and six months endedJune 30, 2020 , respectively. The increase in both periods was primarily due to higher earnings. Net Income Attributable to Noncontrolling Interests decreased$2 million and$6 million in the three and six months endedJune 30, 2020 , respectively. The decrease in both periods was primarily due to theMay 2019 purchase of an additional 30% ownership interest in SGG. See Note 4 to the Consolidated Financial Statements, "Acquisitions," for discussion of the acquisition ofBlue Union and LEAP inDecember 2019 . Outlook - Significant expansion activities are underway to increase capacity of theBlue Union and LEAP assets, which provide natural gas gathering and other midstream services to producers located primarily inLouisiana . InJuly 2020 , the LEAP gathering pipeline achieved the final milestone of its construction and the assets are expected to be placed in service inAugust 2020 .DTE Energy believes its long-term agreements with producers and the quality of the natural gas reserves in theMarcellus /Utica andHaynesville shale regions soundly position the business for future revenues. Gas Storage and Pipelines will continue to execute quality investments, with a focus on continued organic growth from well-positioned existing assets. Recent declines in commodity prices can have a negative impact on customers of Gas Storage and Pipelines if sustained for an extended period.DTE Energy continues to work with its customers by executing short, medium, and long-term storage, gathering, and transportation contracts. Gas Storage and Pipelines is also monitoring the impacts of the COVID-19 pandemic on future operations and financial results. Refer to the "Executive Overview" and "Outlook" sections above forDTE Energy's consideration of COVID-19 impacts on our business segments. POWER AND INDUSTRIAL PROJECTS The Power and Industrial Projects segment is comprised primarily of projects that deliver energy and utility-type products and services to industrial, commercial, and institutional customers, produce reduced emissions fuel, and sell electricity and pipeline-quality gas from renewable energy projects. Power and Industrial Projects results are discussed below: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (In millions) Operating Revenues - Non-utility operations$ 219 $ 402 $ 526 $ 790 Fuel, purchased power, and gas - non-utility 153 320 378 624 Non-utility Margin 66 82 148 166 Operation and maintenance 66 83 135 164 Depreciation and amortization 17 17 35 34 Taxes other than income 2 2 6 6 Asset (gains) losses and impairments, net - - (10) - Operating Loss (19) (20) (18) (38) Other (Income) and Deductions (34) (26) (53) (53) Income Taxes Expense 6 3 11 6 Production Tax Credits (13) (18) (28) (39) (7) (15) (17) (33) Net Income 22 21 52 48 Less: Net Loss Attributable to Noncontrolling Interests (3) (8) (3) (7) Net Income Attributable to DTE Energy Company $ 25$ 29 $ 55 $ 55 67
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Operating Revenues - Non-utility operations decreased
Three Months Six Months
(In millions) Lower production and sale of membership interests in the REF business
$
(125)
Lower demand in the Steel business (56) (66)
Other (2) (4)
$ (183) $ (264)
Non-utility Margin decreased $16 million and $18 million in the three and six
months ended June 30, 2020 , respectively. The following table details changes in
Non-utility Margin relative to the comparable prior periods:
Three Months Six Months
(In millions)
Lower demand in the Steel business $
(17)
New projects offset by lower demand in the On-site business 3 4
Other (2) (1)
$ (16) $ (18)
Operation and maintenance expense decreased $17 million and $29 million in the
three and six months ended June 30, 2020 , respectively. The decrease in both
periods was primarily due to lower maintenance spending associated with lower
production in the current year.
Asset (gains) losses and impairments, net increased $10 million in the six
months ended June 30, 2020 . The increase in the six-month period was primarily
due to the write-off of environmental liabilities upon completing site
remediation in the Steel business and the sale of assets in the On-site
business.
Other (Income) and Deductions increased $8 million and did not change in the
three and six months ended June 30, 2020 , respectively. The increase in the
second quarter was primarily due to $11 million of selling profit associated
with the sale of membership interests in the REF business and new investment in
lease, $3 million of higher interest income associated with lease transactions
in the On-site business, and $5 million higher equity earnings at various
projects. These increases were partially offset by $10 million of lower
production in the REF business. For the six-month period, selling profit of $11
million associated with the sale of membership interest in the REF business and
new investment in lease and $6 million of higher interest income associated with
lease transactions in the On-site business were offset primarily by $13 million
of lower production in the REF business and change in insurance proceeds in the
Renewables business ($3 million received in 2019).
Income Taxes - Production Tax Credits decreased $5 million and $11 million in
the three and six months ended June 30, 2020 , respectively. The decrease in both
periods was primarily due to lower production in the REF business.
Net Loss Attributable to Noncontrolling Interests decreased $5 million and $4
million in the three and six months ended June 30, 2020 , respectively. The
decrease in both periods was primarily due to lower production in the REF
business.
Outlook - During June 2020 , DTE Energy executed an Energy Services Agreement
with a Canadian integrated steel manufacturing facility in Nanticoke, Ontario,
Canada to construct, own, and operate a 65 MW steam turbine generator, refurbish
existing boilers, and ancillary equipment. The project is expected to achieve
commercial operations in 2022 for a term of 20 years.
Power and Industrial Projects 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 in addition to optimizing the REF facilities until the
phase out at the end of 2021.
Power and Industrial Projects is currently assessing expected demand of
metallurgical coke and pulverized coal supplied to steel industry customers in
consideration of COVID-19 and other challenges within the steel industry.
Power and Industrial Projects is also monitoring all other impacts from the
COVID-19 pandemic on future operations and financial results. Refer to the
"Executive Overview" and "Outlook" sections above for DTE Energy's consideration
of COVID-19 impacts on our business segments.
68
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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 are discussed below:
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(In millions)
Operating Revenues - Non-utility operations $ 740 $ 1,113 $ 1,653 $ 2,414
Purchased power and gas - non-utility 719 1,100 1,560 2,335
Non-utility Margin 21 13 93 79
Operation and maintenance 18 17 41 36
Depreciation and amortization 2 2 3 3
Taxes other than income 1 1 3 3
Operating Income (Loss) - (7) 46 37
Other (Income) and Deductions 1 1 2 2
Income Tax Expense (Benefit) - (2) 11 9
Net Income (Loss) Attributable to DTE
Energy Company $ (1) $ (6) Operating Revenues - Non-utility operations decreased$373 million and$761 million in the three and six months endedJune 30, 2020 , respectively. The decrease in both periods was primarily due to a decrease in gas prices in the gas structured strategy. Non-utility Margin increased$8 million and$14 million in the three and six months endedJune 30, 2020 , 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 power and gas trading, and gas structured strategies(b) $ 25 Unfavorable results, primarily in the environmental trading strategy (16) 9 Realized Margins(a) Favorable results, primarily in gas structured, power full requirements, and gas transportation strategies(c) 21
Unfavorable results, primarily in environmental and power trading strategies
(22)
(1)
Increase in Non-utility Margin $ 8
_______________________________________
(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$6 million of timing related gains related to gas strategies which will reverse in future periods as the underlying contracts settle. (c)Amount includes$5 million of timing related losses related to gas strategies recognized in previous periods that reversed as the underlying contracts settled. 69 --------------------------------------------------------------------------------
Six Months
(In millions)
Unrealized Margins(a)
Favorable results, primarily in environmental trading, gas structured, power
trading, and power full requirements strategies $ 66
Unfavorable results, primarily in gas transportation and gas full requirements
strategies(b) (19)
47
Realized Margins(a)
Favorable results, primarily in power full requirements, gas storage, and gas
transportation strategies 19
Unfavorable results, primarily in environmental trading, gas structured, and gas
trading strategies(c) (52)
(33)
Increase in Non-utility Margin _______________________________________
(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$7 million of timing related losses related to gas strategies which will reverse in future periods as the underlying contracts settle. (c)Amount includes $4 million of timing related gains related to gas strategies recognized in previous periods that reversed as the underlying contracts settled. Operation and maintenance increased$1 million and$5 million in the three and six months endedJune 30, 2020 , respectively. The increase in the second quarter was due primarily to higher broker fees. The increase in the six-month period was primarily due to higher broker fees and compensation costs. 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. Energy Trading is also monitoring the impacts of the COVID-19 pandemic on future operations and financial results. Refer to the "Executive Overview" and "Outlook" sections above forDTE Energy's consideration of COVID-19 impacts on our business segments. CORPORATE AND OTHER Corporate and Other includes various holding company activities, holds certain non-utility debt, and holds energy-related investments. The net loss of$1 million and$12 million for the three and six months endedJune 30, 2020 , respectively, represents a decrease of$31 million and$23 million from the net loss of$32 million and$35 million in the comparable 2019 period. The decrease in both periods was primarily due to the carryback of 2018 net operating losses to 2013 pursuant to the CARES Act, which resulted in a$34 million reduction in Income Tax Expense. The decrease in both periods was partially offset by effective income tax rate adjustments. Refer to Note 2 to the Consolidated Financial Statements, "Significant Accounting Policies" for additional information. 70 -------------------------------------------------------------------------------- CAPITAL RESOURCES AND LIQUIDITY Cash RequirementsDTE 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 2020 will be approximately$3.0 billion .DTE Energy anticipates base level utility capital investments, including environmental, renewable, and energy waste reduction expenditures; expenditures for non-utility businesses; and contributions to equity method investees in 2020 of approximately$4.5 billion .DTE Energy plans to seek regulatory approval to include utility capital expenditures in regulatory rate base consistent with prior treatment. Capital spending for growth of existing or new non-utility businesses will depend on the existence of opportunities that meet strict risk-return and value creation criteria. Six Months Ended June 30, 2020 2019 (in millions) Cash, Cash Equivalents, and Restricted Cash, Beginning $ 93$ 76 Net cash from operating activities 1,681 1,367 Net cash used for investing activities (2,185) (1,514) Net cash from financing activities 1,032 133
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash
528 (14)
Cash, Cash Equivalents, and Restricted Cash, Ending $ 621 $ 62
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 $314 million in 2020. The increase is
primarily due to an increase in Net Income, Deferred income taxes, and
Depreciation and amortization, partially offset by a decrease in cash from
working capital items.
The change in working capital items in 2020 was primarily related to a decrease
in cash from Accounts receivable, net, Regulatory assets and liabilities, and
Inventories, partially offset by a decrease in cash used for Accounts payable
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 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 increased by $671 million in 2020
primarily due to an increase in Plant and equipment expenditures and
Acquisitions related to business combinations, net of cash acquired, as
described in Note 4 to the Consolidated Financial Statements.
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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 increased by $899 million in 2020 primarily
due to an increase in cash from Short-term borrowings, net and Issuance of
long-term debt, net of issuance costs, partially offset by an increase in
Redemptions of long-term debt. The change is also due to the Purchases of
noncontrolling interests, principally SGG, during the six months ended June 30,
2019 .
Outlook
DTE Energy expects cash flows from operations to increase over the long-term,
primarily as a result of growth from the utility and non-utility businesses.
Growth in the utilities is expected to be driven primarily by capital spending
which will increase the base from which rates are determined. Non-utility growth
is expected from additional investments, primarily in the Gas Storage and
Pipelines and Power and Industrial Projects segments.
DTE Energy may be impacted by the timing of collection or refund of various
recovery and tracking mechanisms, as a result of timing of MPSC orders. Energy
prices are likely to be a source of volatility with regard to working capital
requirements for the foreseeable future. DTE Energy continues its efforts to
identify opportunities to improve cash flows through working capital initiatives
and maintaining flexibility in the timing and extent of long-term capital
projects.
DTE Energy has approximately $0.7 billion in long-term debt, including finance
leases, maturing in the next twelve months. The repayment of the debt is
expected to be paid through internally generated funds or the issuance of
long-term debt.
DTE Energy has approximately $3.4 billion of available liquidity at June 30,
2020 , consisting of cash, amounts available under unsecured revolving credit
agreements, and unsecured term loans.
At the discretion of management and depending upon economic and financial market
conditions, DTE Energy expects to issue equity up to $300 million in 2020. If
issued, DTE Energy anticipates up to $185 million of these equity issuances will
be made through contributions to the qualified pension plans, including $160
million of DTE Electric contributions. DTE Energy does not anticipate making any
contributions to the other postretirement plans in 2020.
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 June 30, 2020 , 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 $368 million .
In April 2020 , Fitch Ratings downgraded DTE Energy's unsecured debt rating from
BBB+ to BBB. The downgrade primarily reflects increased leverage and business
risk associated with DTE Energy's acquisition of midstream natural gas assets in
December 2019 . Refer to Note 4 to the Consolidated Financial Statements,
"Acquisitions," for additional information. We do not expect the downgrade to
negatively impact DTE Energy's liquidity or access to the capital markets.
DTE Energy is also actively monitoring the impact of the COVID-19 pandemic on
capital markets and any related effects to our cost of capital. During the six
months ended June 30, 2020 , concerns over the pandemic led to an impact in
liquidity in the commercial paper market and increases to related borrowing
costs. Despite these impacts, the Registrants have maintained adequate liquidity
due to the availability of committed credit facilities, and by raising
additional liquidity through term loans and the public issuance of utility debt,
while paying off maturing commercial paper.
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DTE Energy believes it will have sufficient operating flexibility, cash
resources, and funding sources to maintain adequate amounts of liquidity and to
meet future operating cash and capital expenditure needs. However, virtually all
of DTE Energy's businesses are capital intensive, or require access to capital,
and the inability to access adequate capital could adversely impact earnings and
cash flows.
See Notes 6, 10, 11, 13, and 14 to the Consolidated Financial Statements,
"Regulatory Matters," "Long-Term Debt," "Short-Term Credit Arrangements and
Borrowings," "Commitments and Contingencies," and "Retirement Benefits and
Trusteed Assets," respectively.
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, 2019 $ 5
Reclassified to realized upon settlement -
Changes in fair value recorded to income 46
Amounts recorded to unrealized income 46
Changes in fair value recorded in regulatory liabilities 12
MTM at June 30, 2020 $ 63
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The table below shows the maturity of DTE Energy's MTM positions. The positions
from 2023 and beyond principally represent longer tenor gas structured
transactions:
Source of Fair Value 2020 2021 2022 2023 and Beyond Total Fair Value
(In millions)
Level 1 $ (21) $ (1) $ (3) $ (1) $ (26)
Level 2 19 30 (1) (5) 43
Level 3 32 15 13 (14) 46
MTM before collateral
adjustments $ 30 $ 44 $ 9 $ (20) 63
Collateral adjustments -
MTM at June 30, 2020 $ 63
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