EEI Financial Conference Discussion Document October 2004 San Diego, California
Jan 03, 2016
EEI Financial Conference
Discussion Document
October 2004San Diego, California
2
Safe Harbor Statement
The information contained in this document is as of the date of this presentation. DTE Energy expressly disclaims any current intention to update any forward-looking statements contained in this document as a result of new information or future events or developments. Words such as “anticipate,” “believe,” “expect,” “projected” and “goals” signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions but rather are subject to various assumptions, risks and uncertainties. This presentation contains forward-looking statements about DTE Energy’s financial results and estimates of future prospects, and actual results may differ materially. Factors that may impact forward-looking statements include, but are not limited to: the effects of weather and other natural phenomena on operations and sales to customers, and purchases; economic climate and growth or decline in the geographic areas where we do business; environmental issues, laws and regulations, and the cost of remediation and compliance associated therewith; nuclear regulations and operations associated with nuclear facilities; the ability to utilize Section 29 tax credits and/or sell interests in facilities producing such credits; implementation of electric and gas Customer Choice programs; impact of electric and gas utility restructuring in Michigan, including legislative amendments; employee relations and the impact of collective bargaining agreements; unplanned outages; access to capital markets and capital market conditions and the results of other financing efforts which can be affected by credit agency ratings; the timing and extent of changes in interest rates; the level of borrowings; changes in the cost of coal and availability of coal and other raw materials, purchased power and natural gas; effects of competition; impacts of regulations by FERC, MPSC, NRC and other applicable governmental proceedings and regulations; contributions to earnings by non-regulated businesses; changes in federal, state and local tax laws and their interpretations, including the Internal Revenue Code, regulations, rulings, court proceedings and audits; the ability to recover costs through rate increases; the availability, cost, coverage and terms of insurance; the cost of protecting assets against or damage due to terrorism; changes in 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; and changes in the economic and financial viability of our suppliers, customers and trading counter parties, and the continued ability of such parties to perform their obligations to the company. This press release should also be read in conjunction with the forward-looking statements in each of DTE Energy’s, MichCon’s and Detroit Edison’s 2003 Form 10-K, and in conjunction with other SEC reports filed by DTE Energy, MichCon and Detroit Edison.
3
Consistent Business Strategy
• Since 1997, DTE Energy has had a consistent business strategy:
– A stable regulated utility base • Detroit Edison• MichCon
– Coupled with consistent growth in our non-regulated portfolio• Inter-related businesses that leverage the knowledge and expertise
developed in the regulated businesses
• Anchoring this strategy is a commitment to financial discipline
– Focus on value creation
– Emphasis on cash flow
– Growth within balance sheet limits
4
Corporate Priorities
• Successful outcome in rate cases for Detroit Edison and MichCon
• Achieve structural fixes to the Electric Choice program
• Redeployment of synfuel cash flows
• Continued growth in non-regulated business portfolio
• Maintain cash and balance sheet strength
5
Rate Case ProgressDetroit Edison
June2003
December2003
Rate Case FiledRequested $553 million
MPSC Staff Recommended
$315 million Net Rate Increase *
June 2004
December 2004
Interim Rate Order Granted Net Rate
Increase of $152 million *
Administrative Law Judge Concurs with MPSC Staff
Recommendation Regarding Final Rate Relief
Final Rate Order Expected
• We are nearing the end of Detroit Edison rate case process, and anticipate final resolution soon
* Additional detail included in appendix
6
Rate Case ProgressMichCon
September2003
March2004
Rate Case FiledRequested $194 million
MPSC Staff Recommended
Interim Rate Relief of $25 million
September 2004
March2005
Interim Rate Order Granted Relief of
$35 million
Final Rate Order Expected
MPSC Staff Recommended Final
Rate Relief of $70 million
Administrative Law Judge
Recommendation Expected
• On September 21, MichCon received an order granting interim rate relief of $35 million
• Resolution of the case is anticipated early next year
7
Utility Returns are Expected to Improve
• Regulatory deferrals represent an increasing portion of Detroit Edison’s earnings
• With the expected resolution of the rate cases and Electric Choice, utility returns are expected to improve
• Detroit Edison’s improvement will be staggered as rate caps roll off
• Ultimately the utilities will be allowed to earn reasonable returns
2001 2002 2003 MPSC StaffRec
MichCon Return on Equity (%)*
2001 2002 2003 MPSC StaffRec
Return on Equity (%)*
Detroit Edison
*Excludes merger related costs
11.5%
15.4%
11.1% 11.0%
3.8%
9.0%
5.4%
11.0%
*Excludes merger related costs and GCR disallowances
8
Corporate Priorities
• Successful outcome in rate cases for Detroit Edison and MichCon
• Achieve structural fixes to the Electric Choice program
• Redeployment of synfuel cash flow
• Continued growth in non-regulated business portfolio
• Maintain cash and balance sheet strength
9
Choice Sales Levels have Flattened, but Margin Loss Remains an Important Issue
• The interim order implemented a transition charge and eliminated Choice credits
• Wholesale market price increases earlier this year reduced savings for prospective Choice customers
• Some customers are reluctant to switch pending the issuance of the final rate order
• Choice sales volumes have stabilized as:– some lower margin customers have
returned – some margin deterioration persists as
high margin (rate subsidy) customers continue to leave for Choice
Detroit Edison Electric Choice Program
Annualized Sales(Gwh)
0
2,000
4,000
6,000
8,000
10,000
May
200
3A
ug 2
003
Nov
200
3D
ec 2
003
Jan
2004
Feb
2004
Mar
200
4A
pr 2
004
May
200
4Ju
ne 2
004
July
200
4A
ug 2
004
Sep
2004
10
Paths to Reforming Electric Choice
Remove cross-subsidies between rate classes
Design rates to delineate the cost of service
Recover revenue lost as customers with skewed rates go to Choice
Rate unbundling
Rate de-skew
Class-specific transition charges
Level playing
field initiatives
Remove inconsistent rules that provide marketers an unfair advantage
Desired Outcome Status Update
• Class-specific Choice transition charges requested in main rate case
• Plan to file rate de-skewing case
• Rate redesign included in proposed legislation
• Plan to file rate de-skewing case
• Rate unbundling included in proposed legislation
• Class-specific Choice transition charges requested in main rate case
• Specific calculation of transition charges included in proposed legislation
• Fair return to service provisions and equal responsibility for low-income programs addressed in main rate case
• Level playing field initiatives included in proposed legislation
Issue
11
Path to Reforming Electric Choice: Legislative Update
1. SB1331 – Core Bill
2. SB1332 – Increasing Reliability
3. SB1333 – Low-Income Assistance
4. SB 1334 – Special Rates for Schools
5. SB 1335 – Cost of Mandated Environmental Upgrades
6. SB 1336 – Securitization
1. SB1331 – Core Bill
2. SB1332 – Increasing Reliability
3. SB1333 – Low-Income Assistance
4. SB 1334 – Special Rates for Schools
5. SB 1335 – Cost of Mandated Environmental Upgrades
6. SB 1336 – Securitization
• In addition to aggressively pursuing regulatory resolution for these issues, DTE is supporting recently-introduced legislation:
– On July 1, six bills were introduced to amend Michigan Public Acts 141 & 142
– The overall purpose of the bills is to create a fair Electric Choice program and to codify certain policy issues
– The Michigan Senate held 13 hearings and 5 workgroup meetings on this issue; the bills could move out of the Senate Energy & Technology Committee in early November
12
Corporate Priorities
• Successful outcome in rate cases for Detroit Edison and MichCon
• Achieve structural fixes to the Electric Choice program
• Redeployment of synfuel cash flow
• Continued growth in non-regulated business portfolio
• Maintain cash and balance sheet strength
13
Synfuel Overview
• DTE Energy’s synfuel business developed from our expertise with coal and coke batteries
• The synfuel portfolio has contributed substantially to net income since its inception
• We believe that current industry issues are facility specific and should not impact us
– We have IRS determination letters at our six EarthCo facilities
– Audits successfully completed at four facilities (two EarthCo, two Covol)
– Reconfirming PLRs attained on two recently sold facilities
2000 2001 2002 2003 2004E
$3
$31
$136
$197
$190-210
$ millions
Synfuel Net Income
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The Sale of our Synfuel Facilities Will Provide Significant Cash Flows
• We are selling our interests in these facilities in order to optimize the cash generated
• Through Q2 we have sold 81% of 2004 capacity
– We expect to close two additional transactions in the fourth quarter representing ~10% of capacity
• Through 2008 our synfuel business is expected to generate substantial net income and approximately $1.8 billion in net cash flow
Expected Net Cash Flow from Synfuels($US millions)
2003A 2004E 2005E 2006E 2007E 2008E
($200)
$190
$380$485 $455
$265
Expected Net Income from Synfuels($US millions)
2003A 2004E 2005E 2006E 2007E 2008E
$197
$190-210
$200-230
$200-230
$200-230
$0
15
Redeployment of Synfuel Cash
• The redeployment of the synfuel cash will be consistent with our overall investment strategy. Options include:– Pay down a portion of parent company debt– New business opportunities that meet our value
creation objectives– If suitable investments are not found, we will
consider re-purchasing shares
• When considering our options, two issues are at the forefront– What is the best way to replace the value implicit in
the stock that is tied to synfuel cash flow?– Given the finite nature of the synfuel cash flows, what
are our balance sheet targets in 2008 – post synfuel cash flows?
16
Corporate Priorities
• Successful outcome in rate cases for Detroit Edison and MichCon
• Achieve structural fixes to the Electric Choice program
• Redeployment of synfuel cash flow
• Continued growth in non-regulated business portfolio
• Maintain cash and balance sheet strength
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1999 2000 2001 2002 2003 2004E
$68 $84
$162
$205$228
$215-$255
Non-Regulated Net Income($ millions)
DTE Energy’s Approach to Non-Regulated Businesses Has Produced Solid Growth
• Build around unique DTE Energy strengths
• Pursue closely inter-related niche businesses
• Seek sound, lower-risk businesses with opportunities for additional value creation
• Focus where competition is manageable
• Build outward from regional base of strength
• Build around broad portfolio, not a single platform
Reconciliation to reported earnings included in the Appendix
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Non-Regulated Opportunities Focus in Three Areas
• On-site energy projects
• Steel-related projects
• Power generation with services
• Waste coal recovery
1. Power & Industrial Projects
1. Power & Industrial Projects
2. Unconventional Gas Production
2. Unconventional Gas Production
3. Fuel Transportation & Marketing
3. Fuel Transportation & Marketing
• Michigan gas production
• Shale and coalbed methane
• Landfill gas
• Coal transportation & marketing
• Gas pipelines & storage
• Energy marketing & trading
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Historical Non-Regulated Business Returns
Average 2001 - 2003
2003 Invested Capital,
$MM
Unlevered After-Tax Return on
Capital
After-Tax ROE
Energy Services $810 21% 28%
Coal Services $60 23% >30%
Biomass Energy $40 14% 16%
Gas Production & Midstream Gas
$440 7% 7%
Energy Trading* $10 N/A N/A
$ Millions
* Return on capital is not generally used as a metric for trading operations
20
Corporate Priorities
• Successful outcome in rate cases for Detroit Edison and MichCon
• Achieve structural fixes to the Electric Choice program
• Redeployment of synfuel cash flow
• Continued growth in non-regulated business portfolio
• Maintain cash and balance sheet strength
21
Cash Flow and Balance Sheet Strength
• Balance sheet and cash flow strength remain a key goal for DTE
• Debt and leverage is declining
– Leverage of 49%* at the end of Q2 2004 vs. 52%* last year
• Cash from operations is strengthening as synfuels provide significant cash inflow
• We are spending capital very conservatively until regulatory relief is received
• Continued improvement in net cash is dependent on successful resolution of rate cases
* Excludes securitization debt, MichCon short-term debt and quasi-equity instruments, calculation included in the appendix
22
Summary
• DTE Energy is a strong company with a consistent, successful business strategy
• Successful rate case outcomes and fixing the Electric Choice program remain our top corporate priorities, with resolution expected in the near future
• 2004 will be a transition year for the utilities, but we expect an eventual return to traditional earnings levels
• Synfuel cash flows will be redeployed in a well-managed, balanced manner
• Our non-regulated businesses continue to perform well• The balance sheet and liquidity position remain strong;
we’ll manage our growth capital carefully
23
APPENDIX
24
Long-Term SynfuelNet Cash Flow Outlook
* Includes annual tax credits generated from ongoing minority interest ownership
Using 2004- 2008 Net Cash Flow and a discount rate between 6-9% produces a per share value between $8-9
($ millions)
2004E 2005E 2006E 2007E 2008E
Production (millions of tons) 15.6 19 19 19 -Tax Credits Generated from Sold Facilities $416 $520 $525 $530 -
Net Income $190-210 $200-230
Cash Flow
Synfuel Cash Flow $190Tax Credit Carryforward Utilized* -
Net Cash Flow $190 $380 $485 $455 $265
$200-230 $200-230 -
$290
90
$365
120
$375
80
$135
130
25
Synfuel Portfolio
Ownership Interest as of
6/30/2004 Manufacturer
Yearly Production Capacity (000 tons)
Sold FacilitiesBelews Creek 1% EarthCo 3,080 Buckeye (2) 1% EarthCo 6,080 Clover 5% EarthCo 2,640 Smith Branch 1% EarthCo 2,750
Retained Facilities
Indy Coke 20% EarthCo 2,640 Red Mountain 2% Covol 1,800
River Hill 100% Covol 1,577 Utah 100% Covol 2,000
3,577
Determination Letter
Recently Completed Field Audit
18,990
YesYesYes
No
NoYes
Yes YesYes NoNo No
No YesNo Yes
Sold in Q2 2004
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Lost Margin and PA 141 Regulatory Assets
• At the end of Q2, Choice volume was ~9,400 GWh
• Total regulatory assets booked in Q2 were $29M
• Regulatory asset for Choice lost margin will continue in 2004, given the small transition charge in interim order
• Remaining PA 141 regulatory assets will be booked only for capped customers
Q1Q1 Q2 Q3 Q4 Total
$25 $6 $6 $8 $38 $58
44 3 4 10 21
414 9 10 10 43
42 2 5 9 18
$37$26 $20 $27 $67 $140
2003
Choice Regulatory Asset
Choice Implementation Costs
Environmental Compliance
Other
Total Regulatory Assets
Regulatory Assets
Choice Lost Margin $50 $20 $25 $35 $40 $120
($ millions, pre-tax) Q2
$19
2
6
3
$29
$58
2004
27
Key Electric Choice Statistics
Calendar Year Statistics: 2001 2002 2003 2004EChoice Volumes - Calendar Year (Gwh) 1,085 2,990 6,200 9,000-9,500% of Total Load 2% 6% 12% 18%
Calendar Year margin loss (pre tax) $15 $50 $120 $200-220
Calendar Year margin loss (after tax) $10 $33 $78 $130-143
Year over Year margin loss (after tax) $23 $45 $85-98
Choice PA141 Regulatory Asset (pre tax) $10 $58 TBD
Choice PA141 Regulatory Asset (after tax) $7 $38 TBD
Choice Transition Charge TBD
Bundled Price Increase TBD
Choice Income Impact with regulatory asset offset (after tax) $26 $40
Year End "Run Rate" Statistics:Choice Volumes - Year end rate annualized (Gwh) 1,200 3,600 9,000 TBD % of Total Load 2% 7% 17% TBD
Year end "exit" margin annualized loss (pre tax) $65 $190 TBD
Year end "exit" margin annualized loss (after tax) $42 $124 TBD
($ millions)
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MPSC Staff Filing on Final Rates and MPSC Interim Rate Order
Detroit Edison
Interim Rate Request
MPSC Staff
Report on Interim Rates
MPSC Order on Interim Rates
Detroit Edison Final
Rate Request
MPSC Staff
Report on Final Rates
ALJ Proposal
for Decision
Revenue Deficiency – Final Rates (with PSCR reinstated)
553 553 553 553 553 553
Net Adjustments (49) (264) (305) - (278) (279)
Adjusted Revenue Deficiency 504 289 248 553 275 274
Regulatory Asset SurchargesElectric Choice Implementation Costs - - - 31 25 25 Clean Air Act Costs and Other - - - 73 53 57 Net Generation Lost Margin - - 30 5 30 30
Subtotal - - - 109 108 112
Mitigation Sales Benefit - - - - 58 58
Subtotal 504 289 278 662 441 444
PSCR Reduction (126) (126) (126) (126) (126) (126)
Net Rate Increase 378 163 152 536 315 318
NOTE: Net Revenue amounts have not been adjusted to reflect the impact of rate caps
Interim Rates Final Rates
* Based on revised MPSC Staff testimony (Aldrich) filed March 18, 2004, which increased the recommendation by $20M from the original filing
*
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DTE Energy 2004 Cash Flows
Cash from Operations $950 $800
Capital Expenditures (751) (750)
Dividends (346) (353)
Asset Sales 669 40
Cash Flow $611
($ millions)
$12
2003A Low
Synfuel Production Payment*
Adjusted Cash from Operations
89 175
$1,039 $975
$1,050
(1,060)
(353)
40
$2
High
225
$1,275
2004E
* Accounted for as ‘investing activity’
• Cash flows in 2004, similar to net income, are uncertain. Final results depend on:
– Timing and amount of rate relief
– Electric Choice– Timing of synfuel sales
• The cash initiative successfully implemented in 2003 will continue this year, with a minimum goal of internally funding the dividend
• Leverage is expected to remain at the low end of our range
Cash Improvement Initiative 100 100
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DTE EnergyCapital Expenditures
Detroit Edison
NOx
MichCon
Non Regulated & Corporate*
Total
• Based on utility rate case filings, 2004 capital expenditures will be approximately $1B
• These capital expenditures are largely incurred at the two regulated utilities
• We intend to match actual 2004 capital spending with available cash flows. Until utility rate cases are resolved, capital spending will remain at 2003 levels
($ millions)
$672
38
139
211
$1,060
2004E
Capital Expenditures(2004 Based on Rate Case Filings)
* 2004 includes $55M of corporate capital
$516
64
98
73
$751
2003A
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DTE EnergyCurrent Credit Ratings
• Negative outlook from Moody’s and S&P reflects concerns over:
– Rate case outcomes
– Electric choice program and need for change
• Cash flow metrics should start improving with impact of rate cases and synfuel monetization
S&P Moody's Fitch
DTE Energy BBB+A, B Baa2 B BBB
Detroit Edison A- B A3 B A-
MichCon BBB+ B A2 C A
Last action 11/7/2003 1/28/2004 11/10/2003
Current Ratings
A) Corporate Credit Rating
B) Negative Outlook
C) Under review for possible downgrade
32
Calculation of Leverage
short-term borrowings $490current portion LTD + cap leases 340
long-term debt 5,672 securitization bonds 1,446
capital leases 71 less QUIDS (385)
less MichCon short-term debt - less securitization debt, including current portion (1,539)
Total debt $6,095
Trust preferred $289QUIDS 385
Mandatory convertible 181 Total preferred/ other $855
Equity $5,489
Total cap $12,439
Debt 49.0%Preferred stock 6.9%
Common shareholders' equity 44.1%
Total 100.0%
DTE Energy Debt/Equity Calculation
As of June 30, 2004($ millions)
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2003 Reconciliation of Operating Earnings to Reported Earnings
Operating Earnings to Reported Earnings Reconciliation
Earnings Per Share
Full Year 2003DTE Energy
ConsolidatedDTE Energy
ConsolidatedRegulated
ElectricRegulated
GasNon-
RegulatedHolding
Company
Operating 3.09 521 282 46 228 (35)
Blackout Costs (0.10) (16) (16) Adjustment of EITF 98-10 accounting change (Flowback) 0.10 16 16 Loss on sale of steam heating business (0.08) (14) (14) Disallowance of gas costs (0.10) (17) (17) Contribution to DTE Energy Foundation (0.06) (10) (10) Adjustment for discontinued operations of ITC 0.03 5 5 Gain on sale of ITC 0.37 63 63 Asset retirement obligations (SFAS 143) (0.07) (11) (6) (1) (4)
Adjustment of EITF 98-10 accounting change (cumulative effect) (0.09) (16) (16)
Reported 3.09 521 314 28 224 (45)
Net Income ($ millions)
Use of Operating Earnings Information – DTE Energy management believes that operating earnings provide a more meaningful representation of the company’s earnings from ongoing operations and uses operating earnings as the primary performance measurement for external communications with analysts and investors. Internally, DTE Energy uses operating earnings to measure performance against budget and to report to the Board of Directors.
34
Reconciliation of YTD (Through June) Operating Earnings to Reported Earnings
Use of Operating Earnings Information – DTE Energy management believes that operating earnings provide a more meaningful representation of the company’s earnings from ongoing operations and uses operating earnings as the primary performance measurement for external communications with analysts and investors. Internally, DTE Energy uses operating earnings to measure performance against budget and to report to the Board of Directors.
(in millions, except per share amounts)Diluted Earnings
Per Share Net Income
YTD 2003DTE Energy
ConsolidatedDTE Energy
ConsolidatedRegulated
ElectricRegulated
Gas Non-
RegulatedHolding
Company
Operating Earnings $1.47 $248 $65 $68 $146 ($31)
Unusual ItemsTax credit driven normalization (0.90) (152) (152) Loss on Sale of Steam Heating Business (0.08) (14) (14) Contribution to DTE Energy Foundation (0.06) (10) (10) Disallowance of Gas Costs (0.10) (17) (17) Energy Trading Activities (EITF 98-10 flowback) 0.09 16 16
Discontinued Operations
International Transmission Company 0.43 72
Cumulative Effect of Accounting ChangeAsset Retirement Obligations (FAS 143) (0.07) (11) Energy Trading Activities (EITF 98-10 implementation (0.09) (16)
Reported Earnings $0.69 $116 $51 $51 $162 ($193)
Diluted Earnings Per Share
YTD 2004DTE Energy
ConsolidatedDTE Energy
ConsolidatedRegulated
ElectricRegulated
Gas Non-
RegulatedHolding
Company
Operating Earnings $1.13 $194 $52 $33 $92 $17
One-Time ItemsAdjustment for contract termination/adjustment 0.28 48 48 Tax credit driven normalization (0.06) (10) (10)
Discontinued OperationsImpairment Loss (Southern Missouri Gas Company) (0.04) (7)
Reported Earnings $1.31 $225 $52 $33 $140 $7
Net Income