01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
DTE Energy's 2008 annual report shows a company whose earnings fell sharply from the prior year, mainly because 2007 included a large one-time gain on the sale of the Antrim shale business.
Diluted EPS from continuing operations was $3.23a in 2008 versus $4.62 in 2007, and net income was $546 million versus $971 million. Excluding one-time items, the utilities drove results: Electric Utility net income rose to $331 million and Gas Utility to $85 million, while non-utility results improved on the Barnett shale property sale gain of $128 million pre-tax. Corporate & Other swung to a $94 million loss from a $502 million gain in 2007.
The filing highlights mounting pressure on the balance sheet and liquidity. Uncollectible accounts expense rose to $213 millionb from $135 million, the economy is depressing demand, and pension and postretirement plan assets fell to $2.8 billion, leaving pension plans underfunded by $877 million and other postretirement plans by $1.4 billion. Management expects higher contributions of up to $250 million to pensions and $130 million to postretirement plans in 2009.
Commercial paper access was sharply reduced in late 2008, forcing draws on credit lines, and about $1.2 billionc of the $2.1 billion in short-term credit facilities expires in 2009. Credit ratings remain investment grade, but a downgrade would increase collateral requirements and borrowing costs. Looking ahead, management plans roughly $6 billion of electric utility capital spending from 2009 to 2013, including about $2.8 billion of environmental controls through 2018, and it is seeking regulatory approval to recover these costs.
The Michigan energy legislation (PA 286 and PA 295) introduced a 10%d Customer Choice cap, a renewable energy standard, and cost-of-service ratemaking. Investors should weigh the strong regulated utility base against elevated capital needs, pension funding obligations, exposure to the Michigan auto sector, and the Energy Trading and Power and Industrial Projects segments' sensitivity to credit conditions.
02—Key points
Key Highlights
- Diluted EPS from continuing operations fell to $3.23 in 2008 from $4.62 in 2007, and net income fell to $546 million from $971 million, mainly because 2007 included a $580 million after-tax gain on the Antrim shale sale.
- Electric Utility net income rose to $331 million from $317 million, while Gas Utility net income increased to $85 million from $70 million, showing the utilities' underlying strength.
- Operating revenues grew to $9.3 billion from $8.5 billion, driven by higher gas sales prices and the Energy Trading segment's revenue increase, though Electric Utility revenue declined slightly to $4.9 billion.
- Pension plan assets fell to $2.2 billion, leaving pension plans underfunded by $877 million and postretirement plans underfunded by $1.4 billion; management anticipates contributions of up to $250 million to pensions and $130 million to postretirement plans in 2009.
- Commercial paper market access was sharply reduced in late 2008, and about $1.2 billion of the $2.1 billion in short-term credit facilities expires in 2009, with renewal pricing expected to rise significantly.
- Long-term capital needs are substantial, with about $6 billion planned for electric utility investment from 2009 to 2013 and an estimated $2.8 billion for emissions controls through 2018, and management plans to seek rate base recovery.
- Michigan's 2008 energy legislation (PA 286 and PA 295) caps electric Customer Choice at 10%, requires 10% renewable energy by 2015, and moves rates toward cost-of-service, all of which affect future regulated earnings.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Operating Expenses | $8.07B$6.87B | +17.4% |
| Operating Income | $1.26B$1.60B | −21.3% |
| Interest Expense | $503.00M$533.00M | −5.6% |
| Net Income | $546.00M$971.00M | −43.8% |
| EPS (Basic) | $3.34$5.70 | −41.4% |
| EPS (Diluted) | $3.34$5.69 | −41.3% |
| Shares Outstanding (Basic) | 163.00M170.00M | −4.1% |
| Shares Outstanding (Diluted) | 163.00M171.00M | −4.7% |
05—Questions
Frequently Asked Questions
Why did DTE's earnings decline so much in 2008?
The main driver was the 2007 gain on the sale of the Antrim shale business, which contributed roughly $580 million after tax. That gain did not recur in 2008. Partly offsetting it, 2008 benefited from an $81 million after-tax gain on the sale of part of the Barnett shale properties, but the net result was lower reported earnings.
How healthy are DTE's utility businesses?
Both utilities grew net income in 2008. Electric Utility earned $331 million and Gas Utility earned $85 million. However, uncollectible accounts expense rose sharply to $213 million, weather and service territory performance hurt electric margins, and demand is expected to decline in 2009 as the Michigan economy weakens.
What are the main financial risks facing DTE shareholders?
Key risks include access to capital markets and possible credit rating downgrades, significant pension and retiree health care underfunding requiring larger cash contributions, heavy environmental capital spending, and exposure to automotive customers such as GM, Ford and Chrysler, which are in financial distress. The Energy Trading segment also carries mark-to-market earnings volatility and collateral requirements if the parent is downgraded.
Is DTE's dividend at risk?
The company paid $344 million in common dividends in 2008 and kept its quarterly dividend at $0.53 per share, or $2.12 annually. Management expects to continue paying dividends for the foreseeable future, though payments depend on earnings, cash flow and board review. A bank covenant limits the debt-to-capitalization ratio to 0.65:1, which restricts dividends from about $3 billion of retained earnings to roughly $555 million.
What are DTE's largest expected capital projects?
The Electric Utility segment expects to invest about $6 billion from 2009 to 2013, excluding new generation, with a significant portion for environmental compliance. The Gas Utility plans $750 million to $800 million over the same period. The company is also evaluating a possible new 1,500 MW nuclear plant at Fermi 2, for which it filed a combined operating license application with the NRC, but it has not decided to build.
06—Continue