Transcript Name of Presentation

Merrill Lynch
Global Power & Gas Leaders
Conference
Gerard M. Anderson
President – DTE Energy
September 28, 2004
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
Update on 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 Progress
Detroit Edison
• We are nearing the end of Detroit Edison rate case process, and
anticipate final resolution next month
Rate Case Filed
Requested
$553 million
June
2003
Interim Rate Order
Granted Net Rate
Increase of
$152 million *
June
2004
December
2003
MPSC Staff
Recommended
$315 million
Net Rate Increase *
* Additional detail included in appendix
Administrative Law Judge
Concurs with MPSC Staff
Recommendation Regarding
Final Rate Relief
December
2004
Final Rate Order
Expected
6
Rate Case Progress
MichCon
• On September 21, MichCon received an order granting interim rate
relief of $35.3 million
• Resolution of the case is anticipated early next year
Rate Case Filed
Requested
$194 million
September
2003
MPSC Staff
Recommended
Interim Rate Relief
of $25 million
March
2004
Interim Rate Order
Granted Relief of
$35.3 million
Final Rate Order
Expected
September
2004
MPSC Staff
Recommended Final
Rate Relief
of $70 million
March
2005
Administrative Law
Judge
Recommendation
Expected
7
Utility Returns are Expected to
Improve
Detroit Edison
Return on Equity (%)*
15.4%
11.5%
2001
2002
11.1%
11.0%
2003
MPSC Staff
Rec
*Excludes merger related costs
• 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
MichCon
Return on Equity (%)*
11.0%
9.0%
2001
• Ultimately the utilities will be allowed
to earn reasonable returns
5.4%
3.8%
2002
2003
• Detroit Edison’s improvement will be
staggered as rate caps roll off
MPSC Staff
Rec
*Excludes merger related costs and GCR disallowances
8
Update on 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
Detroit Edison
Electric Choice Program
Annualized Sales
• The interim order implemented a transition
charge and eliminated Choice credits
(Gwh)
10,000
• Wholesale market price increases earlier
this year reduced savings for prospective
Choice customers
8,000
6,000
4,000
2,000
0
• 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
10
Paths to Reforming Electric
Choice
Issue
Rate de-skew
Desired Outcome
Remove crosssubsidies between
rate classes
Class-specific
transition charges
Recover revenue lost as
customers with skewed
rates go to Choice
Rate unbundling
Design rates to delineate
the cost of service
Level playing
field initiatives
Remove inconsistent
rules that provide
marketers an unfair
advantage
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
• Class-specific Choice transition charges requested
in main rate case
• Specific calculation of transition charges included in
proposed legislation
• Plan to file rate de-skewing case
• Rate unbundling 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
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legislation
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
• 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
– Senate hearings on this issue started
on August 25, and will continue
through mid October
12
Update on 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
Synfuel Net Income
$ millions
$197
$190210
$136
$31
$3
2000
2001
2002
2003
2004E
• DTE Energy’s synfuel business
developed from our expertise with
coal and coke batteries
• The synfuel portfolio has
contributed substantially to net
income since its inception
• We believe that current industry
issues are facility specific and
should not impact us
– We have IRS determination letters at our
six EarthCo facilities
– Audits successfully completed at four
facilities (two EarthCo, two Covol)
– Reconfirming PLRs attained on two
recently sold facilities
14
The Sale of our Synfuel
Facilities Will Provide
Significant Cash Flows
Expected Net Cash Flow from Synfuels
($US millions)
$485
$380
$455
$265
$190
($200)
2003A
2004E 2005E
2006E
2007E 2008E
Expected Net Income from Synfuels
($US millions)
$197
$190210
$200- $200230
230
$200230
• We are selling our interests in these
facilities in order to optimize the cash
generated
• To date 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
$0
2003A
2004E 2005E
2006E
2007E 2008E
15
Redeployment of Synfuel Cash
•
The redeployment of the synfuel cash will be consistent
with our overall investment strategy. Options include:
– Pay down a portion of parent company debt
– New business opportunities that meet our value
creation objectives
– If suitable investments are not found, we will
consider re-purchasing shares
•
When considering our options, two issues are at the
forefront
– What is the best way to replace the value implicit in
the stock that is tied to synfuel cash flow?
– Given the finite nature of the synfuel cash flows, what
are our balance sheet targets in 2008 – post synfuel
cash flows?
16
Update on Corporate Priorities
• Successful outcome in rate cases for Detroit Edison and MichCon
• Achieve structural fixes to the Electric Choice program
• Redeployment of synfuel cash flow
• Continued growth in non-regulated business portfolio
• Maintain cash and balance sheet strength
17
DTE Energy’s Approach to
Non-Regulated Businesses
Has Produced Solid Growth
Non-Regulated Net Income
($ millions)
$215$255
$205
• Pursue closely inter-related niche
businesses
• Seek sound, lower-risk
businesses with opportunities for
additional value creation
$228
$162
$68
• Build around unique DTE Energy
strengths
• Focus where competition is
manageable
$84
• Build outward from regional base
of strength
1999
2000
2001
2002
2003
Reconciliation to reported earnings included in the Appendix
2004E
• Build around broad portfolio, not
a single platform
18
Non-Regulated Opportunities
Focus in Three Areas
• On-site energy projects
1. Power & Industrial
Projects
• Steel-related projects
• Power generation with services
• Waste coal recovery
2. Unconventional
Gas Production
3. Fuel Transportation
& Marketing
• Michigan gas production
• Shale and coalbed methane
• Landfill gas
• Coal transportation & marketing
• Gas pipelines & storage
• Energy marketing & trading
19
Update on 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
20
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
21
* Excludes securitization debt, MichCon short-term debt and quasi-equity instruments
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
22
APPENDIX
23
Summary of Detroit Edison
Interim Rate Order
• Granted $278 million in interim relief
– $248 million base rate increase
– $30 million of transition charge revenue from Choice customers
• Interim increase reduced by $126M due to the PSCR
reinstatement for a net increase of $152M
• Increases 2004 net revenues by $51 million, due to impact of
rate caps, effective date, PSCR adjustment and allocation
between Choice and full service customers
• Began to address Choice issues by implementing a transition
charge and eliminating transition credits for Choice
customers
24
Recommendations from Staff
Filing on Detroit Edison Final
Rates
•
•
•
•
•
Capital structure of 54% debt, 46% equity
11.0% ROE, $3.05B equity level
Declined to endorse any earnings sharing mechanism
Recommended an increase of $441M
– $275M* from base rates
– $58M from the retained benefit of mitigation sales
– $108M from regulatory asset recovery mechanisms
• Electric Choice Implementation Costs: surcharge to all
customers
• Clean Air Act costs: surcharge collected from full service
customers
• Prior period lost Choice Margin: Choice transition charge
Recommended increase reduced by $126M due to the PSCR
reinstatement, resulting in a net proposed increase of $315M
* Based on revised MPSC Staff testimony (Aldrich) filed March 18, 2004, which increased the
recommendation by $20M from the original filing
25
Recommendations from Staff
Filing on Detroit Edison Final
Rates (cont.)
•
Proposed changes to the Electric Choice program
– Modifications of return to utility service provisions applicable
to new Choice sales:
• Customers that leave for Electric Choice would not be able to
return to Detroit Edison for three years
• Customers must provide twelve months notice prior to returning
to Detroit Edison
• Upon return, customers would be required to stay with Detroit
Edison for twelve months
– Recovery of prospective stranded costs:
• Current inter-class rate subsidies to be recovered from full service
customers (rate deskewing)
• No transition charge for Choice customers; mitigate future
stranded costs by retaining economic benefit of 90% of wholesale
power sales up to 110% of Choice sales volumes
26
Reconciliation of Non-Regulated
Operating Earnings to Reported
Earnings
Non-Regulated Operating Earnings to Reported Earnings Reconciliation
Net Income ($ millions)
Full Year 2003
Operating
Full Year
2003
228
Adjustment of EITF 98-10 accounting change (Flowback)
16
Asset retirement obligations (SFAS 143)
(4)
Adjustment of EITF 98-10 accounting change
(cumulative effect)
92
(16)
Adjustment for contract termination/adjustment
Reported
6 months ended
June 2004
48
224
140
27