EEI Financial Conference Discussion Document

1
EEI Financial ConferenceDiscussion Document

• October 2004
• San 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 Energys
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 Energys, MichCons and
Detroit Edisons 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

• We are nearing the end of Detroit Edison rate
  case process, and anticipate final resolution
  soon

Interim Rate Order Granted Net Rate Increase of
152 million
Administrative Law Judge Concurs with MPSC Staff
Recommendation Regarding Final Rate Relief
Rate Case Filed Requested 553 million
June 2004
June 2003
December 2003
December 2004
MPSC Staff Recommended 315 million Net Rate
Increase
Final Rate Order Expected
Additional detail included in appendix
6
Rate Case ProgressMichCon

• On September 21, MichCon received an order
  granting interim rate relief of 35 million
• Resolution of the case is anticipated early next
  year

MPSC Staff Recommended Interim Rate Relief of 25
million
Rate Case Filed Requested 194 million
Interim Rate Order Granted Relief of 35 million
Final Rate Order Expected
September 2004
September 2003
March 2004
March 2005
MPSC Staff Recommended Final Rate Relief of 70
million
Administrative Law Judge Recommendation Expected
7
Utility Returns are Expected to Improve
Detroit Edison
Return on Equity ()
15.4
11.5
11.1
11.0

• Regulatory deferrals represent an increasing
  portion of Detroit Edisons earnings
• With the expected resolution of the rate cases
  and Electric Choice, utility returns are expected
  to improve
• Detroit Edisons improvement will be staggered as
  rate caps roll off
• Ultimately the utilities will be allowed to earn
  reasonable returns

2001
2002
2003
MPSC Staff
Rec
Excludes merger related costs
MichCon
Return on Equity ()
11.0
9.0
5.4
3.8
2001
2002
2003
MPSC Staff
Rec
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
Detroit Edison Electric Choice
Program Annualized Sales (Gwh)

• 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

10
Paths to Reforming Electric Choice
Status Update
Issue
Desired Outcome

• Class-specific Choice transition charges
  requested in main rate case
• Plan to file rate de-skewing case
• Rate redesign included in proposed legislation

Remove cross-subsidies between rate classes
Rate de-skew

• Class-specific Choice transition charges
  requested in main rate case
• Specific calculation of transition charges
  included in proposed legislation

Recover revenue lost as customers with skewed
rates go to Choice
Class-specific transition charges

• Plan to file rate de-skewing case
• Rate unbundling included in proposed legislation

Design rates to delineate the cost of service
Rate unbundling

• 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

Remove inconsistent rules that provide marketers
an unfair advantage
Level playing field initiatives
11
Path to Reforming Electric Choice Legislative
Update

• SB1331 Core Bill
• SB1332 Increasing Reliability
• SB1333 Low-Income Assistance
• SB 1334 Special Rates for Schools
• SB 1335 Cost of Mandated Environmental Upgrades
• 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 Energys 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

Synfuel Net Income
190-210
millions
197
136
31
3
2000
2001
2002
2003
2004E
14
The Sale of our Synfuel Facilities Will Provide
Significant Cash Flows
Expected Net Cash Flow from Synfuels (US
millions)
485

• 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

455
380
265
190
(200)
2003A
2004E
2005E
2006E
2007E
2008E
Expected Net Income from Synfuels (US millions)
200-230
200-230
200-230
190-210
197
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
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 Energys Approach to Non-Regulated
Businesses Has Produced Solid Growth
Non-Regulated Net Income ( millions)

• 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

215- 255
228
205
162
84
68
1999
2000
2001
2002
2003
2004E
Reconciliation to reported earnings included in
the Appendix
18
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

• Michigan gas production
• Shale and coalbed methane
• Landfill gas

2. Unconventional Gas Production

• Coal transportation marketing
• Gas pipelines storage
• Energy marketing trading

3. Fuel Transportation Marketing
19
Historical Non-Regulated Business Returns
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 well manage our growth capital carefully

23

• APPENDIX

24
Long-Term SynfuelNet Cash Flow Outlook
( millions)
2004E
2005E
2006E
2007E
2008E
15.6


19


19


19


-
Production (millions of tons)
Tax Credits Generated from Sold
416
520
525
530
-
Facilities
-
190-210
200-230
200-230
200-230
Net Income
Cash Flow
190
290
Synfuel Cash Flow
365
375
135
Tax Credit Carryforward
90
-



120
80
130
Utilized
190
380
485
455
265
Net Cash Flow

Using 2004- 2008 Net Cash Flow and a discount
rate between 6-9 produces a per share value
between 8-9
Includes annual tax credits generated from
ongoing minority interest ownership
25
Synfuel Portfolio
Yearly
Production
Ownership Interest as of 6/30/2004
Recently Completed Field Audit
Determination Letter
Capacity
Manufacturer
(000 tons)
Sold Facilities
Belews Creek
1
EarthCo
3,080

Yes
No
Buckeye (2)
1
EarthCo
6,080


Yes
No
Clover
5
EarthCo
2,640


Yes
Yes
Smith Branch
1
EarthCo
2,750


Yes
Yes
Yes
Indy Coke
20
EarthCo
2,640


No
Sold in Q2 2004
No
No
Red Mountain
2
Covol
1,800


18,990
Retained Facilities
River Hill
100
Covol
1,577


No
Yes
No
Utah
100
Covol
2,000

Yes


3,577


26
Lost Margin and PA 141 Regulatory Assets
2004

• 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

2003
( millions, pre-tax)
Q1
Q1
Q2
Q3
Q4
Total
Q2
50
20
25
35
40
120
58
Choice Lost Margin
Regulatory Assets
Choice Regulatory Asset
25
6
6
8
38
58
19
Choice Implementation Costs
4
4
3
4
10
21
2
Environmental Compliance
4
14
9
10
10
43
6
4
2
2
5
9
18
3
Other
37
26
20
27
67
140
29
Total Regulatory Assets
27
Key Electric Choice Statistics
( millions)
Calendar Year Statistics
2001
2002
2003
2004E
Choice 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
28
MPSC Staff Filing on Final Rates and MPSC Interim
Rate Order

Based on revised MPSC Staff testimony (Aldrich)
filed March 18, 2004, which increased the
recommendation by 20M from the original filing
29
DTE Energy 2004 Cash Flows
2004E
( millions)
2003A
Low
High

• 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 from Operations
950
800
1,050
Synfuel Production Payment
89
175
225
Adjusted Cash from Operations
1,039
975
1,275
Capital Expenditures
(751)
(750)
(1,060)
Cash Improvement Initiative
100
100
Asset Sales
40
40
669
Dividends
(346)
(353)
(353)
Cash Flow
2
611
12
Accounted for as investing activity
30
DTE EnergyCapital Expenditures
Capital Expenditures (2004 Based on Rate Case
Filings)

• 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)
2004E
2003A
Detroit Edison
516
672
NOx
64
38
MichCon
98
139
Non Regulated Corporate
211
73
Total
1,060
751
2004 includes 55M of corporate capital
31
DTE EnergyCurrent Credit Ratings

• Negative outlook from Moodys and SP 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

Current Ratings
SP
Moody's
Fitch
A, B
B
DTE Energy
BBB
Baa2
BBB
B
B
Detroit Edison
A-
A3
A-
B
C
MichCon
BBB
A2
A
Last action
11/7/2003
1/28/2004
11/10/2003

• Corporate Credit Rating
• Negative Outlook
• C) Under review for possible downgrade

32
Calculation of Leverage
DTE Energy Debt/Equity Calculation
As of June 30, 2004
( millions)
short-term borrowings
490
current 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
289
QUIDS
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
33
2003 Reconciliation of Operating Earnings to
Reported Earnings
Use of Operating Earnings Information DTE
Energy management believes that operating
earnings provide a more meaningful representation
of the companys 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.
Operating Earnings to Reported Earnings
Reconciliation
Earnings Per
Share
Net Income ( millions)
DTE Energy
DTE Energy
Regulated
Regulated
Non-
Holding
Full Year 2003
Consolidated
Consolidated
Electric
Gas
Regulated
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)


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 companys 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.
Diluted Earnings
(in millions, except per share amounts)
Per Share
Net Income
DTE Energy
DTE Energy
Regulated
Regulated
Non-
Holding
YTD 2003
Consolidated
Consolidated
Electric
Gas
Regulated
Company
1.47
248
65
68
146
(31)
Operating Earnings
Unusual Items
(0.90)


(152)


(152)


Tax credit driven normalization
Loss on Sale of Steam Heating
(0.08)


(14)


(14)


Business
Contribution to DTE Energy
(0.06)


(10)


(10)


Foundation
(0.10)


(17)


(17)


Disallowance of Gas Costs
Energy Trading Activities (EITF 98-10
flowback)
0.09


16


16


Discontinued Operations
0.43


72


International Transmission Company
Cumulative Effect of Accounting Change
Asset Retirement Obligations (FAS
(0.07)


(11)


143)
Energy Trading Activities (EITF 98-10
(0.09)


(16)


implementation
0.69
116
51
51
162
(193)
Reported Earnings
Diluted Earnings
Per Share
Net Income
DTE Energy
DTE Energy
Regulated
Regulated
Non-
Holding
YTD 2004
Consolidated
Consolidated
Electric
Gas
Regulated
Company
1.13
194
52
33
92
17
Operating Earnings
One-Time Items
0.28


48


Adjustment for contract termination/adjustment
48


(0.06)


(10)


(10)


Tax credit driven normalization
Discontinued Operations
Impairment Loss (Southern Missouri
(0.04)


(7)


Gas Company)
1.31
225
52
33
140
7
Reported Earnings