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, 2018
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 every Interactive Data File required to be submitted 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 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, a 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 | Emerging growth company o |
DTE Electric | Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o | 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 September 30, 2018:
Registrant | Description | Shares | |||
DTE Energy | Common Stock, without par value | 181,925,024 | |||
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 any individual registrant is filed by such registrant solely on its own 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
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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. |
AMT | Alternative Minimum Tax |
ANPR | Advanced Notice of Proposed Rulemaking |
ASU | Accounting Standards Update issued by the FASB |
CCR | Coal Combustion Residuals |
CFTC | U.S. Commodity Futures Trading Commission |
CON | Certificate of Necessity |
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 |
Equity units | DTE Energy's 2016 Equity Units issued in October 2016, which were used to finance the October 1, 2016 Gas Storage and Pipelines acquisition |
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 |
Green Bonds | A financing option to fund projects that have a positive environmental impact based upon a specified set of criteria. The proceeds are required to be used for eligible green expenditures. |
MDEQ | Michigan Department of Environmental Quality |
MGP | Manufactured Gas Plant |
MPSC | Michigan Public Service Commission |
MTM | Mark-to-market |
NAV | Net Asset Value |
NEXUS | NEXUS Gas Transmission, LLC, a joint venture in which DTE Energy own a 50% partnership interest. |
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 |
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DEFINITIONS
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. |
REC | Renewable Energy Credit |
REF | Reduced Emissions Fuel |
Registrants | DTE Energy and DTE Electric |
Retail access | Michigan legislation provided customers the option of access to alternative suppliers for electricity and natural gas. |
SEC | Securities and Exchange Commission |
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. |
SO2 | Sulfur Dioxide |
TCJA | Tax Cuts and Jobs Act of 2017 |
TCJA rate reduction reserve | Beginning January 1, 2018, as a result of the change in the corporate tax rate, DTE Electric and DTE Gas have reduced revenue and recorded an offsetting regulatory liability |
Topic 606 | FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, as amended |
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. |
VIE | Variable Interest Entity |
Units of Measurement | |
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 to 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 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 2017 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,” “may,” “could,” “projected,” “aspiration,” “plans,” 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; |
• | the cost of protecting assets against, or damage due to, cyber crime and terrorism; |
• | health, safety, financial, environmental, and regulatory risks associated with ownership and operation of nuclear facilities; |
• | 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 cost and availability of coal and other raw materials, purchased power, and natural gas; |
• | advances in technology that produce power or reduce power consumption; |
• | changes in the financial condition of 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; |
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• | 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; |
• | 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; |
• | employee relations and the impact of collective bargaining agreements; |
• | the risk of a major safety incident; |
• | 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, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(In millions, except per share amounts) | |||||||||||||||
Operating Revenues | |||||||||||||||
Utility operations | $ | 1,669 | $ | 1,573 | $ | 4,923 | $ | 4,714 | |||||||
Non-utility operations | 1,881 | 1,672 | 5,539 | 4,622 | |||||||||||
3,550 | 3,245 | 10,462 | 9,336 | ||||||||||||
Operating Expenses | |||||||||||||||
Fuel, purchased power, and gas — utility | 453 | 437 | 1,440 | 1,362 | |||||||||||
Fuel, purchased power, and gas — non-utility | 1,682 | 1,469 | 4,898 | 3,897 | |||||||||||
Operation and maintenance | 604 | 550 | 1,721 | 1,676 | |||||||||||
Depreciation and amortization | 273 | 258 | 826 | 756 | |||||||||||
Taxes other than income | 99 | 91 | 307 | 297 | |||||||||||
Asset (gains) losses and impairments, net | 10 | 6 | 8 | 9 | |||||||||||
3,121 | 2,811 | 9,200 | 7,997 | ||||||||||||
Operating Income | 429 | 434 | 1,262 | 1,339 | |||||||||||
Other (Income) and Deductions | |||||||||||||||
Interest expense | 142 | 146 | 412 | 404 | |||||||||||
Interest income | (3 | ) | (4 | ) | (9 | ) | (9 | ) | |||||||
Non-operating retirement benefits, net | 9 | 16 | 27 | 49 | |||||||||||
Other income | (99 | ) | (74 | ) | (262 | ) | (204 | ) | |||||||
Other expenses | 11 | 13 | 51 | 26 | |||||||||||
60 | 97 | 219 | 266 | ||||||||||||
Income Before Income Taxes | 369 | 337 | 1,043 | 1,073 | |||||||||||
Income Tax Expense | 34 | 74 | 121 | 241 | |||||||||||
Net Income | 335 | 263 | 922 | 832 | |||||||||||
Less: Net Income (Loss) Attributable to Noncontrolling Interests | 1 | (7 | ) | (7 | ) | (15 | ) | ||||||||
Net Income Attributable to DTE Energy Company | $ | 334 | $ | 270 | $ | 929 | $ | 847 | |||||||
Basic Earnings per Common Share | |||||||||||||||
Net Income Attributable to DTE Energy Company | $ | 1.84 | $ | 1.51 | $ | 5.13 | $ | 4.72 | |||||||
Diluted Earnings per Common Share | |||||||||||||||
Net Income Attributable to DTE Energy Company | $ | 1.84 | $ | 1.51 | $ | 5.13 | $ | 4.72 | |||||||
Weighted Average Common Shares Outstanding | |||||||||||||||
Basic | 182 | 179 | 181 | 179 | |||||||||||
Diluted | 182 | 179 | 181 | 179 | |||||||||||
Dividends Declared per Common Share | $ | — | $ | — | $ | 2.65 | $ | 2.48 | |||||||
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, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(In millions) | |||||||||||||||
Net Income | $ | 335 | $ | 263 | $ | 922 | $ | 832 | |||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Benefit obligations, net of taxes of $—, $2, $2, and $6, respectively | 2 | 3 | 7 | 10 | |||||||||||
Net unrealized gains on investments during the period, net of taxes of $1 for the nine months ended September 30, 2017 | — | — | — | 1 | |||||||||||
Net unrealized gains on derivatives during the period, net of taxes of $—, respectively | 1 | — | 1 | — | |||||||||||
Foreign currency translation | — | 2 | (1 | ) | 2 | ||||||||||
Other comprehensive income | 3 | 5 | 7 | 13 | |||||||||||
Comprehensive income | 338 | 268 | 929 | 845 | |||||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests | 1 | (7 | ) | (7 | ) | (15 | ) | ||||||||
Comprehensive Income Attributable to DTE Energy Company | $ | 337 | $ | 275 | $ | 936 | $ | 860 | |||||||
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, | ||||||
2018 | 2017 | ||||||
(In millions) | |||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 84 | $ | 66 | |||
Restricted cash | 20 | 23 | |||||
Accounts receivable (less allowance for doubtful accounts of $75 and $49, respectively) | |||||||
Customer | 1,690 | 1,758 | |||||
Other | 83 | 98 | |||||
Inventories | |||||||
Fuel and gas | 390 | 399 | |||||
Materials and supplies | 377 | 380 | |||||
Derivative assets | 97 | 103 | |||||
Regulatory assets | 90 | 55 | |||||
Other | 272 | 199 | |||||
3,103 | 3,081 | ||||||
Investments | |||||||
Nuclear decommissioning trust funds | 1,525 | 1,492 | |||||
Investments in equity method investees | 1,670 | 1,073 | |||||
Other | 241 | 232 | |||||
3,436 | 2,797 | ||||||
Property | |||||||
Property, plant, and equipment | 32,600 | 31,424 | |||||
Accumulated depreciation and amortization | (10,988 | ) | (10,703 | ) | |||
21,612 | 20,721 | ||||||
Other Assets | |||||||
Goodwill | 2,293 | 2,293 | |||||
Regulatory assets | 3,689 | 3,723 | |||||
Intangible assets | 864 | 867 | |||||
Notes receivable | 67 | 73 | |||||
Derivative assets | 31 | 51 | |||||
Prepaid postretirement costs | 45 | — | |||||
Other | 152 | 161 | |||||
7,141 | 7,168 | ||||||
Total Assets | $ | 35,292 | $ | 33,767 | |||
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, | ||||||
2018 | 2017 | ||||||
(In millions, except shares) | |||||||
LIABILITIES AND EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable | $ | 1,160 | $ | 1,171 | |||
Accrued interest | 143 | 111 | |||||
Dividends payable | 161 | 158 | |||||
Short-term borrowings | 77 | 621 | |||||
Current portion long-term debt, including capital leases | 1 | 109 | |||||
Derivative liabilities | 79 | 99 | |||||
Regulatory liabilities | 34 | 18 | |||||
Other | 462 | 525 | |||||
2,117 | 2,812 | ||||||
Long-Term Debt (net of current portion) | |||||||
Mortgage bonds, notes, and other | 12,475 | 11,039 | |||||
Junior subordinated debentures | 1,145 | 1,145 | |||||
Capital lease obligations | — | 1 | |||||
13,620 | 12,185 | ||||||
Other Liabilities | |||||||
Deferred income taxes | 1,974 | 1,888 | |||||
Regulatory liabilities | 3,029 | 2,875 | |||||
Asset retirement obligations | 2,428 | 2,320 | |||||
Unamortized investment tax credit | 140 | 122 | |||||
Derivative liabilities | 66 | 47 | |||||
Accrued pension liability | 719 | 924 | |||||
Accrued postretirement liability | — | 61 | |||||
Nuclear decommissioning | 224 | 220 | |||||
Other | 285 | 323 | |||||
8,865 | 8,780 | ||||||
Commitments and Contingencies (Notes 5 and 11) | |||||||
Equity | |||||||
Common stock (No par value, 400,000,000 shares authorized, and 181,925,024 and 179,386,967 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively) | 4,232 | 3,989 | |||||
Retained earnings | 6,093 | 5,643 | |||||
Accumulated other comprehensive loss | (118 | ) | (120 | ) | |||
Total DTE Energy Company Equity | 10,207 | 9,512 | |||||
Noncontrolling interests | 483 | 478 | |||||
Total Equity | 10,690 | 9,990 | |||||
Total Liabilities and Equity | $ | 35,292 | $ | 33,767 | |||
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, | |||||||
2018 | 2017 | ||||||
(In millions) | |||||||
Operating Activities | |||||||
Net Income | $ | 922 | $ | 832 | |||
Adjustments to reconcile Net Income to Net cash from operating activities: | |||||||
Depreciation and amortization | 826 | 756 | |||||
Nuclear fuel amortization | 39 | 39 | |||||
Allowance for equity funds used during construction | (20 | ) | (17 | ) | |||
Deferred income taxes | 118 | 261 | |||||
Equity earnings of equity method investees | (99 | ) | (77 | ) | |||
Dividends from equity method investees | 48 | 55 | |||||
Asset (gains) losses and impairments, net | 11 | 5 | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable, net | 85 | 43 | |||||
Inventories | 11 | (41 | ) | ||||
Prepaid postretirement benefit costs | (45 | ) | — | ||||
Accounts payable | 9 | 25 | |||||
Accrued pension liability | (205 | ) | (230 | ) | |||
Accrued postretirement liability | (61 | ) | (30 | ) | |||
Derivative assets and liabilities | 24 | (133 | ) | ||||
Regulatory assets and liabilities | 283 | 260 | |||||
Other current and noncurrent assets and liabilities | 101 | (198 | ) | ||||
Net cash from operating activities | 2,047 | 1,550 | |||||
Investing Activities | |||||||
Plant and equipment expenditures — utility | (1,562 | ) | (1,439 | ) | |||
Plant and equipment expenditures — non-utility | (217 | ) | (133 | ) | |||
Proceeds from sale of nuclear decommissioning trust fund assets | 810 | 951 | |||||
Investment in nuclear decommissioning trust funds | (810 | ) | (936 | ) | |||
Distributions from equity method investees | 8 | 10 | |||||
Contributions to equity method investees | (545 | ) | (194 | ) | |||
Other | (20 | ) | (61 | ) | |||
Net cash used for investing activities | (2,336 | ) | (1,802 | ) | |||
Financing Activities | |||||||
Issuance of long-term debt, net of issuance costs | 1,433 | 1,010 | |||||
Redemption of long-term debt | (105 | ) | (385 | ) | |||
Short-term borrowings, net | (544 | ) | 160 | ||||
Issuance of common stock | 7 | — | |||||
Repurchase of common stock | — | (51 | ) | ||||
Dividends on common stock | (459 | ) | (444 | ) | |||
REF contributions from noncontrolling interests | 43 | 34 | |||||
Distributions to noncontrolling interests | (31 | ) | (29 | ) | |||
Other | (40 | ) | (70 | ) | |||
Net cash from financing activities | 304 | 225 | |||||
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | 15 | (27 | ) | ||||
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 89 | 113 | |||||
Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 104 | $ | 86 | |||
Supplemental disclosure of non-cash investing and financing activities | |||||||
Plant and equipment expenditures in accounts payable | $ | 275 | $ | 222 | |||
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, 2017 | 179,387 | $ | 3,989 | $ | 5,643 | $ | (120 | ) | $ | 478 | $ | 9,990 | ||||||||||
Implementation of ASU 2016-01 | — | — | 5 | (5 | ) | — | — | |||||||||||||||
Net Income (Loss) | — | — | 929 | — | (7 | ) | 922 | |||||||||||||||
Dividends declared on common stock | — | — | (481 | ) | — | — | (481 | ) | ||||||||||||||
Issuance of common stock | 255 | 26 | — | — | — | 26 | ||||||||||||||||
Contribution of common stock to pension plan | 1,751 | 175 | — | — | — | 175 | ||||||||||||||||
Benefit obligations, net of tax | — | — | — | 7 | — | 7 | ||||||||||||||||
Net unrealized gains on derivatives, net of tax | — | — | — | 1 | — | 1 | ||||||||||||||||
Foreign currency translation | — | — | — | (1 | ) | — | (1 | ) | ||||||||||||||
Stock-based compensation, net contributions from noncontrolling interests, and other | 532 | 42 | (3 | ) | — | 12 | 51 | |||||||||||||||
Balance, September 30, 2018 | 181,925 | $ | 4,232 | $ | 6,093 | $ | (118 | ) | $ | 483 | $ | 10,690 | ||||||||||
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, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(In millions) | |||||||||||||||
Operating Revenues — Utility operations | $ | 1,521 | $ | 1,434 | $ | 4,002 | $ | 3,827 | |||||||
Operating Expenses | |||||||||||||||
Fuel and purchased power — utility | 438 | 428 | 1,163 | 1,097 | |||||||||||
Operation and maintenance | 360 | 349 | 1,025 | 1,068 | |||||||||||
Depreciation and amortization | 202 | 188 | 616 | 549 | |||||||||||
Taxes other than income | 77 | 74 | 232 | 229 | |||||||||||
1,077 | 1,039 | 3,036 | 2,943 | ||||||||||||
Operating Income | 444 | 395 | 966 | 884 | |||||||||||
Other (Income) and Deductions | |||||||||||||||
Interest expense | 73 | 68 | 210 | 206 | |||||||||||
Non-operating retirement benefits, net | (1 | ) | — | (1 | ) | — | |||||||||
Other income | (23 | ) | (21 | ) | (72 | ) | (57 | ) | |||||||
Other expenses | 9 | 11 | 49 | 23 | |||||||||||
58 | 58 | 186 | 172 | ||||||||||||
Income Before Income Taxes | 386 | 337 | 780 | 712 | |||||||||||
Income Tax Expense | 81 | 118 | 172 | 249 | |||||||||||
Net Income | $ | 305 | $ | 219 | $ | 608 | $ | 463 | |||||||
See Combined Notes to Consolidated Financial Statements (Unaudited)
11
DTE Electric Company
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(In millions) | |||||||||||||||
Net Income | $ | 305 | $ | 219 | $ | 608 | $ | 463 | |||||||
Other comprehensive income | — | — | — | — | |||||||||||
Comprehensive Income | $ | 305 | $ | 219 | $ | 608 | $ | 463 | |||||||
See Combined Notes to Consolidated Financial Statements (Unaudited)
12
DTE Electric Company
Consolidated Statements of Financial Position (Unaudited)
September 30, | December 31, | ||||||
2018 | 2017 | ||||||
(In millions) | |||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 12 | $ | 15 | |||
Accounts receivable (less allowance for doubtful accounts of $43 and $31, respectively) | |||||||
Customer | 894 | 791 | |||||
Affiliates | 4 | 20 | |||||
Other | 40 | 37 | |||||
Inventories | |||||||
Fuel | 145 | 190 | |||||
Materials and supplies | 277 | 275 | |||||
Regulatory assets | 89 | 50 | |||||
Prepaid property tax | 111 | 48 | |||||
Other | 15 | 20 | |||||
1,587 | 1,446 | ||||||
Investments | |||||||
Nuclear decommissioning trust funds | 1,525 | 1,492 | |||||
Other | 40 | 36 | |||||
1,565 | 1,528 | ||||||
Property | |||||||
Property, plant, and equipment | 23,683 | 22,972 | |||||
Accumulated depreciation and amortization | (8,156 | ) | (7,984 | ) | |||
15,527 | 14,988 | ||||||
Other Assets | |||||||
Regulatory assets | 3,003 | 3,005 | |||||
Intangible assets | 29 | 25 | |||||
Prepaid postretirement costs — affiliates | 113 | 113 | |||||
Other | 117 | 123 | |||||
3,262 | 3,266 | ||||||
Total Assets | $ | 21,941 | $ | 21,228 | |||
See Combined Notes to Consolidated Financial Statements (Unaudited)
13
DTE Electric Company
Consolidated Statements of Financial Position (Unaudited) — (Continued)
September 30, | December 31, | ||||||
2018 | 2017 | ||||||
(In millions, except shares) | |||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable | |||||||
Affiliates | $ | 56 | $ | 52 | |||
Other | 391 | 416 | |||||
Accrued interest | 78 | 72 | |||||
Current portion long-term debt, including capital leases | 1 | 5 | |||||
Regulatory liabilities | 13 | 17 | |||||
Short-term borrowings | |||||||
Affiliates | 143 | 116 | |||||
Other | 51 | 238 | |||||
Other | 143 | 145 | |||||
876 | 1,061 | ||||||
Long-Term Debt (net of current portion) | |||||||
Mortgage bonds, notes, and other | 6,537 | 6,017 | |||||
Capital lease obligations | — | 1 | |||||
6,537 | 6,018 | ||||||
Other Liabilities | |||||||
Deferred income taxes | 2,210 | 2,088 | |||||
Regulatory liabilities | 2,259 | 2,137 | |||||
Asset retirement obligations | 2,228 | 2,125 | |||||
Unamortized investment tax credit | 138 | 120 | |||||
Nuclear decommissioning | 224 | 220 | |||||
Accrued pension liability — affiliates | 626 | 811 | |||||
Accrued postretirement liability — affiliates | 240 | 311 | |||||
Other | 76 | 72 | |||||
8,001 | 7,884 | ||||||
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 for both periods) | 4,306 | 4,306 | |||||
Retained earnings | 2,221 | 1,956 | |||||
Accumulated other comprehensive income | — | 3 | |||||
Total Shareholder’s Equity | 6,527 | 6,265 | |||||
Total Liabilities and Shareholder’s Equity | $ | 21,941 | $ | 21,228 | |||
See Combined Notes to Consolidated Financial Statements (Unaudited)
14
DTE Electric Company
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, | |||||||
2018 | 2017 | ||||||
(In millions) | |||||||
Operating Activities | |||||||
Net Income | $ | 608 | $ | 463 | |||
Adjustments to reconcile Net Income to Net cash from operating activities: | |||||||
Depreciation and amortization | 616 | 549 | |||||
Nuclear fuel amortization | 39 | 39 | |||||
Allowance for equity funds used during construction | (14 | ) | (14 | ) | |||
Deferred income taxes | 156 | 248 | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable, net | (89 | ) | (104 | ) | |||
Inventories | 43 | 32 | |||||
Accounts payable | 18 | 32 | |||||
Accrued pension liability — affiliates | (185 | ) | (182 | ) | |||
Accrued postretirement liability — affiliates | (71 | ) | (17 | ) | |||
Regulatory assets and liabilities | 195 | 223 | |||||
Other current and noncurrent assets and liabilities | (71 | ) | (174 | ) | |||
Net cash from operating activities | 1,245 | 1,095 | |||||
Investing Activities | |||||||
Plant and equipment expenditures | (1,248 | ) | (1,103 | ) | |||
Proceeds from sale of nuclear decommissioning trust fund assets | 810 | 951 | |||||
Investment in nuclear decommissioning trust funds | (810 | ) | (936 | ) | |||
Other | (7 | ) | — | ||||
Net cash used for investing activities | (1,255 | ) | (1,088 | ) | |||
Financing Activities | |||||||
Issuance of long-term debt, net of issuance costs | 520 | 435 | |||||
Redemption of long-term debt | — | (300 | ) | ||||
Short-term borrowings, net — affiliate | 27 | (51 | ) | ||||
Short-term borrowings, net — other | (187 | ) | 249 | ||||
Dividends on common stock | (346 | ) | (324 | ) | |||
Other | (7 | ) | (17 | ) | |||
Net cash from (used for) financing activities | 7 | (8 | ) | ||||
Net Decrease in Cash and Cash Equivalents | (3 | ) | (1 | ) | |||
Cash and Cash Equivalents at Beginning of Period | 15 | 13 | |||||
Cash and Cash Equivalents at End of Period | $ | 12 | $ | 12 | |||
Supplemental disclosure of non-cash investing and financing activities | |||||||
Plant and equipment expenditures in accounts payable | $ | 152 | $ | 112 | |||
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, 2017 | 138,632 | $ | 1,386 | $ | 2,920 | $ | 1,956 | $ | 3 | $ | 6,265 | |||||||||||
Implementation of ASU 2016-01 | — | — | — | 3 | (3 | ) | — | |||||||||||||||
Net Income | — | — | — | 608 | — | 608 | ||||||||||||||||
Dividends declared on common stock | — | — | — | (346 | ) | — | (346 | ) | ||||||||||||||
Balance, September 30, 2018 | 138,632 | $ | 1,386 | $ | 2,920 | $ | 2,221 | $ | — | $ | 6,527 | |||||||||||
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 | Revenue | DTE Energy and DTE Electric | ||
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 and DTE Electric | ||
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) services related to the gathering, transportation, and storage of natural gas; 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 2017 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, 2018.
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 DTE Energy were reclassified to match the current year's Consolidated Financial Statements presentation.
Due to the implementation of ASU 2017-07, amounts previously included in Operation and maintenance were reclassified to Non-operating retirement benefits, net on the Consolidated Statements of Operations. See Note 3 to the Consolidated Financial Statements, "New Accounting Pronouncements."
The Dividends Declared per Common Share for the three months ended September 30, 2017 on DTE Energy’s Consolidated Statements of Operations was revised to reflect zero dividend declarations in the third quarter of 2017, or $0.00 for the three-month period. The financial statements previously reflected one dividend declaration of $0.83 for the three-month period ended September 30, 2017. This revision was not material to DTE Energy's Consolidated Financial Statements.
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.
The Registrants have variable interests in NEXUS, which include DTE Energy's 50% ownership interest and DTE Electric's transportation services contract. NEXUS is a joint venture which owns a 256-mile pipeline to transport Utica and Marcellus shale gas to Ohio, Michigan, and Ontario market centers. NEXUS is a VIE as it has insufficient equity at risk to finance its activities. The Registrants are not the primary beneficiaries, as the power to direct significant activities is shared between the owners of the equity interests. DTE Energy accounts for its ownership interest in NEXUS under the equity method.
The Registrants hold ownership interests in certain limited partnerships. The limited partnerships include investment funds which support regional development and economic growth, as well as an operational business providing energy-related products. These entities are generally VIEs as a result of certain characteristics of the limited partnership voting rights. The ownership interests are accounted for under the equity method as the Registrants are not the primary beneficiaries.
18
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
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, 2018, 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 September 30, 2018, 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 and, for DTE Energy, in Note 11 to the Consolidated Financial Statements, "Commitments and Contingencies," related to the REF guarantees and indemnities. For non-consolidated VIEs, the maximum risk exposure of the Registrants is generally limited to their investment, notes receivable, future funding commitments, and amounts which DTE Energy has guaranteed. See Note 11 to the Consolidated Financial Statements, "Commitments and Contingencies," for further discussion of the NEXUS guarantee arrangements.
The following table summarizes the major Consolidated Statements of Financial Position items for consolidated VIEs as of September 30, 2018 and December 31, 2017. 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.
Amounts for DTE Energy's consolidated VIEs are as follows:
September 30, 2018 | December 31, 2017 | ||||||||||||||||||||||
SGG(a) | Other | Total | SGG(a) | Other | Total | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||
Cash and cash equivalents | $ | 23 | $ | 15 | $ | 38 | $ | 23 | $ | 14 | $ | 37 | |||||||||||
Restricted cash | — | 4 | 4 | — | 8 | 8 | |||||||||||||||||
Accounts receivable | 9 | 32 | 41 | 11 | 42 | 53 | |||||||||||||||||
Inventories | 3 | 62 | 65 | 3 | 114 | 117 | |||||||||||||||||
Property, plant, and equipment, net | 392 | 50 | 442 | 400 | 75 | 475 | |||||||||||||||||
Goodwill | 25 | — | 25 | 25 | — | 25 | |||||||||||||||||
Intangible assets | 561 | — | 561 | 572 | — | 572 | |||||||||||||||||
Other current and long-term assets | 1 | — | 1 | 4 | — | 4 | |||||||||||||||||
$ | 1,014 | $ | 163 | $ | 1,177 | $ | 1,038 | $ | 253 | $ | 1,291 | ||||||||||||
LIABILITIES | |||||||||||||||||||||||
Accounts payable and accrued current liabilities | $ | 2 | $ | 30 | $ | 32 | $ | 26 | $ | 47 | $ | 73 | |||||||||||
Current portion long-term debt, including capital leases | — | — | — | — | 4 | 4 | |||||||||||||||||
Mortgage bonds, notes, and other | — | — | — | — | 1 | 1 | |||||||||||||||||
Other current and long-term liabilities | 7 | 6 | 13 | 1 | 16 | 17 | |||||||||||||||||
$ | 9 | $ | 36 | $ | 45 | $ | 27 | $ | 68 | $ | 95 | ||||||||||||
_____________________________________
(a)Amounts shown are 100% of SGG's assets and liabilities, of which DTE Energy owns 55%.
19
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
Amounts for DTE Energy's non-consolidated VIEs are as follows:
September 30, 2018 | December 31, 2017 | ||||||
(In millions) | |||||||
Investments in equity method investees | $ | 1,342 | $ | 811 | |||
Notes receivable | $ | 18 | $ | 17 | |||
Future funding commitments | $ | 135 | $ | 598 | |||
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Other Income
The following is a summary of DTE Energy's Other income:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(In millions) | |||||||||||||||
Equity earnings of equity method investees | $ | 46 | $ | 26 | $ | 99 | $ | 77 | |||||||
Income from REF entities | 27 | 20 | 75 | 60 | |||||||||||
Contract services | 11 | 9 | 43 | 17 | |||||||||||
Allowance for equity funds used during construction | 7 | 5 | 20 | 17 | |||||||||||
Gains from equity securities | 5 | 6 | 6 | 19 | |||||||||||
Other | 3 | 8 | 19 | 14 | |||||||||||
$ | 99 | $ | 74 | $ | 262 | $ | 204 | ||||||||
The following is a summary of DTE Electric's Other income:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(In millions) | |||||||||||||||
Contract services | $ | 11 | $ | 9 | $ | 44 | $ | 18 | |||||||
Allowance for equity funds used during construction | 5 | 4 | 14 | 14 | |||||||||||
Gains from equity securities allocated from DTE Energy | 5 | 6 | 6 | 19 | |||||||||||
Other | 2 | 2 | 8 | 6 | |||||||||||
$ | 23 | $ | 21 | $ | 72 | $ | 57 | ||||||||
Changes in Accumulated Other Comprehensive Income (Loss)
For the three and nine months ended September 30, 2018 and 2017, 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. For further discussion regarding changes in Accumulated other comprehensive income (loss), see Note 3 to the Consolidated Financial Statements, "New Accounting Pronouncements."
20
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
Income Taxes
The 2018 estimated annual effective tax rates for DTE Energy and DTE Electric are 12% and 22%, respectively. These tax rates are affected by estimated annual permanent items, including AFUDC equity, production tax credits, and other flow-through items, as well as discrete items that may occur in any given period, but are not consistent from period to period.
The interim effective tax rate of the Registrants are as follows:
Effective Tax Rate | |||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||
DTE Energy | 9 | % | 22 | % | 12 | % | 22 | % | |||
DTE Electric | 21 | % | 35 | % | 22 | % | 35 | % | |||
The 13% decrease and the 10% decrease in DTE Energy's effective tax rate for the three and nine months ended September 30, 2018 and 2017, respectively, was primarily due to the reduction of the corporate tax rate from 35% to 21%, which became effective in 2018.
The decrease in the effective tax rate for the three months ended September 30, 2018 was also impacted by an increase in annual production tax credits, offset by a $20 million valuation allowance for the AMT credit carryover. The decrease in the effective tax rate for the nine months ended September 30, 2018 was also impacted by an increase in annual production tax credits, partially offset by true-up adjustments to the remeasurement of deferred taxes in 2018 of $21 million, $20 million valuation allowance for the AMT credit carryover, a reduction of excess tax benefits on stock-based compensation and other adjustments. For further discussion regarding the true-up adjustments, and the valuation allowance, see Note 3 to the Consolidated Financial Statements, "New Accounting Pronouncements."
The 14% decrease and the 13% decrease in DTE Electric's effective tax rate for the three and nine months ended September 30, 2018 and 2017, respectively, was primarily due to the reduction of the corporate tax rate from 35% to 21%, which became effective in 2018. The decrease in the effective tax rate for the nine months ended September 30, 2018 was partially offset by true-up adjustments to the remeasurement of deferred taxes in 2018 of $7 million.
DTE Energy's total amount of unrecognized tax benefits as of September 30, 2018 was $8 million, which if recognized, would favorably impact its effective tax rate. DTE Electric's total amount of unrecognized tax benefits as of September 30, 2018 was $10 million, which 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.
DTE Electric had income tax payables of $4 million with DTE Energy at September 30, 2018 and income tax receivables with DTE Energy of $12 million at December 31, 2017.
Unrecognized Compensation Costs
As of September 30, 2018, DTE Energy had $86 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 1.29 years.
Allocated Stock-Based Compensation
DTE Electric received an allocation of costs from DTE Energy associated with stock-based compensation of $11 million and $10 million for the three months ended September 30, 2018 and 2017, respectively, while such allocation was $27 million and $28 million for the nine months ended September 30, 2018 and 2017, respectively.
Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents include cash on hand, cash in banks, and temporary investments purchased with remaining maturities of three months or less. Restricted cash consists of funds held to satisfy requirements of certain debt and DTE Energy partnership operating agreements. Restricted cash designated for interest and principal payments within one year is classified as a Current Asset.
21
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
The following is a table that provides a reconciliation of DTE Energy's Cash and cash equivalents as well as Restricted cash reported within the Consolidated Statements of Financial Position that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows:
September 30, | December 31, | ||||||
2018 | 2017 | ||||||
(In millions) | |||||||
Cash and cash equivalents | $ | 84 | $ | 66 | |||
Restricted cash | 20 | 23 | |||||
Total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of Cash Flows | $ | 104 | $ | 89 | |||
NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted 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 required 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 to be applied retrospectively. The Registrants adopted the standard effective January 1, 2018, using the modified retrospective approach. Under the modified retrospective approach, the information for periods prior to the adoption date has not been restated and continues to be reported under the accounting standards in effect for those periods. As permitted under the standard, the Registrants have elected to apply the guidance only to those contracts that were not completed at January 1, 2018, and have elected not to restate the impacts of any contract modifications made prior to the earliest period presented.
The adoption of the ASU did not have a significant impact on the Registrants' financial position or results of operations, but required additional disclosures for revenue. See Note 4 to the Consolidated Financial Statements, "Revenue."
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 required 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 of income from operations. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable. The Registrants adopted the standard effective January 1, 2018. The standard has been 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. As permitted by the standard, the Registrants have used benefit cost amounts disclosed for prior periods as the basis for retrospective application in the income statement. As a result of regulatory mechanisms, the impact to the Consolidated Financial Statements was not material for the three and nine months ended September 30, 2018.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, as amended. The new guidance is intended to improve the recognition and measurement of financial instruments. The guidance primarily impacts accounting for equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) and financial liabilities under the fair value option. The guidance requires equity investments to be generally measured at fair value, with subsequent changes in fair value recognized in net income. The guidance requires entities to make a cumulative-effect adjustment to the Statements of Financial Position as of the beginning of the first reporting period in which the guidance is effective. The Registrants adopted the standard effective January 1, 2018. Upon adoption, DTE Energy and DTE Electric recorded a cumulative-effect adjustment to reclassify $5 million and $3 million of unrealized gains from Accumulated other comprehensive income (loss) to Retained earnings, respectively.
22
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 118. The Amendments in this update add various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118). SAB 118 directs taxpayers to consider the implications of the TCJA as provisional when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. As described in Note 10 to the Consolidated Financial Statements, "Income Taxes," within the combined DTE Energy and DTE Electric 2017 Annual Report on Form 10-K and in accordance with SAB 118, the Registrants recorded amounts that were considered provisional. During the nine months ended September 30, 2018, DTE Energy and DTE Electric recorded true-up adjustments to the remeasurement of deferred taxes of $21 million and $7 million, respectively. The impact of the true-up adjustments was an increase in Income Tax Expense, of which $16 million was attributable to the regulated utilities and offset to Regulatory liabilities. The true-up adjustments were a result of further analysis for items subject to further consideration at December 31, 2017, under SAB 118 and primarily related to timing differences not recoverable from DTE Electric and DTE Gas customers. Additionally, during the three and nine months ended September 30, 2018, DTE Energy recorded a valuation allowance of $20 million against AMT credits that are expected to be subject to sequestration when refunded in accordance with TCJA. This adjustment increased Income Tax Expense and reduced the deferred tax asset related to AMT credits determined to be unrealizable. The valuation allowance adjustment was the result of further analysis for items subject to further consideration at December 31, 2017 under SAB 118. The Registrants will continue to analyze the amounts throughout 2018, which may result in additional changes.
Recently Issued Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), as amended. This guidance requires a lessee to account for leases as finance or operating leases, and disclose key information about leasing arrangements. Both types of 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, depending on the lease classification. The Registrants will adopt the standard on January 1, 2019. The standard allows lessees and lessors to apply either, 1) a modified retrospective approach for leases existing or entered into after the beginning of the earliest comparative period in the Consolidated Financial Statements, or 2) a prospective transition approach for leases existing as of January 1, 2019 with a cumulative effect adjustment to be recorded to retained earnings. The Registrants plan to apply the standard on a prospective basis. The Registrants expect to elect the package of practical expedients allowing entities to not reassess whether an agreement is a lease, to carryforward the existing lease classification, and to not reassess initial direct costs associated with existing leases. The Registrants also plan to elect to exclude leases from the balance sheet that are for a period of one year or less, as well as, the practical expedient allowing entities to not evaluate land easements under the new guidance at adoption if they were not previously accounted for as leases.
A third-party software tool is being implemented that will assist with the initial adoption and ongoing compliance of the standard. Preliminary system configuration has been completed and testing is in progress. The Registrants are continuing procedures to ensure all leases are captured, as well as, evaluating and implementing, new business processes, internal controls, and accounting policies. In addition, the Registrants are monitoring utility industry implementation issues for purchase power agreements, pipeline laterals, and other industry specific arrangements. While the Registrants expect an increase in assets and liabilities, as well as additional disclosures, they are still assessing the impact of this ASU on their Consolidated Financial Statements.
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 generally accepted accounting principles 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.
23
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
In February 2018, the FASB issued ASU No. 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. The amendments in this update also require entities to disclose their accounting policy for releasing income tax effects from accumulated other comprehensive income. The ASU is effective for the Registrants for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. The Registrants are currently assessing the impact of this standard on their Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820. The ASU is effective for the Registrants for fiscal years 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 August 2018, the FASB issued ASU No. 2018-14, Compensation — Retirement Benefits — Defined Benefit Plans (Subtopic 715-20): Disclosure Framework — Changes to the Disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for the Registrants for fiscal years ending after December 15, 2020. Early adoption is permitted. The Registrants are currently assessing the impact of this standard on their Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The ASU is effective for the Registrants for fiscal years 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.
NOTE 4 — REVENUE
Significant Accounting Policy
Upon the adoption of Topic 606, revenue is measured based upon the consideration specified in a contract with a customer at the time when performance obligations are satisfied. Under Topic 606, a performance obligation is a promise in a contract to transfer a distinct good or service or a series of distinct goods or services to the customer. The Registrants recognize revenue when performance obligations are satisfied by transferring control over a product or service to a customer. The Registrants have determined control to be transferred when the product is delivered or the service is provided to the customer. For the three and nine months ended September 30, 2018, recognition of revenue for the Registrants subsequent to the adoption of Topic 606 is substantially similar in amount and approach to that prior to adoption.
Rates for DTE Electric and DTE Gas include provisions to adjust billings for fluctuations in fuel and purchased power costs, cost of natural gas, and certain other costs. Revenues are adjusted for differences between actual costs subject to reconciliation and the amounts billed in current rates. Under or over recovered revenues related to these cost recovery mechanisms are included in Regulatory assets or liabilities on the Registrants' Consolidated Statements of Financial Position and are recovered or returned to customers through adjustments to the billing factors.
For discussion of derivative contracts, see Note 8 to the Consolidated Financial Statements, "Financial and Other Derivative Instruments."
24
DTE Energy Company — DTE Electric Company
Combined Notes to Consolidated Financial Statements (Unaudited) — (Continued)
Disaggregation of Revenue
The following is a summary of revenues disaggregated by segment for DTE Energy:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2018 | 2018 | ||||||
(In millions) | |||||||
Electric(a) | |||||||
Residential | $ | 773 | $ | 1,943 | |||
Commercial | 495 | 1,370 | |||||
Industrial | 173 | 527 | |||||
Other | 80 | 162 | |||||
Total Electric operating revenues(b) | $ | 1,521 | $ | 4,002 | |||