Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2015
Commission File Number | Registrants; State of Incorporation; Address; and Telephone Number | I.R.S. Employer Identification No. | ||
1-11607 | DTE Energy Company (a Michigan corporation) One Energy Plaza Detroit, Michigan 48226-1279 313-235-4000 | 38-3217752 | ||
1-2198 | DTE Electric Company (a Michigan corporation) One Energy Plaza Detroit, Michigan 48226-1279 313-235-4000 | 38-0478650 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
DTE Energy Company (DTE Energy) Yes x No o DTE Electric Company (DTE Electric) Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
DTE Energy Yes x No o DTE Electric Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
DTE Energy | Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company) | ||||
DTE Electric | Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
DTE Energy Yes o No x DTE Electric Yes o No x
Number of shares of Common Stock outstanding at September 30, 2015:
Registrant | Description | Shares | |||
DTE Energy | Common Stock, without par value | 179,475,625 | |||
DTE Electric | Common Stock, $10 par value, directly owned by DTE Energy | 138,632,324 |
This combined Form 10-Q is filed separately by two registrants: DTE Energy and DTE Electric. Information contained herein relating to an individual registrant is filed by such registrant solely on its behalf. DTE Electric makes no representation as to information relating exclusively to DTE Energy.
DTE Electric, a wholly owned subsidiary of DTE Energy, meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format specified in General Instructions H(2) of Form 10-Q.
TABLE OF CONTENTS
Page | ||
DEFINITIONS
ARO | Asset Retirement Obligation |
ASU | Accounting Standards Update issued by the FASB |
CFTC | U.S. Commodity Futures Trading Commission |
DOE | U.S. Department of Energy |
DTE Electric | DTE Electric Company (a direct wholly owned subsidiary of DTE Energy) and subsidiary companies |
DTE Energy | DTE Energy Company, directly or indirectly the parent of DTE Electric, DTE Gas, and numerous non-utility subsidiaries |
DTE Gas | DTE Gas Company (an indirect wholly owned subsidiary of DTE Energy) and subsidiary companies |
EPA | U.S. Environmental Protection Agency |
FASB | Financial Accounting Standards Board |
FERC | Federal Energy Regulatory Commission |
FOV | Finding of Violation |
FTRs | Financial Transmission Rights are financial instruments that entitle the holder to receive payments related to costs incurred for congestion on the transmission grid. |
GCR | A Gas Cost Recovery mechanism authorized by the MPSC that allows DTE Gas to recover through rates its natural gas costs |
MDEQ | Michigan Department of Environmental Quality |
MGP | Manufactured Gas Plant |
MPSC | Michigan Public Service Commission |
MTM | Mark-to-market |
NAV | Net Asset Value |
NEIL | Nuclear Electric Insurance Limited |
NEXUS | NEXUS Gas Transmission, LLC |
Non-utility | An entity that is not a public utility. Its conditions of service, prices of goods and services, and other operating related matters are not directly regulated by the MPSC. |
NOV | Notice of Violation |
NRC | U.S. Nuclear Regulatory Commission |
PLD | City of Detroit's Public Lighting Department |
Production tax credits | Tax credits as authorized under Sections 45K and 45 of the Internal Revenue Code that are designed to stimulate investment in and development of alternate fuel sources. The amount of a production tax credit can vary each year as determined by the Internal Revenue Service. |
PSCR | A Power Supply Cost Recovery mechanism authorized by the MPSC that allows DTE Electric to recover through rates its fuel, fuel-related, and purchased power costs |
REF | Reduced Emissions Fuel |
Registrant(s) | DTE Energy and DTE Electric |
Retail access | Michigan legislation provided customers the option of access to alternative suppliers for electricity and natural gas |
Securitization | DTE Electric financed specific stranded costs at lower interest rates through the sale of rate reduction bonds by a wholly-owned special purpose entity, The Detroit Edison Securitization Funding LLC |
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DEFINITIONS
TRIA | Terrorism Risk Insurance Program Reauthorization Act of 2015 |
TRM | A Transitional Reconciliation Mechanism authorized by the MPSC that allows DTE Electric to recover through rates the deferred net incremental revenue requirement associated with the transition of PLD customers to DTE Electric's distribution system |
VEBA | Voluntary Employees Beneficiary Association |
VIE | Variable Interest Entity |
Units of Measurement | |
Bcf | Billion cubic feet of natural gas |
BTU | Heat value (energy content) of fuel |
kWh | Kilowatthour of electricity |
MMBtu | One million BTU |
MW | Megawatt of electricity |
MWh | Megawatthour of electricity |
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FILING FORMAT
This combined Form 10-Q is separately filed by DTE Energy and DTE Electric. Information in this combined Form 10-Q relating to each individual Registrant is filed by such Registrant on its own behalf. DTE Electric makes no representation regarding information relating to any other companies affiliated with DTE Energy other than its own subsidiaries. Neither DTE Energy, nor any of DTE Energy’s other subsidiaries (other than DTE Electric), has any obligation in respect of DTE Electric's debt securities and holders of such debt securities should not consider the financial resources or results of operations of DTE Energy nor any of DTE Energy’s other subsidiaries (other than DTE Electric and its own subsidiaries (in relevant circumstances)) in making a decision with respect to DTE Electric's debt securities. Similarly, none of DTE Electric nor any other subsidiary of DTE Energy has any obligation in respect of debt securities of DTE Energy. This combined Form 10-Q should be read in its entirety. No one section of this combined Form 10-Q deals with all aspects of the subject matter of this combined Form 10-Q. This combined Form 10-Q report should be read in conjunction with the separately filed Consolidated Financial Statements and Notes to Consolidated Financial Statements and with Management's Discussion and Analysis included in DTE Energy's 2014 Annual Report on Form 10-K and DTE Electric's 2014 Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
Certain information presented herein includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of the Registrants. Words such as “anticipate,” “believe,” “expect,” “projected,” “aspiration,” and “goals” signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to numerous assumptions, risks and uncertainties that may cause actual future results to be materially different from those contemplated, projected, estimated, or budgeted. Many factors may impact forward-looking statements of the Registrants including, but not limited to, the following:
• | impact of regulation by the EPA, FERC, MPSC, NRC, and CFTC, as well as other applicable governmental proceedings and regulations, including any associated impact on rate structures; |
• | the amount and timing of cost recovery allowed as a result of regulatory proceedings, related appeals, or new legislation, including legislative amendments and retail access programs; |
• | economic conditions and population changes in the Registrants' geographic area resulting in changes in demand, customer conservation, and thefts of electricity and, for DTE Energy, natural gas; |
• | environmental issues, laws, regulations, and the increasing costs of remediation and compliance, including actual and potential new federal and state requirements; |
• | health, safety, financial, environmental, and regulatory risks associated with ownership and operation of nuclear facilities; |
• | changes in the cost and availability of coal and other raw materials, purchased power, and natural gas; |
• | the potential for losses on investments, including nuclear decommissioning and benefit plan assets and the related increases in future expense and contributions; |
• | volatility in the short-term natural gas storage markets impacting third-party storage revenues related to DTE Energy; |
• | volatility in commodity markets, deviations in weather, and related risks impacting the results of DTE Energy's energy trading operations; |
• | access to capital markets and the results of other financing efforts which can be affected by credit agency ratings; |
• | instability in capital markets which could impact availability of short and long-term financing; |
• | the timing and extent of changes in interest rates; |
• | the level of borrowings; |
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• | the potential for increased costs or delays in completion of significant construction projects; |
• | changes in and application of federal, state, and local tax laws and their interpretations, including the Internal Revenue Code, regulations, rulings, court proceedings, and audits; |
• | the effects of weather and other natural phenomena on operations and sales to customers, and purchases from suppliers; |
• | unplanned outages; |
• | the cost of protecting assets against, or damage due to, terrorism or cyber attacks; |
• | employee relations and the impact of collective bargaining agreements; |
• | the risk of a major safety incident at an electric distribution or generation facility and, for DTE Energy, a gas storage, transmission or distribution facility; |
• | the availability, cost, coverage, and terms of insurance and stability of insurance providers; |
• | cost reduction efforts and the maximization of plant and distribution system performance; |
• | the effects of competition; |
• | changes in and application of accounting standards and financial reporting regulations; |
• | changes in federal or state laws and their interpretation with respect to regulation, energy policy, and other business issues; |
• | contract disputes, binding arbitration, litigation, and related appeals; and |
• | the risks discussed in the Registrants' public filings with the Securities and Exchange Commission. |
New factors emerge from time to time. The Registrants cannot predict what factors may arise or how such factors may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statements speak only as of the date on which such statements are made. The Registrants undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
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Part I — Financial Information
Item 1. Financial Statements
DTE Energy Company
Consolidated Statements of Operations (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In millions, except per share amounts) | |||||||||||||||
Operating Revenues | $ | 2,598 | $ | 2,595 | $ | 7,850 | $ | 9,223 | |||||||
Operating Expenses | |||||||||||||||
Fuel, purchased power, and gas | 1,053 | 1,119 | 3,393 | 4,550 | |||||||||||
Operation and maintenance | 817 | 860 | 2,436 | 2,512 | |||||||||||
Depreciation and amortization | 196 | 293 | 625 | 855 | |||||||||||
Taxes other than income | 91 | 86 | 282 | 268 | |||||||||||
Asset (gains) losses and impairments, net | 1 | (2 | ) | 9 | (10 | ) | |||||||||
2,158 | 2,356 | 6,745 | 8,175 | ||||||||||||
Operating Income | 440 | 239 | 1,105 | 1,048 | |||||||||||
Other (Income) and Deductions | |||||||||||||||
Interest expense | 116 | 107 | 341 | 323 | |||||||||||
Interest income | (4 | ) | (2 | ) | (10 | ) | (7 | ) | |||||||
Other income | (55 | ) | (55 | ) | (155 | ) | (136 | ) | |||||||
Other expenses | 17 | 11 | 36 | 29 | |||||||||||
74 | 61 | 212 | 209 | ||||||||||||
Income Before Income Taxes | 366 | 178 | 893 | 839 | |||||||||||
Income Tax Expense | 102 | 21 | 250 | 229 | |||||||||||
Net Income | 264 | 157 | 643 | 610 | |||||||||||
Less: Net Income (Loss) Attributable to Noncontrolling Interests | (1 | ) | 1 | (4 | ) | 4 | |||||||||
Net Income Attributable to DTE Energy Company | $ | 265 | $ | 156 | $ | 647 | $ | 606 | |||||||
Basic Earnings per Common Share | |||||||||||||||
Net Income Attributable to DTE Energy Company | $ | 1.47 | $ | 0.88 | $ | 3.61 | $ | 3.42 | |||||||
Diluted Earnings per Common Share | |||||||||||||||
Net Income Attributable to DTE Energy Company | $ | 1.47 | $ | 0.88 | $ | 3.61 | $ | 3.42 | |||||||
Weighted Average Common Shares Outstanding | |||||||||||||||
Basic | 179 | 177 | 179 | 177 | |||||||||||
Diluted | 180 | 177 | 179 | 177 | |||||||||||
Dividends Declared per Common Share | $ | 0.73 | $ | 0.69 | $ | 2.11 | $ | 2.00 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
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DTE Energy Company
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In millions) | |||||||||||||||
Net Income | $ | 264 | $ | 157 | $ | 643 | $ | 610 | |||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Benefit obligations, net of taxes of $2, $1, $6, and $2, respectively | 3 | 2 | 9 | 3 | |||||||||||
Net unrealized gains on investments during the period, net of taxes of $—, $—, $—, and $—, respectively | — | — | — | 1 | |||||||||||
Foreign currency translation | (2 | ) | (1 | ) | (4 | ) | (1 | ) | |||||||
Other comprehensive income | 1 | 1 | 5 | 3 | |||||||||||
Comprehensive income | 265 | 158 | 648 | 613 | |||||||||||
Less comprehensive income (loss) attributable to noncontrolling interests | (1 | ) | 1 | (4 | ) | 4 | |||||||||
Comprehensive income attributable to DTE Energy Company | $ | 266 | $ | 157 | $ | 652 | $ | 609 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
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DTE Energy Company
Consolidated Statements of Financial Position (Unaudited)
September 30, | December 31, | ||||||
2015 | 2014 | ||||||
(In millions) | |||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 67 | $ | 48 | |||
Restricted cash | 21 | 120 | |||||
Accounts receivable (less allowance for doubtful accounts of $56 and $54, respectively) | |||||||
Customer | 1,242 | 1,504 | |||||
Other | 79 | 94 | |||||
Inventories | |||||||
Fuel and gas | 533 | 512 | |||||
Materials and supplies | 307 | 292 | |||||
Derivative assets | 90 | 128 | |||||
Regulatory assets | 15 | 76 | |||||
Other | 346 | 313 | |||||
2,700 | 3,087 | ||||||
Investments | |||||||
Nuclear decommissioning trust funds | 1,199 | 1,241 | |||||
Other | 684 | 628 | |||||
1,883 | 1,869 | ||||||
Property | |||||||
Property, plant, and equipment | 28,014 | 26,538 | |||||
Less accumulated depreciation and amortization | (10,147 | ) | (9,718 | ) | |||
17,867 | 16,820 | ||||||
Other Assets | |||||||
Goodwill | 2,018 | 2,018 | |||||
Regulatory assets | 3,719 | 3,651 | |||||
Securitized regulatory assets | — | 34 | |||||
Intangible assets | 89 | 102 | |||||
Notes receivable | 82 | 90 | |||||
Derivative assets | 48 | 44 | |||||
Other | 248 | 259 | |||||
6,204 | 6,198 | ||||||
Total Assets | $ | 28,654 | $ | 27,974 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
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DTE Energy Company
Consolidated Statements of Financial Position (Unaudited) — (Continued)
September 30, | December 31, | ||||||
2015 | 2014 | ||||||
(In millions, except shares) | |||||||
LIABILITIES AND EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable | $ | 835 | $ | 973 | |||
Accrued interest | 119 | 86 | |||||
Dividends payable | 131 | 122 | |||||
Short-term borrowings | 185 | 398 | |||||
Current portion long-term debt, including capital leases | 468 | 274 | |||||
Derivative liabilities | 56 | 77 | |||||
Regulatory liabilities | 67 | 153 | |||||
Other | 412 | 494 | |||||
2,273 | 2,577 | ||||||
Long-Term Debt (net of current portion) | |||||||
Mortgage bonds, notes, and other | 8,368 | 7,860 | |||||
Junior subordinated debentures | 480 | 480 | |||||
Capital lease obligations | 8 | 3 | |||||
8,856 | 8,343 | ||||||
Other Liabilities | |||||||
Deferred income taxes | 4,022 | 3,776 | |||||
Regulatory liabilities | 598 | 667 | |||||
Asset retirement obligations | 2,180 | 1,962 | |||||
Unamortized investment tax credit | 50 | 41 | |||||
Derivative liabilities | 27 | 8 | |||||
Accrued pension liability | 1,120 | 1,280 | |||||
Accrued postretirement liability | 302 | 515 | |||||
Nuclear decommissioning | 174 | 182 | |||||
Other | 219 | 281 | |||||
8,692 | 8,712 | ||||||
Commitments and Contingencies (Notes 6 and 12) | |||||||
Equity | |||||||
Common stock, without par value, 400,000,000 shares authorized, and 179,475,625 and 176,991,231 shares issued and outstanding, respectively | 4,117 | 3,904 | |||||
Retained earnings | 4,845 | 4,578 | |||||
Accumulated other comprehensive loss | (150 | ) | (155 | ) | |||
Total DTE Energy Company Equity | 8,812 | 8,327 | |||||
Noncontrolling interests | 21 | 15 | |||||
Total Equity | 8,833 | 8,342 | |||||
Total Liabilities and Equity | $ | 28,654 | $ | 27,974 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
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DTE Energy Company
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Operating Activities | |||||||
Net Income | $ | 643 | $ | 610 | |||
Adjustments to reconcile Net Income to net cash from operating activities: | |||||||
Depreciation and amortization | 625 | 855 | |||||
Nuclear fuel amortization | 40 | 33 | |||||
Allowance for equity funds used during construction | (16 | ) | (16 | ) | |||
Deferred income taxes | 251 | 244 | |||||
Asset (gains) losses and impairments, net | 9 | (10 | ) | ||||
Changes in assets and liabilities: | |||||||
Accounts receivable, net | 277 | 273 | |||||
Inventories | (36 | ) | (165 | ) | |||
Accounts payable | (125 | ) | 48 | ||||
Accrued pension obligation | (160 | ) | (154 | ) | |||
Accrued postretirement obligation | (213 | ) | (64 | ) | |||
Derivative assets and liabilities | 32 | (56 | ) | ||||
Regulatory assets and liabilities | 35 | (211 | ) | ||||
Other current and noncurrent assets and liabilities | 106 | (89 | ) | ||||
Net cash from operating activities | 1,468 | 1,298 | |||||
Investing Activities | |||||||
Plant and equipment expenditures — utility | (1,239 | ) | (1,295 | ) | |||
Plant and equipment expenditures — non-utility | (162 | ) | (207 | ) | |||
Acquisition | (241 | ) | — | ||||
Proceeds from sale of assets | 16 | 36 | |||||
Restricted cash for debt redemption, principally Securitization | 99 | 62 | |||||
Proceeds from sale of nuclear decommissioning trust fund assets | 627 | 652 | |||||
Investment in nuclear decommissioning trust funds | (638 | ) | (665 | ) | |||
Other | (34 | ) | (40 | ) | |||
Net cash used for investing activities | (1,572 | ) | (1,457 | ) | |||
Financing Activities | |||||||
Issuance of long-term debt, net of issuance costs | 956 | 1,289 | |||||
Redemption of long-term debt | (260 | ) | (1,222 | ) | |||
Short-term borrowings, net | (213 | ) | 522 | ||||
Issuance of common stock | 9 | — | |||||
Repurchase of common stock | — | (52 | ) | ||||
Dividends on common stock | (370 | ) | (348 | ) | |||
Other | 1 | (22 | ) | ||||
Net cash from financing activities | 123 | 167 | |||||
Net Increase in Cash and Cash Equivalents | 19 | 8 | |||||
Cash and Cash Equivalents at Beginning of Period | 48 | 52 | |||||
Cash and Cash Equivalents at End of Period | $ | 67 | $ | 60 | |||
Supplemental disclosure of non-cash investing and financing activities | |||||||
Plant and equipment expenditures in accounts payable | $ | 185 | $ | 192 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
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DTE Energy Company
Consolidated Statements of Changes in Equity (Unaudited)
Accumulated Other Comprehensive Income (Loss) | Non-Controlling Interests | |||||||||||||||||||||
Common Stock | Retained Earnings | |||||||||||||||||||||
Shares | Amount | Total | ||||||||||||||||||||
(Dollars in millions, shares in thousands) | ||||||||||||||||||||||
Balance, December 31, 2014 | 176,991 | $ | 3,904 | $ | 4,578 | $ | (155 | ) | $ | 15 | $ | 8,342 | ||||||||||
Net Income (Loss) | — | — | 647 | — | (4 | ) | 643 | |||||||||||||||
Dividends declared on common stock | — | — | (379 | ) | — | — | (379 | ) | ||||||||||||||
Issuance of common stock | 105 | 9 | — | — | — | 9 | ||||||||||||||||
Contribution of common stock to VEBA Trust | 1,428 | 117 | — | — | — | 117 | ||||||||||||||||
Benefit obligations, net of tax | — | — | — | 9 | — | 9 | ||||||||||||||||
Foreign currency translation | — | — | — | (4 | ) | — | (4 | ) | ||||||||||||||
Stock-based compensation, contributions, and distributions to noncontrolling interests and other | 952 | 87 | (1 | ) | — | 10 | 96 | |||||||||||||||
Balance, September 30, 2015 | 179,476 | $ | 4,117 | $ | 4,845 | $ | (150 | ) | $ | 21 | $ | 8,833 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
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DTE Electric Company
Consolidated Statements of Operations (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In millions) | |||||||||||||||
Operating Revenues | $ | 1,385 | $ | 1,357 | $ | 3,735 | $ | 4,048 | |||||||
Operating Expenses | |||||||||||||||
Fuel and purchased power | 441 | 430 | 1,212 | 1,328 | |||||||||||
Operation and maintenance | 330 | 351 | 966 | 1,022 | |||||||||||
Depreciation and amortization | 141 | 238 | 461 | 695 | |||||||||||
Taxes other than income | 73 | 66 | 214 | 202 | |||||||||||
Asset (gains) losses and impairments, net | — | — | — | (1 | ) | ||||||||||
985 | 1,085 | 2,853 | 3,246 | ||||||||||||
Operating Income | 400 | 272 | 882 | 802 | |||||||||||
Other (Income) and Deductions | |||||||||||||||
Interest expense | 66 | 65 | 196 | 189 | |||||||||||
Other income | (14 | ) | (15 | ) | (42 | ) | (45 | ) | |||||||
Other expenses | 15 | 11 | 32 | 26 | |||||||||||
67 | 61 | 186 | 170 | ||||||||||||
Income Before Income Taxes | 333 | 211 | 696 | 632 | |||||||||||
Income Tax Expense | 117 | 75 | 244 | 229 | |||||||||||
Net Income | $ | 216 | $ | 136 | $ | 452 | $ | 403 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
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DTE Electric Company
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In millions) | |||||||||||||||
Net Income | $ | 216 | $ | 136 | $ | 452 | $ | 403 | |||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Transfer of benefit obligations, net of taxes of $—, $—, $18, and $—, respectively | — | — | 28 | — | |||||||||||
Benefit obligations, net of taxes of $—, $—, $—, and $—, respectively | — | 1 | — | — | |||||||||||
Comprehensive income | $ | 216 | $ | 137 | $ | 480 | $ | 403 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
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DTE Electric Company
Consolidated Statements of Financial Position (Unaudited)
September 30, | December 31, | ||||||
2015 | 2014 | ||||||
(In millions) | |||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 29 | $ | 14 | |||
Restricted cash, principally Securitization | — | 96 | |||||
Accounts receivable (less allowance for doubtful accounts of $29, for both periods) | |||||||
Customer | 730 | 688 | |||||
Affiliates | 69 | 31 | |||||
Other | 38 | 15 | |||||
Inventories | |||||||
Fuel | 267 | 269 | |||||
Materials and supplies | 250 | 231 | |||||
Notes receivable | |||||||
Affiliates | 4 | 8 | |||||
Other | 6 | 8 | |||||
Regulatory assets | 3 | 46 | |||||
Prepaid property tax | 96 | 44 | |||||
Other | 27 | 31 | |||||
1,519 | 1,481 | ||||||
Investments | |||||||
Nuclear decommissioning trust funds | 1,199 | 1,241 | |||||
Other | 34 | 172 | |||||
1,233 | 1,413 | ||||||
Property | |||||||
Property, plant, and equipment | 21,045 | 19,805 | |||||
Less accumulated depreciation and amortization | (7,586 | ) | (7,216 | ) | |||
13,459 | 12,589 | ||||||
Other Assets | |||||||
Regulatory assets | 3,002 | 2,913 | |||||
Securitized regulatory assets | — | 34 | |||||
Intangible assets | 39 | 37 | |||||
Other | 171 | 182 | |||||
3,212 | 3,166 | ||||||
Total Assets | $ | 19,423 | $ | 18,649 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
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DTE Electric Company
Consolidated Statements of Financial Position (Unaudited) — (Continued)
September 30, | December 31, | ||||||
2015 | 2014 | ||||||
(In millions, except shares) | |||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable | |||||||
Affiliates | $ | 41 | $ | 60 | |||
Other | 360 | 366 | |||||
Accrued interest | 68 | 58 | |||||
Current portion long-term debt, including capital leases | 153 | 118 | |||||
Regulatory liabilities | 36 | 150 | |||||
Short-term borrowings | |||||||
Affiliates | 68 | 84 | |||||
Other | 46 | 50 | |||||
Other | 159 | 151 | |||||
931 | 1,037 | ||||||
Long-Term Debt (net of current portion) | |||||||
Mortgage bonds, notes, and other | 5,492 | 5,144 | |||||
Capital lease obligations | 8 | — | |||||
5,500 | 5,144 | ||||||
Other Liabilities | |||||||
Deferred income taxes | 3,454 | 3,188 | |||||
Regulatory liabilities | 218 | 245 | |||||
Asset retirement obligations | 2,007 | 1,796 | |||||
Unamortized investment tax credit | 45 | 36 | |||||
Nuclear decommissioning | 174 | 182 | |||||
Accrued pension liability — affiliates | 985 | 1,200 | |||||
Accrued postretirement liability — affiliates | 356 | 520 | |||||
Other | 74 | 105 | |||||
7,313 | 7,272 | ||||||
Commitments and Contingencies (Notes 6 and 12) | |||||||
Shareholder’s Equity | |||||||
Common stock, $10 par value, 400,000,000 shares authorized, and 138,632,324 shares issued and outstanding | 4,086 | 3,786 | |||||
Retained earnings | 1,591 | 1,436 | |||||
Accumulated other comprehensive income (loss) | 2 | (26 | ) | ||||
5,679 | 5,196 | ||||||
Total Liabilities and Shareholder’s Equity | $ | 19,423 | $ | 18,649 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
15
DTE Electric Company
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Operating Activities | |||||||
Net Income | $ | 452 | $ | 403 | |||
Adjustments to reconcile Net Income to net cash from operating activities: | |||||||
Depreciation and amortization | 461 | 695 | |||||
Nuclear fuel amortization | 40 | 33 | |||||
Allowance for equity funds used during construction | (15 | ) | (16 | ) | |||
Deferred income taxes | 269 | 199 | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable, net | (103 | ) | 36 | ||||
Inventories | (17 | ) | (38 | ) | |||
Accounts payable | 3 | 7 | |||||
Accrued pension liability — affiliates | (215 | ) | (122 | ) | |||
Accrued postretirement liability — affiliates | (164 | ) | (42 | ) | |||
Regulatory assets and liabilities | (12 | ) | (163 | ) | |||
Other current and noncurrent assets and liabilities | 9 | (113 | ) | ||||
Net cash from operating activities | 708 | 879 | |||||
Investing Activities | |||||||
Plant and equipment expenditures | (1,045 | ) | (1,143 | ) | |||
Acquisition | (241 | ) | — | ||||
Restricted cash for debt redemption, principally Securitization | 96 | 60 | |||||
Notes receivable from affiliate | 4 | 164 | |||||
Proceeds from sale of nuclear decommissioning trust fund assets | 627 | 652 | |||||
Investment in nuclear decommissioning trust funds | (638 | ) | (665 | ) | |||
Transfer of Rabbi Trust assets to affiliate | 137 | — | |||||
Other | 9 | (16 | ) | ||||
Net cash used for investing activities | (1,051 | ) | (948 | ) | |||
Financing Activities | |||||||
Issuance of long-term debt, net of issuance costs | 495 | 942 | |||||
Redemption of long-term debt | (115 | ) | (837 | ) | |||
Capital contribution by parent company | 300 | — | |||||
Short-term borrowings, net — other | (4 | ) | 254 | ||||
Short-term borrowings, net — affiliate | (16 | ) | (2 | ) | |||
Dividends on common stock | (297 | ) | (277 | ) | |||
Other | (5 | ) | (10 | ) | |||
Net cash from financing activities | 358 | 70 | |||||
Net Increase in Cash and Cash Equivalents | 15 | 1 | |||||
Cash and Cash Equivalents at Beginning of the Period | 14 | 27 | |||||
Cash and Cash Equivalents at End of the Period | $ | 29 | $ | 28 | |||
Supplemental disclosure of non-cash investing and financing activities | |||||||
Plant and equipment expenditures in accounts payable | $ | 134 | $ | 139 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
16
DTE Electric Company
Consolidated Statements of Changes in Shareholder's Equity (Unaudited)
Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||
Common Stock | ||||||||||||||||||||||
Shares | Amount | Total | ||||||||||||||||||||
(Dollars in millions, shares in thousands) | ||||||||||||||||||||||
Balance, December 31, 2014 | 138,632 | $ | 1,386 | $ | 2,400 | $ | 1,436 | $ | (26 | ) | $ | 5,196 | ||||||||||
Net Income | — | — | — | 452 | — | 452 | ||||||||||||||||
Dividends declared on common stock | — | — | — | (297 | ) | — | (297 | ) | ||||||||||||||
Transfer of benefit obligations, net of tax | — | — | — | — | 28 | 28 | ||||||||||||||||
Capital contribution by parent company | — | — | 300 | — | — | 300 | ||||||||||||||||
Balance, September 30, 2015 | 138,632 | $ | 1,386 | $ | 2,700 | $ | 1,591 | $ | 2 | $ | 5,679 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
17
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited)
Index of Combined Notes to Consolidated Financial Statements (Unaudited)
The Combined Notes to Consolidated Financial Statements (Unaudited) are a combined presentation for DTE Energy and DTE Electric. The following list indicates the Registrant(s) to which each note applies:
Note 1 | Organization and Basis of Presentation | DTE Energy and DTE Electric | ||
Note 2 | Significant Accounting Policies | DTE Energy and DTE Electric | ||
Note 3 | New Accounting Pronouncements | DTE Energy and DTE Electric | ||
Note 4 | Acquisitions | DTE Energy and DTE Electric | ||
Note 5 | Asset Retirement Obligations | DTE Energy and DTE Electric | ||
Note 6 | Regulatory Matters | DTE Energy and DTE Electric | ||
Note 7 | Earnings per Share | DTE Energy | ||
Note 8 | Fair Value | DTE Energy and DTE Electric | ||
Note 9 | Financial and Other Derivative Instruments | DTE Energy and DTE Electric | ||
Note 10 | Long-Term Debt | DTE Energy and DTE Electric | ||
Note 11 | Short-Term Credit Arrangements and Borrowings | DTE Energy and DTE Electric | ||
Note 12 | Commitments and Contingencies | DTE Energy and DTE Electric | ||
Note 13 | Retirement Benefits and Trusteed Assets | DTE Energy and DTE Electric | ||
Note 14 | Stock-Based Compensation | DTE Energy and DTE Electric | ||
Note 15 | Segment and Related Information | DTE Energy |
NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION
Corporate Structure
DTE Energy owns the following businesses:
• | DTE Electric is an electric utility engaged in the generation, purchase, distribution, and sale of electricity to approximately 2.1 million customers in southeastern Michigan; |
• | DTE Gas is a natural gas utility engaged in the purchase, storage, transportation, distribution, and sale of natural gas to approximately 1.2 million customers throughout Michigan and the sale of storage and transportation capacity; and |
• | Other businesses involved in 1) natural gas pipelines, gathering, and storage; 2) power and industrial projects; and 3) energy marketing and trading operations. |
DTE Electric and DTE Gas are regulated by the MPSC. Certain activities of DTE Electric and DTE Gas, as well as various other aspects of businesses under DTE Energy are regulated by the FERC. In addition, the Registrants are regulated by other federal and state regulatory agencies including the NRC, the EPA, the MDEQ, and the CFTC.
Basis of Presentation
The Consolidated Financial Statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the DTE Energy 2014 Annual Report on Form 10-K and the Notes to Consolidated Financial Statements included in the DTE Electric 2014 Annual Report on Form 10-K.
The accompanying Consolidated Financial Statements of the Registrants are prepared using accounting principles generally accepted in the United States of America. These accounting principles require management to use estimates and assumptions that impact reported amounts of assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from the Registrants' estimates.
18
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
The Consolidated Financial Statements are unaudited, but in the Registrants' opinions include all adjustments necessary to present a fair statement of the results for the interim periods. All adjustments are of a normal recurring nature, except as otherwise disclosed in these Consolidated Financial Statements and Combined Notes to Consolidated Financial Statements. Financial results for this interim period are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year ending December 31, 2015.
The information in these combined notes relates to each of the Registrants as noted in the Index of Combined Notes to Consolidated Financial Statements. However, DTE Electric does not make any representation as to information related solely to DTE Energy or the subsidiaries of DTE Energy other than itself.
Certain prior year balances for the Registrants were reclassified to match current year's financial statement presentation.
Principles of Consolidation
The Registrants consolidate all majority-owned subsidiaries and investments in entities in which they have controlling influence. Non-majority owned investments are accounted for using the equity method when the Registrants are able to influence the operating policies of the investee. When the Registrants do not influence the operating policies of an investee, the cost method is used. These Consolidated Financial Statements also reflect the Registrants' proportionate interests in certain jointly-owned utility plants. The Registrants eliminate all intercompany balances and transactions.
The Registrants evaluate whether an entity is a VIE whenever reconsideration events occur. The Registrants consolidate VIEs for which they are the primary beneficiary. If a Registrant is not the primary beneficiary and an ownership interest is held, the VIE is accounted for under the equity method of accounting. When assessing the determination of the primary beneficiary, a Registrant considers all relevant facts and circumstances, including: the power, through voting or similar rights, to direct the activities of the VIE that most significantly impact the VIE's economic performance and the obligation to absorb the expected losses and/or the right to receive the expected returns of the VIE. The Registrants perform ongoing reassessments of all VIEs to determine if the primary beneficiary status has changed.
Legal entities within DTE Energy's Power and Industrial Projects segment enter into long-term contractual arrangements with customers to supply energy-related products or services. The entities are generally designed to pass-through the commodity risk associated with these contracts to the customers, with DTE Energy retaining operational and customer default risk. These entities generally are VIEs and consolidated when DTE Energy is the primary beneficiary. In addition, DTE Energy has interests in certain VIEs through which control of all significant activities is shared with partners, and therefore are accounted for under the equity method.
DTE Energy has variable interests in VIEs through certain of its long-term purchase and sale contracts. DTE Electric has variable interests in VIEs through certain of its long-term purchase contracts. As of September 30, 2015, the carrying amount of assets and liabilities in the Registrants' Consolidated Statements of Financial Position that relate to its variable interests under long-term purchase and sale contracts are predominately related to working capital accounts and generally represent the amounts owed by or to the Registrants for the deliveries associated with the current billing cycle under the contracts. The Registrants have not provided any significant form of financial support associated with these long-term contracts. There is no significant potential exposure to loss as a result of DTE Energy's variable interests through these long-term purchase and sale contracts. In addition, there is no significant potential exposure to loss as a result of DTE Electric's variable interests through these long-term purchase contracts.
In 2001, DTE Electric financed a regulatory asset related to Fermi 2 and certain other regulatory assets through the sale of rate reduction bonds by a wholly-owned special purpose entity, Securitization. DTE Electric performed servicing activities including billing and collecting surcharge revenue for Securitization. The remaining amounts due on the rate reduction bonds were paid in March 2015. The associated regulatory assets were fully amortized by March 31, 2015. Securitization has an over-recovery of funds. DTE Electric began to return the funds to customers in September 2015. Remaining funds are expected to be returned to customers during the fourth quarter of 2015. Subsequent to the pay-down of the bonds, Securitization is no longer a VIE but continues to be consolidated by the Registrants as a voting interest entity.
The maximum risk exposure for consolidated VIEs is reflected on the Registrants' Consolidated Statements of Financial Position. For non-consolidated VIEs, the maximum risk exposure is generally limited to its investment and amounts which it has guaranteed.
19
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
The following table summarizes the major Consolidated Statements of Financial Position items for consolidated VIEs as of September 30, 2015 and December 31, 2014. All assets and liabilities of a consolidated VIE are presented where it has been determined that a consolidated VIE has either (1) assets that can be used only to settle obligations of the VIE or (2) liabilities for which creditors do not have recourse to the general credit of the primary beneficiary. Securitization, included in the DTE Energy table below for December 31, 2014, also relates to DTE Electric. VIEs, in which DTE Energy holds a majority voting interest and is the primary beneficiary, that meet the definition of a business and whose assets can be used for purposes other than the settlement of the VIE's obligations have been excluded from the table below.
September 30, 2015 | December 31, 2014 | ||||||||||||||
Total | Securitization | Other | Total | ||||||||||||
(In millions) | |||||||||||||||
ASSETS | |||||||||||||||
Cash and cash equivalents | $ | 12 | $ | — | $ | 7 | $ | 7 | |||||||
Restricted cash | 6 | 96 | 8 | 104 | |||||||||||
Accounts receivable | 14 | 26 | 15 | 41 | |||||||||||
Inventories | 43 | — | 67 | 67 | |||||||||||
Property, plant, and equipment, net | 70 | — | 81 | 81 | |||||||||||
Securitized regulatory assets | — | 34 | — | 34 | |||||||||||
Other current and long-term assets | 4 | 1 | 6 | 7 | |||||||||||
$ | 149 | $ | 157 | $ | 184 | $ | 341 | ||||||||
LIABILITIES | |||||||||||||||
Accounts payable and accrued current liabilities | $ | 11 | $ | 3 | $ | 8 | $ | 11 | |||||||
Current portion long-term debt, including capital leases | 9 | 105 | 10 | 115 | |||||||||||
Current regulatory liabilities | — | 32 | — | 32 | |||||||||||
Mortgage bonds, notes, and other | 11 | — | 15 | 15 | |||||||||||
Capital lease obligations | — | — | 3 | 3 | |||||||||||
Other current and long-term liabilities | 6 | 9 | 6 | 15 | |||||||||||
$ | 37 | $ | 149 | $ | 42 | $ | 191 |
Amounts for DTE Energy's non-consolidated VIEs as of September 30, 2015 and December 31, 2014 are as follows:
September 30, 2015 | December 31, 2014 | ||||||
(In millions) | |||||||
Other investments | $ | 138 | $ | 134 | |||
Notes receivable | $ | 15 | $ | 15 |
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Other Income
Other income for the Registrants is recognized for non-operating income such as equity earnings, allowance for equity funds used during construction, and contract services. DTE Energy's Power & Industrial Projects segment also recognizes Other income in connection with the sale of membership interests in reduced emissions fuel facilities to investors. In exchange for the cash received, the investors will receive a portion of the economic attributes of the facilities, including income tax attributes. The transactions are not treated as a sale of membership interests for financial reporting purposes. Other income is considered earned when refined coal is produced and tax credits are generated. Power & Industrial Projects recognized approximately $24 million and $25 million of Other income for the three months ended September 30, 2015 and 2014, respectively, and approximately $64 million and $57 million of Other income for the nine months ended September 30, 2015 and 2014, respectively.
20
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
Changes in Accumulated Other Comprehensive Income (Loss)
For the three and nine months ended September 30, 2015 and 2014, reclassifications out of Accumulated other comprehensive income (loss) for the Registrants were not material. Refer to Note 13 to the Consolidated Financial Statements, "Retirement Benefits and Trusteed Assets", regarding the transfer of a portion of DTE Electric benefit obligations during the year. Changes in Accumulated other comprehensive income (loss) are presented in DTE Energy's Consolidated Statements of Changes in Equity and DTE Electric's Consolidated Statements of Changes in Shareholder's Equity.
Intangible Assets
DTE Energy has certain intangible assets relating to emission allowances, renewable energy credits and non-utility contracts as shown below:
September 30, | December 31, | ||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Emission allowances | $ | 1 | $ | 1 | |||
Renewable energy credits | 49 | 45 | |||||
Contract intangible assets | 109 | 122 | |||||
159 | 168 | ||||||
Less accumulated amortization | 59 | 57 | |||||
Intangible assets, net | 100 | 111 | |||||
Less current intangible assets | 11 | 9 | |||||
$ | 89 | $ | 102 |
DTE Electric has certain intangible assets relating to emission allowances and renewable energy credits as shown below:
September 30, | December 31, | ||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Emission allowances | $ | 1 | $ | 1 | |||
Renewable energy credits | 49 | 45 | |||||
50 | 46 | ||||||
Less current intangible assets | 11 | 9 | |||||
$ | 39 | $ | 37 |
Emission allowances and renewable energy credits are charged to expense, using average cost, as the allowances and credits are consumed in the operation of the businesses by the Registrants. DTE Energy amortizes contract intangible assets on a straight-line basis over the expected period of benefit, ranging from 1 to 26 years.
Income Taxes
The effective tax rate and unrecognized tax benefits of the Registrants are as follows:
Effective Tax Rate | Unrecognized Tax Benefits | ||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | September 30, | |||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | |||||||||||
(In millions) | |||||||||||||||
DTE Energy | 28 | % | 12 | % | 28 | % | 27 | % | $ | 3 | |||||
DTE Electric | 35 | % | 36 | % | 35 | % | 36 | % | $ | 4 |
The increase in DTE Energy's effective tax rate for the three months ended September 30, 2015 is primarily due to higher annual forecasted production tax credits in 2014 as compared to 2015.
21
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
The increase in DTE Energy's effective tax rate for the nine months ended September 30, 2015 is primarily due to lower production tax credits partially offset by the inclusion in 2014 of $8 million of deferred tax expense resulting from the New York state income tax reform enacted on March 31, 2014.
The decrease in DTE Electric's effective tax rate for the three and nine months ended September 30, 2015 is due primarily to higher production tax credits in 2015.
If recognized, $2 million of the unrecognized tax benefits of the Registrants would favorably impact their effective tax rates. During the 2015 third quarter, there was a decrease of $6 million of unrecognized tax benefits at DTE Energy due to the expiration of statute of limitations. The $6 million decrease did not impact tax expense because the unrecognized tax benefit was offset by a net operating loss. The Registrants do not anticipate any material changes to the unrecognized tax benefits in the next twelve months.
DTE Electric had income tax receivables with DTE Energy of $68 million and $29 million at September 30, 2015 and December 31, 2014, respectively.
NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The objectives of this ASU are to improve upon revenue recognition requirements by providing a single comprehensive model to determine the measurement of revenue and timing of recognition. The core principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. This ASU also requires expanded qualitative and quantitative disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. In July 2015, the FASB deferred implementation of the revenue standard to be effective for the first interim period within annual reporting periods beginning after December 15, 2017. The standard is to be applied retrospectively and early adoption is permitted in the preceding year. The Registrants are currently assessing the impact of this ASU on their Consolidated Financial Statements.
In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The ASU affects (1) limited partnerships and similar legal entities, (2) evaluating fees paid to a decision maker or a service provider as a variable interest, (3) the effect of fee arrangements on the primary beneficiary determination, (4) the effect of related parties on the primary beneficiary determination, and (5) certain investment funds. It is effective for the Registrants for the first interim period within annual reporting periods beginning on or after December 15, 2015 and early adoption is permitted. The Registrants are currently assessing the impact of this ASU on their Consolidated Financial Statements.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU is effective for reporting periods beginning after December 15, 2015 and interim periods therein. It is to be applied retrospectively and early adoption is permitted. The adoption of this ASU will not have a significant impact on the Registrants' Consolidated Statements of Financial Position.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory. The ASU replaces the current lower of cost or market test with a lower of cost or net realizable value test when cost is determined on a first-in, first-out or average cost basis. The standard is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods therein. It is to be applied prospectively and early adoption is permitted. The ASU will not have a significant impact on the Registrants' Consolidated Statements of Financial Position.
22
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 4 — ACQUISITIONS
On January 21, 2015, DTE Electric closed on an acquisition of a 732 MW simple-cycle natural gas facility in Carson City, Michigan from The LS Power Group. The facility will serve to meet customer needs during periods of peak demand. DTE Electric has completed its valuation analysis to arrive at the fair value of the assets acquired. The cash consideration and total purchase price of approximately $241 million was allocated based on the underlying fair value of the assets acquired, which was primarily Property, plant, and equipment. The pro forma results of operations have not been presented for DTE Electric as the effects of the acquisition were not material to either Registrant's Consolidated Statements of Operations.
On October 1, 2015, DTE Electric closed on an acquisition of a 350 MW simple-cycle natural gas facility in East China Township, Michigan from a non-utility affiliate of DTE Energy. The facility will serve to meet customer needs during periods of peak demand. DTE Electric has completed its purchase accounting. The cash consideration and total purchase price of approximately $69 million was based on the net book value of the assets acquired, which was primarily Property, plant, and equipment. The pro forma results of operations have not been presented for DTE Electric as the effects of the acquisition were not material to its Consolidated Statements of Operations.
NOTE 5 — ASSET RETIREMENT OBLIGATIONS
A reconciliation of the ARO for the nine months ended September 30, 2015 follows:
DTE Energy | DTE Electric | ||||||
(In millions) | |||||||
Asset retirement obligations at December 31, 2014 | $ | 1,962 | $ | 1,796 | |||
Accretion | 90 | 83 | |||||
Revision in estimated cash flows | 128 | 128 | |||||
Asset retirement obligations at September 30, 2015 | $ | 2,180 | $ | 2,007 |
The Revision in estimated cash flows was principally attributed to the impact of the Coal Combustion Residual Rule on DTE Electric's coal ash storage facility AROs. Refer to Note 12 to the Consolidated Financial Statements, "Commitments and Contingencies", for discussion of the implications of the Coal Combustion Residual Rule.
NOTE 6 — REGULATORY MATTERS
2014 Electric Rate Case Filing
DTE Electric filed a rate case with the MPSC on December 19, 2014 requesting an increase in base rates of $370 million based on a projected twelve-month period ending June 30, 2016. The requested increase in base rates is due primarily to an increase in net plant resulting from infrastructure investments, plant acquisitions, environmental compliance, and reliability improvement projects. The rate filing also included projected changes in sales, working capital, operation and maintenance expenses, return on equity, and capital structure. On July 1, 2015, DTE Electric realized a rate increase of $230 million consisting of $190 million of self-implemented base rate increase related to the December 19, 2014 rate request and $40 million associated with the required elimination of a credit surcharge. A final order in this rate case is expected in December 2015.
Customer Settlement
In July 2014, an industrial customer of DTE Electric filed a complaint with the MPSC alleging they had been overcharged for the period of February 2008 through March 2014, and sought payment from DTE Electric of $22 million, plus interest. In July 2015, the MPSC issued an order that found the customer is entitled to a refund in the amount of $20 million, plus interest calculated at 7% per annum, until the refund is paid in full. In July 2015, DTE Electric issued a customer refund of $25 million, inclusive of interest. Approximately $16 million of the refund obligation is expected to be recovered through the PSCR and other regulatory mechanisms. DTE Electric does not expect this order to have a material impact to its Consolidated Statements of Operations.
23
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 7 — EARNINGS PER SHARE
DTE Energy reports both basic and diluted earnings per share. The calculation of diluted earnings per share assumes the issuance of potentially dilutive common shares outstanding during the period from the exercise of stock options. A reconciliation of both calculations is presented in the following table for the three and nine months ended September 30:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In millions, except per share amounts) | |||||||||||||||
Basic Earnings per Share | |||||||||||||||
Net Income Attributable to DTE Energy Company | $ | 265 | $ | 156 | $ | 647 | $ | 606 | |||||||
Average number of common shares outstanding | 179 | 177 | 179 | 177 | |||||||||||
Dividends declared — common shares | $ | 131 | $ | 122 | $ | 378 | $ | 353 | |||||||
Dividends declared — net restricted shares | — | — | 1 | 1 | |||||||||||
Total distributed earnings | $ | 131 | $ | 122 | $ | 379 | $ | 354 | |||||||
Net Income less distributed earnings | $ | 134 | $ | 34 | $ | 268 | $ | 252 | |||||||
Distributed (dividends per common share) | $ | 0.73 | $ | 0.69 | $ | 2.11 | $ | 2.00 | |||||||
Undistributed | 0.74 | 0.19 | 1.50 | 1.42 | |||||||||||
Total Basic Earnings per Common Share | $ | 1.47 | $ | 0.88 | $ | 3.61 | $ | 3.42 | |||||||
Diluted Earnings per Share | |||||||||||||||
Net Income Attributable to DTE Energy Company | $ | 265 | $ | 156 | $ | 647 | $ | 606 | |||||||
Average number of common shares outstanding | 180 | 177 | 179 | 177 | |||||||||||
Dividends declared — common shares | $ | 131 | $ | 122 | $ | 378 | $ | 353 | |||||||
Dividends declared — net restricted shares | — | — | 1 | 1 | |||||||||||
Total distributed earnings | $ | 131 | $ | 122 | $ | 379 | $ | 354 | |||||||
Net Income less distributed earnings | $ | 134 | $ | 34 | $ | 268 | $ | 252 | |||||||
Distributed (dividends per common share) | $ | 0.73 | $ | 0.69 | $ | 2.11 | $ | 2.00 | |||||||
Undistributed | 0.74 | 0.19 | 1.50 | 1.42 | |||||||||||
Total Diluted Earnings per Common Share | $ | 1.47 | $ | 0.88 | $ | 3.61 | $ | 3.42 |
NOTE 8 — FAIR VALUE
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in a principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets or liabilities. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Registrants make certain assumptions they believe that market participants would use in pricing assets or liabilities, including assumptions about risk, and the risks inherent in the inputs to valuation techniques. Credit risk of the Registrants and their counterparties is incorporated in the valuation of assets and liabilities through the use of credit reserves, the impact of which was immaterial at September 30, 2015 and December 31, 2014. The Registrants believe they use valuation techniques that maximize the use of observable market-based inputs and minimize the use of unobservable inputs.
24
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
A fair value hierarchy has been established 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). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. All assets and liabilities are required to be classified in their entirety based on the lowest level of input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability, and may affect the valuation of the asset or liability and its placement within the fair value hierarchy. The Registrants classify fair value balances based on the fair value hierarchy defined as follows:
• | Level 1 — Consists of unadjusted quoted prices in active markets for identical assets or liabilities that the Registrants have the ability to access as of the reporting date. |
• | Level 2 — Consists of inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. |
• | Level 3 — Consists of unobservable inputs for assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints. |
25
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
The following table presents assets and liabilities for DTE Energy measured and recorded at fair value on a recurring basis as of September 30, 2015 and December 31, 2014:
September 30, 2015 | December 31, 2014 | ||||||||||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Netting (a) | Net Balance | Level 1 | Level 2 | Level 3 | Netting (a) | Net Balance | ||||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||||||||||
Cash equivalents (b) | $ | 11 |