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 March 31, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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) | Emerging growth company o | |||
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) | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 March 31, 2017:
Registrant | Description | Shares | |||
DTE Energy | Common Stock, without par value | 179,387,424 | |||
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.
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TABLE OF CONTENTS
Page | ||
DEFINITIONS
AFUDC | Allowance for Funds Used During Construction |
AGS | Appalachia Gathering System is a midstream natural gas asset located in Pennsylvania and West Virginia. DTE Energy purchased 100% of AGS in October 2016, and this asset is part of DTE Energy's Gas Storage and Pipelines segment. |
ASU | Accounting Standards Update issued by the FASB |
CCR | Coal Combustion Residuals |
CFTC | U.S. Commodity Futures Trading Commission |
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 |
EGU | Electric Generating Unit |
ELG | Effluent Limitations Guidelines |
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. |
GHGs | Greenhouse gases |
MDEQ | Michigan Department of Environmental Quality |
MPSC | Michigan Public Service Commission |
MTM | Mark-to-market |
NAV | Net Asset Value |
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 |
NOX | Nitrogen Oxides |
NRC | U.S. Nuclear Regulatory Commission |
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 |
Registrants | DTE Energy and DTE Electric |
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DEFINITIONS
Retail access | Michigan legislation provided customers the option of access to alternative suppliers for electricity and natural gas. |
SGG | Stonewall Gas Gathering is a midstream natural gas asset located in West Virginia. DTE Energy purchased 55% of SGG in October 2016, and this asset is part of DTE Energy's Gas Storage and Pipelines segment. |
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 City of Detroit's Public Lighting Department customers to DTE Electric's distribution system. |
SO2 | Sulfur Dioxide |
VIE | Variable Interest Entity |
Units of Measurement | |
Bcf | Billion cubic feet of natural gas |
BTU | Heat value (energy content) of fuel |
MMBtu | One million BTU |
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 Consolidated Financial Statements and Combined Notes to Consolidated Financial Statements and with Management's Discussion and Analysis included in the combined DTE Energy and DTE Electric 2016 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 businesses 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, the FERC, the MPSC, the NRC, and for DTE Energy, the 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; |
• | volatility in the short-term natural gas storage markets impacting third-party storage revenues related to DTE Energy; |
• | impact of volatility of prices in the oil and gas markets on DTE Energy's gas storage and pipelines operations; |
• | impact of volatility in prices in the international steel markets on DTE Energy's power and industrial projects operations; |
• | volatility in commodity markets, deviations in weather, and related risks impacting the results of DTE Energy's energy trading operations; |
• | changes in the financial condition of DTE Energy's significant customers and strategic partners; |
• | the potential for losses on investments, including nuclear decommissioning and benefit plan assets and the related increases in future expense and contributions; |
• | 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; |
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• | the timing and extent of changes in interest rates; |
• | the level of borrowings; |
• | the potential for increased costs or delays in completion of significant capital 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, cyber crime and terrorism; |
• | 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; |
• | implementation of new information systems; 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 March 31, | |||||||
2017 | 2016 | ||||||
(In millions, except per share amounts) | |||||||
Operating Revenues | |||||||
Utility operations | $ | 1,718 | $ | 1,664 | |||
Non-utility operations | 1,518 | 902 | |||||
3,236 | 2,566 | ||||||
Operating Expenses | |||||||
Fuel, purchased power, and gas — utility | 529 | 565 | |||||
Fuel, purchased power, and gas — non-utility | 1,180 | 776 | |||||
Operation and maintenance | 600 | 516 | |||||
Depreciation and amortization | 249 | 229 | |||||
Taxes other than income | 109 | 99 | |||||
2,667 | 2,185 | ||||||
Operating Income | 569 | 381 | |||||
Other (Income) and Deductions | |||||||
Interest expense | 125 | 113 | |||||
Interest income | (3 | ) | (11 | ) | |||
Other income | (64 | ) | (52 | ) | |||
Other expenses | 7 | 8 | |||||
65 | 58 | ||||||
Income Before Income Taxes | 504 | 323 | |||||
Income Tax Expense | 110 | 83 | |||||
Net Income | 394 | 240 | |||||
Less: Net Loss Attributable to Noncontrolling Interests | (6 | ) | (7 | ) | |||
Net Income Attributable to DTE Energy Company | $ | 400 | $ | 247 | |||
Basic Earnings per Common Share | |||||||
Net Income Attributable to DTE Energy Company | $ | 2.23 | $ | 1.38 | |||
Diluted Earnings per Common Share | |||||||
Net Income Attributable to DTE Energy Company | $ | 2.23 | $ | 1.37 | |||
Weighted Average Common Shares Outstanding | |||||||
Basic | 179 | 179 | |||||
Diluted | 179 | 180 | |||||
Dividends Declared per Common Share | $ | 0.825 | $ | 0.73 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
5
DTE Energy Company
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
(In millions) | |||||||
Net Income | $ | 394 | $ | 240 | |||
Other comprehensive income, net of tax: | |||||||
Benefit obligations, net of taxes of $2, for both periods | 4 | 3 | |||||
Foreign currency translation | — | 2 | |||||
Other comprehensive income | 4 | 5 | |||||
Comprehensive income | 398 | 245 | |||||
Less comprehensive loss attributable to noncontrolling interests | (6 | ) | (7 | ) | |||
Comprehensive Income Attributable to DTE Energy Company | $ | 404 | $ | 252 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
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DTE Energy Company
Consolidated Statements of Financial Position (Unaudited)
March 31, | December 31, | ||||||
2017 | 2016 | ||||||
(In millions) | |||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 82 | $ | 92 | |||
Restricted cash | 20 | 21 | |||||
Accounts receivable (less allowance for doubtful accounts of $32 and $41, respectively) | |||||||
Customer | 1,408 | 1,522 | |||||
Other | 101 | 71 | |||||
Inventories | |||||||
Fuel and gas | 286 | 416 | |||||
Materials and supplies | 354 | 356 | |||||
Derivative assets | 68 | 47 | |||||
Regulatory assets | 26 | 42 | |||||
Other | 222 | 195 | |||||
2,567 | 2,762 | ||||||
Investments | |||||||
Nuclear decommissioning trust funds | 1,364 | 1,320 | |||||
Investments in equity method investees | 868 | 752 | |||||
Other | 210 | 201 | |||||
2,442 | 2,273 | ||||||
Property | |||||||
Property, plant, and equipment | 30,287 | 30,029 | |||||
Accumulated depreciation and amortization | (10,421 | ) | (10,299 | ) | |||
19,866 | 19,730 | ||||||
Other Assets | |||||||
Goodwill | 2,292 | 2,286 | |||||
Regulatory assets | 3,833 | 3,871 | |||||
Intangible assets | 837 | 842 | |||||
Notes receivable | 71 | 73 | |||||
Derivative assets | 73 | 34 | |||||
Other | 168 | 170 | |||||
7,274 | 7,276 | ||||||
Total Assets | $ | 32,149 | $ | 32,041 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
7
DTE Energy Company
Consolidated Statements of Financial Position (Unaudited) — (Continued)
March 31, | December 31, | ||||||
2017 | 2016 | ||||||
(In millions, except shares) | |||||||
LIABILITIES AND EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable | $ | 910 | $ | 1,079 | |||
Accrued interest | 131 | 96 | |||||
Dividends payable | 148 | 148 | |||||
Short-term borrowings | 59 | 499 | |||||
Current portion long-term debt, including capital leases | 13 | 14 | |||||
Derivative liabilities | 33 | 69 | |||||
Gas inventory equalization | 86 | — | |||||
Regulatory liabilities | 37 | 34 | |||||
Other | 417 | 498 | |||||
1,834 | 2,437 | ||||||
Long-Term Debt (net of current portion) | |||||||
Mortgage bonds, notes, and other | 10,999 | 10,506 | |||||
Junior subordinated debentures | 756 | 756 | |||||
Capital lease obligations | 3 | 7 | |||||
11,758 | 11,269 | ||||||
Other Liabilities | |||||||
Deferred income taxes | 4,270 | 4,162 | |||||
Regulatory liabilities | 563 | 555 | |||||
Asset retirement obligations | 2,229 | 2,197 | |||||
Unamortized investment tax credit | 91 | 93 | |||||
Derivative liabilities | 93 | 98 | |||||
Accrued pension liability | 1,022 | 1,152 | |||||
Accrued postretirement liability | 63 | 36 | |||||
Nuclear decommissioning | 203 | 194 | |||||
Other | 335 | 349 | |||||
8,869 | 8,836 | ||||||
Commitments and Contingencies (Notes 5 and 11) | |||||||
Equity | |||||||
Common stock, without par value, 400,000,000 shares authorized, and 179,387,424 and 179,432,581 shares issued and outstanding, respectively | 3,958 | 4,030 | |||||
Retained earnings | 5,365 | 5,114 | |||||
Accumulated other comprehensive loss | (129 | ) | (133 | ) | |||
Total DTE Energy Company Equity | 9,194 | 9,011 | |||||
Noncontrolling interests | 494 | 488 | |||||
Total Equity | 9,688 | 9,499 | |||||
Total Liabilities and Equity | $ | 32,149 | $ | 32,041 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
8
DTE Energy Company
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
(In millions) | |||||||
Operating Activities | |||||||
Net Income | $ | 394 | $ | 240 | |||
Adjustments to reconcile Net Income to net cash from operating activities: | |||||||
Depreciation and amortization | 249 | 229 | |||||
Nuclear fuel amortization | 12 | 15 | |||||
Allowance for equity funds used during construction | (7 | ) | (5 | ) | |||
Deferred income taxes | 100 | 80 | |||||
Equity earnings of equity method investees | (26 | ) | (15 | ) | |||
Dividends from equity method investees | 18 | 18 | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable, net | 84 | 97 | |||||
Inventories | 135 | 143 | |||||
Accounts payable | (33 | ) | (93 | ) | |||
Gas inventory equalization | 86 | 87 | |||||
Accrued pension liability | (130 | ) | (3 | ) | |||
Accrued postretirement liability | 27 | (29 | ) | ||||
Derivative assets and liabilities | (100 | ) | 40 | ||||
Regulatory assets and liabilities | 128 | 34 | |||||
Other current and noncurrent assets and liabilities | (150 | ) | (93 | ) | |||
Net cash from operating activities | 787 | 745 | |||||
Investing Activities | |||||||
Plant and equipment expenditures — utility | (533 | ) | (394 | ) | |||
Plant and equipment expenditures — non-utility | (22 | ) | (30 | ) | |||
Proceeds from sale of nuclear decommissioning trust fund assets | 394 | 260 | |||||
Investment in nuclear decommissioning trust funds | (378 | ) | (262 | ) | |||
Distributions from equity method investees | 6 | 3 | |||||
Contributions to equity method investees | (112 | ) | (26 | ) | |||
Other | 4 | 12 | |||||
Net cash used for investing activities | (641 | ) | (437 | ) | |||
Financing Activities | |||||||
Issuance of long-term debt, net of issuance costs | 496 | — | |||||
Redemption of long-term debt | (5 | ) | (11 | ) | |||
Short-term borrowings, net | (440 | ) | (134 | ) | |||
Repurchase of common stock | (51 | ) | (33 | ) | |||
Dividends on common stock | (148 | ) | (131 | ) | |||
Other | (8 | ) | (1 | ) | |||
Net cash used for financing activities | (156 | ) | (310 | ) | |||
Net Decrease in Cash and Cash Equivalents | (10 | ) | (2 | ) | |||
Cash and Cash Equivalents at Beginning of Period | 92 | 37 | |||||
Cash and Cash Equivalents at End of Period | $ | 82 | $ | 35 | |||
Supplemental disclosure of non-cash investing and financing activities | |||||||
Plant and equipment expenditures in accounts payable | $ | 196 | $ | 134 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
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DTE Energy Company
Consolidated Statements of Changes in Equity (Unaudited)
Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | ||||||||||||||||||||
Common Stock | ||||||||||||||||||||||
Shares | Amount | Total | ||||||||||||||||||||
(Dollars in millions, shares in thousands) | ||||||||||||||||||||||
Balance, December 31, 2016 | 179,433 | $ | 4,030 | $ | 5,114 | $ | (133 | ) | $ | 488 | $ | 9,499 | ||||||||||
Net Income (Loss) | — | — | 400 | — | (6 | ) | 394 | |||||||||||||||
Dividends declared on common stock | — | — | (148 | ) | — | — | (148 | ) | ||||||||||||||
Repurchase of common stock | (524 | ) | (51 | ) | — | — | — | (51 | ) | |||||||||||||
Benefit obligations, net of tax | — | — | — | 4 | — | 4 | ||||||||||||||||
Stock-based compensation, net contributions from noncontrolling interests, and other | 478 | (21 | ) | (1 | ) | — | 12 | (10 | ) | |||||||||||||
Balance, March 31, 2017 | 179,387 | $ | 3,958 | $ | 5,365 | $ | (129 | ) | $ | 494 | $ | 9,688 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
10
DTE Electric Company
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
(In millions) | |||||||
Operating Revenues — Utility operations | $ | 1,175 | $ | 1,153 | |||
Operating Expenses | |||||||
Fuel and purchased power — utility | 314 | 335 | |||||
Operation and maintenance | 383 | 324 | |||||
Depreciation and amortization | 181 | 176 | |||||
Taxes other than income | 80 | 73 | |||||
958 | 908 | ||||||
Operating Income | 217 | 245 | |||||
Other (Income) and Deductions | |||||||
Interest expense | 66 | 65 | |||||
Interest income | — | (8 | ) | ||||
Other income | (19 | ) | (16 | ) | |||
Other expenses | 7 | 7 | |||||
54 | 48 | ||||||
Income Before Income Taxes | 163 | 197 | |||||
Income Tax Expense | 57 | 70 | |||||
Net Income | $ | 106 | $ | 127 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
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DTE Electric Company
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
(In millions) | |||||||
Net Income | $ | 106 | $ | 127 | |||
Other comprehensive income | — | — | |||||
Comprehensive Income | $ | 106 | $ | 127 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
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DTE Electric Company
Consolidated Statements of Financial Position (Unaudited)
March 31, | December 31, | ||||||
2017 | 2016 | ||||||
(In millions) | |||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 11 | $ | 13 | |||
Accounts receivable (less allowance for doubtful accounts of $19 and $25, respectively) | |||||||
Customer | 654 | 728 | |||||
Affiliates | 19 | 12 | |||||
Other | 38 | 29 | |||||
Inventories | |||||||
Fuel | 178 | 225 | |||||
Materials and supplies | 276 | 271 | |||||
Regulatory assets | 11 | 36 | |||||
Prepaid property tax | 89 | 45 | |||||
Other | 16 | 18 | |||||
1,292 | 1,377 | ||||||
Investments | |||||||
Nuclear decommissioning trust funds | 1,364 | 1,320 | |||||
Other | 34 | 36 | |||||
1,398 | 1,356 | ||||||
Property | |||||||
Property, plant, and equipment | 22,276 | 22,094 | |||||
Accumulated depreciation and amortization | (7,812 | ) | (7,721 | ) | |||
14,464 | 14,373 | ||||||
Other Assets | |||||||
Regulatory assets | 3,090 | 3,113 | |||||
Intangible assets | 32 | 31 | |||||
Prepaid postretirement costs — affiliates | 114 | 114 | |||||
Other | 125 | 125 | |||||
3,361 | 3,383 | ||||||
Total Assets | $ | 20,515 | $ | 20,489 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
13
DTE Electric Company
Consolidated Statements of Financial Position (Unaudited) — (Continued)
March 31, | December 31, | ||||||
2017 | 2016 | ||||||
(In millions, except shares) | |||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable | |||||||
Affiliates | $ | 55 | $ | 58 | |||
Other | 384 | 452 | |||||
Accrued interest | 72 | 65 | |||||
Current portion long-term debt, including capital leases | 5 | 6 | |||||
Regulatory liabilities | 33 | 27 | |||||
Short-term borrowings | |||||||
Affiliates | 205 | 117 | |||||
Other | 59 | 62 | |||||
Other | 149 | 146 | |||||
962 | 933 | ||||||
Long-Term Debt (net of current portion) | |||||||
Mortgage bonds, notes, and other | 5,879 | 5,878 | |||||
Capital lease obligations | 3 | 7 | |||||
5,882 | 5,885 | ||||||
Other Liabilities | |||||||
Deferred income taxes | 3,850 | 3,793 | |||||
Regulatory liabilities | 241 | 229 | |||||
Asset retirement obligations | 2,041 | 2,012 | |||||
Unamortized investment tax credit | 88 | 90 | |||||
Nuclear decommissioning | 203 | 194 | |||||
Accrued pension liability — affiliates | 885 | 1,008 | |||||
Accrued postretirement liability — affiliates | 290 | 269 | |||||
Other | 79 | 81 | |||||
7,677 | 7,676 | ||||||
Commitments and Contingencies (Notes 5 and 11) | |||||||
Shareholder’s Equity | |||||||
Common stock, $10 par value, 400,000,000 shares authorized, and 138,632,324 shares issued and outstanding | 4,206 | 4,206 | |||||
Retained earnings | 1,786 | 1,787 | |||||
Accumulated other comprehensive income | 2 | 2 | |||||
Total Shareholder’s Equity | 5,994 | 5,995 | |||||
Total Liabilities and Shareholder’s Equity | $ | 20,515 | $ | 20,489 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
14
DTE Electric Company
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
(In millions) | |||||||
Operating Activities | |||||||
Net Income | $ | 106 | $ | 127 | |||
Adjustments to reconcile Net Income to net cash from operating activities: | |||||||
Depreciation and amortization | 181 | 176 | |||||
Nuclear fuel amortization | 12 | 15 | |||||
Allowance for equity funds used during construction | (6 | ) | (4 | ) | |||
Deferred income taxes | 57 | 70 | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable, net | 58 | 57 | |||||
Inventories | 44 | 31 | |||||
Accounts payable | 26 | 25 | |||||
Accrued pension liability — affiliates | (123 | ) | 3 | ||||
Accrued postretirement liability — affiliates | 21 | (19 | ) | ||||
Regulatory assets and liabilities | 122 | 40 | |||||
Other current and noncurrent assets and liabilities | (87 | ) | (68 | ) | |||
Net cash from operating activities | 411 | 453 | |||||
Investing Activities | |||||||
Plant and equipment expenditures | (408 | ) | (315 | ) | |||
Proceeds from sale of assets | — | 6 | |||||
Proceeds from sale of nuclear decommissioning trust fund assets | 394 | 260 | |||||
Investment in nuclear decommissioning trust funds | (378 | ) | (262 | ) | |||
Other | 5 | 14 | |||||
Net cash used for investing activities | (387 | ) | (297 | ) | |||
Financing Activities | |||||||
Redemption of long-term debt | — | (10 | ) | ||||
Short-term borrowings, net — affiliate | 88 | 22 | |||||
Short-term borrowings, net — other | (3 | ) | (61 | ) | |||
Dividends on common stock | (108 | ) | (105 | ) | |||
Other | (3 | ) | — | ||||
Net cash used for financing activities | (26 | ) | (154 | ) | |||
Net Increase (Decrease) in Cash and Cash Equivalents | (2 | ) | 2 | ||||
Cash and Cash Equivalents at Beginning of Period | 13 | 15 | |||||
Cash and Cash Equivalents at End of Period | $ | 11 | $ | 17 | |||
Supplemental disclosure of non-cash investing and financing activities | |||||||
Plant and equipment expenditures in accounts payable | $ | 134 | $ | 100 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
15
DTE Electric Company
Consolidated Statements of Changes in Shareholder's Equity (Unaudited)
Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | ||||||||||||||||||||
Common Stock | ||||||||||||||||||||||
Shares | Amount | Total | ||||||||||||||||||||
(Dollars in millions, shares in thousands) | ||||||||||||||||||||||
Balance, December 31, 2016 | 138,632 | $ | 1,386 | $ | 2,820 | $ | 1,787 | $ | 2 | $ | 5,995 | |||||||||||
Net Income | — | — | — | 106 | — | 106 | ||||||||||||||||
Dividends declared on common stock | — | — | — | (108 | ) | — | (108 | ) | ||||||||||||||
Other | — | — | — | 1 | — | 1 | ||||||||||||||||
Balance, March 31, 2017 | 138,632 | $ | 1,386 | $ | 2,820 | $ | 1,786 | $ | 2 | $ | 5,994 |
See Combined Notes to Consolidated Financial Statements (Unaudited)
16
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 | Acquisition | DTE Energy | ||
Note 5 | Regulatory Matters | DTE Energy and DTE Electric | ||
Note 6 | Earnings per Share | DTE Energy | ||
Note 7 | Fair Value | DTE Energy and DTE Electric | ||
Note 8 | Financial and Other Derivative Instruments | DTE Energy and DTE Electric | ||
Note 9 | Long-Term Debt | DTE Energy | ||
Note 10 | Short-Term Credit Arrangements and Borrowings | DTE Energy and DTE Electric | ||
Note 11 | Commitments and Contingencies | DTE Energy and DTE Electric | ||
Note 12 | Retirement Benefits and Trusteed Assets | DTE Energy and DTE Electric | ||
Note 13 | Segment and Related Information | DTE Energy |
NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION
Corporate Structure
DTE Energy owns the following businesses:
• | DTE Electric is a public utility engaged in the generation, purchase, distribution, and sale of electricity to approximately 2.2 million customers in southeastern Michigan; |
• | DTE Gas is a public utility engaged in the purchase, storage, transportation, distribution, and sale of natural gas to approximately 1.3 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 for DTE Energy, the CFTC.
Basis of Presentation
The Consolidated Financial Statements should be read in conjunction with the Combined Notes to Consolidated Financial Statements included in the combined DTE Energy and DTE Electric 2016 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.
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, 2017.
17
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
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 the current year's Consolidated Financial Statements 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 significantly 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 owns a 55% interest in SGG, which owns and operates midstream natural gas assets. SGG has contracts through which certain construction risk is designed to pass-through to the customers, with DTE Energy retaining operational and customer default risk. SGG is a VIE with DTE Energy as the primary beneficiary. See Note 4 to the Consolidated Financial Statements, "Acquisition," for more information.
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 March 31, 2017, the carrying amount of assets and liabilities in DTE Energy's Consolidated Statements of Financial Position that relate to its variable interests under long-term purchase and sale contracts are predominantly related to working capital accounts and generally represent the amounts owed by or to DTE Energy for the deliveries associated with the current billing cycle under the contracts. As of March 31, 2017, the carrying amount of assets and liabilities in DTE Electric's Consolidated Statements of Financial Position that relate to its variable interests under long-term purchase contracts are predominantly related to working capital accounts and generally represent the amounts owed by DTE Electric 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.
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, notes receivable, and future funding commitments.
18
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 March 31, 2017 and December 31, 2016. 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. 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.
March 31, 2017 | December 31, 2016 | ||||||||||||||||||||||
SGG(a) | Other | Total | SGG(a) | Other | Total | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||
Cash and cash equivalents | $ | 52 | $ | 11 | $ | 63 | $ | 36 | $ | 27 | $ | 63 | |||||||||||
Restricted cash | — | 7 | 7 | — | 7 | 7 | |||||||||||||||||
Accounts receivable | 10 | 19 | 29 | 8 | 34 | 42 | |||||||||||||||||
Inventories | 3 | 59 | 62 | 3 | 112 | 115 | |||||||||||||||||
Property, plant, and equipment, net | 397 | 75 | 472 | 398 | 76 | 474 | |||||||||||||||||
Goodwill | 22 | — | 22 | 17 | — | 17 | |||||||||||||||||
Intangible assets | 583 | — | 583 | 586 | — | 586 | |||||||||||||||||
Other current and long-term assets | — | 1 | 1 | 1 | 1 | 2 | |||||||||||||||||
$ | 1,067 | $ | 172 | $ | 1,239 | $ | 1,049 | $ | 257 | $ | 1,306 | ||||||||||||
LIABILITIES | |||||||||||||||||||||||
Accounts payable and accrued current liabilities | $ | 19 | $ | 21 | $ | 40 | $ | 19 | $ | 32 | $ | 51 | |||||||||||
Current portion long-term debt, including capital leases | — | 5 | 5 | — | 5 | 5 | |||||||||||||||||
Mortgage bonds, notes, and other | — | 4 | 4 | — | 5 | 5 | |||||||||||||||||
Other current and long-term liabilities | 2 | 14 | 16 | 2 | 15 | 17 | |||||||||||||||||
$ | 21 | $ | 44 | $ | 65 | $ | 21 | $ | 57 | $ | 78 |
_____________________________________
(a)Amounts shown are 100% of SGG's assets and liabilities, of which DTE Energy owns 55%.
Amounts for DTE Energy's non-consolidated VIEs are as follows:
March 31, 2017 | December 31, 2016 | ||||||
(In millions) | |||||||
Investments in equity method investees | $ | 186 | $ | 187 | |||
Notes receivable | $ | 15 | $ | 15 | |||
Future funding commitments | $ | 6 | $ | 7 |
19
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Other Income
The following is a summary of DTE Energy's Other income:
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
(In millions) | |||||||
Equity earnings of equity method investees | $ | 26 | $ | 15 | |||
Income from REF investees | 18 | 19 | |||||
Gains from trading securities | 8 | 5 | |||||
Allowance for equity funds used during construction | 7 | 5 | |||||
Contract services | 4 | 6 | |||||
Other | 1 | 2 | |||||
$ | 64 | $ | 52 |
The following is a summary of DTE Electric's Other income:
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
(In millions) | |||||||
Gains from trading securities allocated from DTE Energy | $ | 8 | $ | 5 | |||
Allowance for equity funds used during construction | 6 | 4 | |||||
Contract services | 4 | 6 | |||||
Other | 1 | 1 | |||||
$ | 19 | $ | 16 |
Changes in Accumulated Other Comprehensive Income (Loss)
For the three months ended March 31, 2017 and 2016, reclassifications out of Accumulated other comprehensive income (loss) for the Registrants were not material. 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.
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 March 31, | March 31, | ||||||||
2017 | 2016 | 2017 | |||||||
(In millions) | |||||||||
DTE Energy | 22 | % | 26 | % | $ | 10 | |||
DTE Electric | 35 | % | 36 | % | $ | 13 |
The 4% decrease in DTE Energy's effective tax rate for the three months ended March 31, 2017 is primarily due to $13 million of excess tax benefits on stock-based compensation recognized in accordance with ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which was adopted effective July 1, 2016.
DTE Energy had $7 million of unrecognized tax benefits that, if recognized, would favorably impact its effective tax rate. DTE Electric had $8 million of unrecognized tax benefits that, if recognized, would favorably impact its effective tax rate. The Registrants do not anticipate any material changes to the unrecognized tax benefits in the next twelve months.
20
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
DTE Electric had income tax receivables with DTE Energy of $10 million and $9 million at March 31, 2017 and December 31, 2016, respectively.
Unrecognized Compensation Costs
As of March 31, 2017, DTE Energy had $92 million of total unrecognized compensation cost related to non-vested stock incentive plan arrangements. That cost is expected to be recognized over a weighted-average period of 1.82 years.
Allocated Stock-Based Compensation
DTE Electric received an allocation of costs from DTE Energy associated with stock-based compensation of $8 million and $10 million for the three months ended March 31, 2017 and 2016, respectively.
NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted Pronouncements
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 applied prospectively. The Registrants adopted this ASU at January 1, 2017. The adoption of the ASU did not have a significant impact on the Registrants' Consolidated Financial Statements.
Recently Issued Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended. 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. The standard is 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 do not plan to early adopt the standard. The Registrants are currently assessing the impact of the ASU, as amended, on their Consolidated Financial Statements as well as the transition method the Registrants will use to adopt the guidance. The Registrants have completed the preliminary evaluations of the impact of this guidance and do not expect the ASU to significantly affect results of operations for tariff-based sales, which represent a majority of the Registrants' revenues, and the remaining non-tariff revenues. The Registrants will continue to evaluate the impact of the ASU on existing revenue recognition policies and procedures and monitor the unresolved industry-related issues. Specifically, the Registrants are considering whether the new guidance will affect accounting for certain contracts where collectibility is in question, contributions in aid of construction, and other utility industry-related areas. The Registrants are evaluating information that would be useful for users of the Consolidated Financial Statements, including information already provided in disclosures outside of the Combined Notes to the Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), a replacement of Leases (Topic 840). This guidance requires a lessee to account for leases as finance or operating leases. Both leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with differing methodology for income statement recognition. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. Entities will classify leases to determine how to recognize lease-related revenue and expense. This ASU is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. A modified retrospective approach is required for leases existing or entered into after the beginning of the earliest comparative period in the Consolidated Financial Statements. The Registrants expect an increase in assets and liabilities, however, they are currently assessing the impact of this ASU on their Consolidated Financial Statements.
21
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Entities will apply the new guidance as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The ASU is effective for the Registrants beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. The Registrants are currently assessing the impact of this standard on their Consolidated Financial Statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside income from operations. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable. The standard will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The ASU is effective for the Registrants beginning after December 15, 2017, including interim periods therein. Early adoption is permitted. The components of net periodic benefit costs (credits) for pension benefits and other postretirement benefits are disclosed in Note 12 to the Consolidated Financial Statements, "Retirement Benefits and Trusteed Assets." The ASU will not have a significant impact on the Registrants' Consolidated Financial Statements.
NOTE 4 — ACQUISITION
Gas Storage and Pipelines Acquisition
Effective October 1, 2016, DTE Energy closed on the purchase of midstream natural gas assets in support of the strategy to continue to grow and earn competitive returns for shareholders. DTE Energy purchased 100% of AGS, located in Pennsylvania and West Virginia, and 40% of SGG, located in West Virginia, from M3 Midstream. In addition, DTE Energy purchased 15% of SGG from Vega Energy Partners, resulting in 55% total ownership of SGG by DTE Energy.
Consideration transferred for the entities acquired was approximately $1.2 billion paid in cash and the assumption of SGG debt of $204 million. The $204 million of debt was comprised of DTE Energy's 55% interest in SGG of $112 million and 45% related to noncontrolling interest partners of $92 million. The acquisition was financed through the issuance of Equity Units and Senior Notes. These entities are part of DTE Energy's Gas Storage and Pipelines segment which owns and manages a network of natural gas gathering, transmission, and storage facilities servicing the Midwest, Ontario, and Northeast markets. SGG has been deemed to be a VIE, and DTE Energy is the primary beneficiary. Thus, SGG's assets and liabilities are included in DTE Energy's Consolidated Statements of Financial Position. See Note 1 to the Consolidated Financial Statements, "Organization and Basis of Presentation," for more information.
DTE Energy has applied purchase accounting to the acquired entities. The allocation of the purchase price included in the Consolidated Statements of Financial Position is preliminary and may be revised up to one year from the date of acquisition due to adjustments in the estimated fair value of the assets acquired and the liabilities assumed. The purchase price is subject to (i) final working capital settlement adjustments, and (ii) resolution of any indemnification claims that might be deducted from the $130 million of cash consideration paid and held in escrow. As such, DTE Energy cannot estimate the potential amount of the additional revisions to the purchase price allocation in 2017. The excess purchase price over the fair value of net assets acquired totaled approximately $268 million and was classified as goodwill. During the first quarter of 2017, a final working capital adjustment was recognized resulting in an additional goodwill of approximately $6 million. The factors contributing to the recognition of goodwill are based on various strategic benefits that are expected to be realized from the AGS and SGG acquisition. The acquisition provides DTE Energy with a platform for midstream growth and access to further investment opportunities in the Appalachian basin, an additional connection to the NEXUS Pipeline which should drive incremental volumes on the NEXUS Pipeline, and a new set of producer relationships that may lead to more partnering opportunities. The goodwill is expected to be deductible for income tax purposes.
22
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
The preliminary allocation of the purchase price was based on estimated fair values of the AGS and SGG assets acquired and liabilities assumed at the date of acquisition, October 1, 2016. The components of the preliminary purchase price allocation were as follows:
(In millions) | |||
Assets | |||
Cash | $ | 83 | |
Accounts receivable | 24 | ||
Inventory | 6 | ||
Property, plant, and equipment, net | 730 | ||
Goodwill | 268 | ||
Customer relationship intangibles | 770 | ||
Other current assets | 1 | ||
$ | 1,882 | ||
Liabilities | |||
Accounts payable | $ | 19 | |
Other current liabilities | 14 | ||
Long-term debt | 204 | ||
Other long-term liabilities | 26 | ||
$ | 263 | ||
Less noncontrolling interest | 390 | ||
Total cash consideration | $ | 1,229 |
The intangible assets recorded as a result of the acquisition pertain to existing customer relationships, which were valued at approximately $770 million as of the acquisition date. The fair value of the intangible assets acquired was estimated by applying the income approach. The income approach was based upon discounted projected future cash flows attributable to the existing contracts and agreements. The fair value measurement was based on significant unobservable inputs, including management estimates and assumptions, and thus represents a Level 3 measurement, pursuant to the applicable accounting guidance. Key estimates and inputs included revenue and expense projections and discount rates based on the risks associated with the entities. The intangible assets are amortized on a straight line basis over a period of 40 years, which is based on the number of years the assets are expected to economically contribute to the business. The expected economic benefit incorporates existing customer contracts with a weighted-average amortization life of 10 years and expected renewal rates, based on the estimated volume and production lives of gas resources in the region.
The fair value of the noncontrolling interest in the table above was derived based on the purchase price DTE Energy paid for the 55% interest in SGG.
DTE Energy evaluated pre-acquisition contingencies relating to AGS and SGG that existed as of the acquisition date. Based on the evaluation, DTE Energy determined that $39 million of certain pre-acquisition contingencies, related to repairing existing right-of-ways, are probable in nature and estimable as of the acquisition date. Accordingly, DTE Energy recorded its best estimates for these contingencies as part of the purchase accounting for AGS and SGG.
DTE Energy incurred $15 million of direct transaction costs for the year ended December 31, 2016. These costs were primarily related to advisory fees and included in Operation and maintenance in DTE Energy's 2016 Consolidated Statements of Operations.
DTE Energy's 2016 Consolidated Statements of Operations included Operating Revenues — Non-utility operations of $39 million and Net Income of $4 million associated with the acquired entities for the three-month period following the acquisition date, excluding the $15 million transaction costs described above. The pro forma financial information was not presented for DTE Energy because the effects of the acquisition were not material to the Consolidated Statements of Operations.
23
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 5 — REGULATORY MATTERS
2016 Electric Rate Case Filing
DTE Electric filed a rate case with the MPSC on February 1, 2016 requesting an increase in base rates of $344 million based on a projected twelve-month period ending July 31, 2017. On August 1, 2016, DTE Electric self-implemented a base rate increase of $245 million. On January 31, 2017, the MPSC issued an order approving an annual revenue increase of $184 million for service rendered on or after February 7, 2017. The MPSC authorized a return on equity of 10.1%. DTE Electric has recorded a refund liability of $37 million, representing the total estimated refund due to customers, inclusive of interest, at March 31, 2017. DTE Electric will file a self-implementation reconciliation with the MPSC by April 30, 2017.
2017 Electric Rate Case Filing
DTE Electric filed a rate case with the MPSC on April 19, 2017 requesting an increase in base rates of $231 million based on a projected twelve-month period ending October 31, 2018. The requested increase in base rates is due primarily to an increase in net plant resulting from infrastructure investments, environmental compliance, and reliability improvement projects. The rate filing also includes projected changes in sales, operation and maintenance expenses, and working capital. The rate filing also requests an increase in return on equity from 10.1% to 10.5% on capital structure. DTE Electric anticipates self-implementing a rate increase in November 2017 with an MPSC order expected by April 2018.
PSCR Proceedings
The PSCR process is designed to allow DTE Electric to recover all of its power supply costs if incurred under reasonable and prudent policies and practices. DTE Electric's power supply costs include fuel and related transportation costs, purchased and net interchange power costs, NOx and SO2 emission allowances costs, urea costs, transmission costs, MISO, and other related costs. The MPSC reviews these costs, policies, and practices for prudence in annual plan and reconciliation filings.
2015 PSCR Year — In March 2016, DTE Electric filed its 2015 PSCR reconciliation. The Administrative Law Judge and certain intervenors in the reconciliation case have challenged the recovery of approximately $13 million of costs related to a customer settlement. Resolution of this matter is expected in 2017.
2016 DTE Main Electric Depreciation Case Filing
DTE Electric filed a depreciation case with the MPSC on November 1, 2016 requesting an increase in depreciation rates of $156 million when compared to current depreciation rates for Plant in service balances as of December 31, 2015. An MPSC order in this case is expected in 2018.
24
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 6 — EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the net income, adjusted for income allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the dilution that would occur if any potentially dilutive instruments were exercised or converted into common shares. DTE Energy’s participating securities are restricted shares under the stock incentive program that contain rights to receive non-forfeitable dividends. Equity units, performance shares, and stock options do not receive cash dividends; as such, these awards are not considered participating securities.
The following is a reconciliation of DTE Energy's basic and diluted income per share calculation:
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
(In millions, except per share amounts) | |||||||
Basic Earnings per Share | |||||||
Net income attributable to DTE Energy Company | $ | 400 | $ | 247 | |||
Less allocation of earnings to net restricted stock awards | (1 | ) | — | ||||
Net income available to common shareholders — basic | $ | 399 | $ | 247 | |||
Average number of common shares outstanding | 179 | 179 | |||||
Basic Earnings per Common Share | $ | 2.23 | $ | 1.38 | |||
Diluted Earnings per Share | |||||||
Net income attributable to DTE Energy Company | $ | 400 | $ | 247 | |||
Less allocation of earnings to net restricted stock awards | (1 | ) | — | ||||
Net income available to common shareholders — diluted | $ | 399 | $ | 247 | |||
Average number of common shares outstanding | 179 | 180 | |||||
Diluted Earnings per Common Share(a) | $ | 2.23 | $ | 1.37 |
(a) | The October 2016 Equity Units are potentially dilutive securities but were excluded from the calculation of diluted EPS for the three months ended March 31, 2017, as the dilutive stock price threshold was not met. |
25
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 7 — 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 March 31, 2017 and December 31, 2016. The Registrants believe they use valuation techniques that maximize the use of observable market-based inputs and minimize the use of unobservable inputs.
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. |
26
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:
March 31, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||||||||||||
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) | $ | 14 | $ | 3 | $ | — | $ | — | $ | 17 | $ | 14 | $ | 3 | $ | — | $ | — | $ | 17 | |||||||||||||||||||
Nuclear decommissioning trusts(c) | |||||||||||||||||||||||||||||||||||||||
Equity securities | 890 | — | — | — | 890 | 887 | — | — | — | 887 | |||||||||||||||||||||||||||||
Fixed income securities | 11 | 460 | — | — | 471 | 11 | 414 | — | — | 425 | |||||||||||||||||||||||||||||
Cash equivalents | 3 | — | — | — | 3 | 8 | — | — | — | 8 | |||||||||||||||||||||||||||||
Other investments(d) | |||||||||||||||||||||||||||||||||||||||
Equity securities | 110 | — | — | — | 110 | 104 | — | — | — | 104 | |||||||||||||||||||||||||||||
Fixed income securities | 63 | — | — | — | 63 | 61 | — | — | — | 61 | |||||||||||||||||||||||||||||
Derivative assets | |||||||||||||||||||||||||||||||||||||||
Commodity Contracts | |||||||||||||||||||||||||||||||||||||||
Natural Gas | 82 | 151 | 71 | (206 | ) | 98 | 216 | 79 | 53 | (306 | ) | 42 | |||||||||||||||||||||||||||
Electricity | — | 152 | 34 | (146 | ) | 40 | — | 154 | 39 | (157 | ) | 36 | |||||||||||||||||||||||||||
Other | — | — | 1 | — | 1 | — | — | 2 | — | 2 | |||||||||||||||||||||||||||||
Foreign currency exchange contracts | — | 5 | — | (3 | ) | 2 | — | 6 | — | (5 | ) | 1 | |||||||||||||||||||||||||||
Total derivative assets | 82 | 308 | 106 | (355 | ) | 141 | 216 | 239 | 94 | (468 | ) | 81 | |||||||||||||||||||||||||||
Total | $ | 1,173 | $ | 771 | $ | 106 | $ | (355 | ) | $ | 1,695 | $ | 1,301 | $ | 656 | $ | 94 | $ | (468 | ) | $ | 1,583 | |||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||||||||||
Derivative liabilities | |||||||||||||||||||||||||||||||||||||||
Commodity Contracts | |||||||||||||||||||||||||||||||||||||||
Natural Gas | $ | (82 | ) | $ | (121 | ) | $ | (86 | ) | $ | 202 | $ | (87 | ) | $ | (226 | ) | $ | (86 | ) | $ | (149 | ) | $ | 321 | $ | (140 | ) | |||||||||||
Electricity | — | (157 | ) | (40 | ) | 158 | (39 | ) | — | (159 | ) | (30 | ) | 163 | (26 | ) | |||||||||||||||||||||||
Other |