Dte Energy Company · NYSE:DTE
Dte Energy — AGA Financial Forum 2005
55 slides from Dte Energy's conference presentation, May 2, 2005
Slide 1: AGA Financial Forum May 2, 2005
AGA Financial Forum May 2, 2005 David Meador Executive Vice President & Chief Financial Officer
Slide 2: Safe Harbor Statement
Safe Harbor Statement The information contained herein 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 "anti
Slide 3: DTE Energy's Strategy
DTE Energy's Strategy Maintain a sound regulated utility base that supports an attractive dividend Enhance traditional utility growth with an integrated portfolio of non-utility businesses Create and expand businesses that are closely linked to our core skills Seek businesses with attractive competi
Slide 4: DTE Energy Is Well Positioned
DTE Energy Is Well Positioned With the recovery of the utilities, we expect earnings to rebound significantly in 2005 The current challenges are very manageable Our strategy effective over the long-term Expected cash flows provide a high degree of flexibility Our balance sheet remains solid with met
Slide 5: Q1 2005 Review
Q1 2005 Review Overall operating earnings were flat on a year-over-year basis. Key drivers were: Benefit of Detroit Edison rate relief Deferral of CoEnergy storage earnings to the next storage cycle Deferral of some synfuel net income offset by mark-to-market gains from oil options Cash flow was hig
Slide 6: DTE Energy 2005 Operating Earnings Guidance
DTE Energy 2005 Operating Earnings Guidance 2004 2005 Non-Regulated 241 310 Regulated Gas 23 84 Regulated Electric 178 280 Holding Company -15 -65 $427 Electric Utility Gas Utility Non-Utility EPS $2.46 $178 $24 $241 Holding Co. $580-635 $270-290 $75-85 $300-320 $3.30-3.60 * Reconciliation to GAAP r
Slide 7: Progress was Made on Choice, but Work Remains to be Done
Progress was Made on Choice, but Work Remains to be Done The final order addressed a number of Choice related issues: Included revenue in base rates to address Electric Choice losses Established a number of return to service provisions Adjusted transition charges to recover $44M in historical choice
Slide 8: Detroit Edison Rate Restructuring Proposal
Detroit Edison Rate Restructuring Proposal Intention is to eliminate subsidies that have historically existed in Detroit Edison's rates and eliminate artificial price signals The Rate Restructuring proposal would: Unbundle rates into power supply and distribution components Establish rates based on
Slide 9: Detroit Edison Electric Choice Volumes
Q1 Q2 Q3 Q4 Q1 Commercial Secondary 583 738 948 874 748 Commercial Primary / Industrial 1559 1742 1706 1689 1166 Detroit Edison Electric Choice Volumes GWh Q1 Q2 Q3 Q4 Choice volumes are down 228 GWh from Q1 2004 levels However, the margin impact was flat as lower overall volumes have been offset by
Slide 10: MichCon Regulatory Orders
MichCon Regulatory Orders On April 28, we received the final rate order for MichCon. The order provided: $61M of base rate increase Tracking mechanism for uncollectibles expense Allowed rate of return on common equity of 11% A 50/50 debt to equity ratio We also received a final order in the 2002 GCR
Slide 11: Significant Progress in Implementing the DTE Energy Operating System
Significant Progress in Implementing the DTE Energy Operating System Operating System Savings ($ millions) 2002 2003 2004 2005E DTEOS savings 20 45 105 125 The redesign of our medium-sized transformer repair process resulted in overall repair costs being cut in half Boiler run time between furnace c
Slide 12: Utility Earnings Are Expected to Recover
DTE Energy Operating Earnings Per Share Utility Earnings Are Expected to Recover From 1997-2002 we achieved our targeted growth in a turbulent industry environment In 2003-2004 cost pressures and Electric Choice had a significant impact on earnings In 2003 both utilities filed their first general ra
Slide 13: Summary: Sound Regulated Utility Base
Sound Regulated Utility Base Continued Non-Utility Growth Maintain Balance Sheet Strength Summary
Slide 14: Continued Non-Utility Growth
Continued Non-Utility Growth We will continue to pursue growth at our non-utility businesses Adhering to our well-established strategy, these businesses will be closely linked to our core skills originally developed at the utilities, such as coal handling and processing, industrial projects, unconve
Slide 15: Synfuel Cash Represents a Substantial Opportunity
Synfuel Cash Represents a Substantial Opportunity Redeployment of synfuel cash represents a unique opportunity to increase shareholder value and strengthen the balance sheet ~ 90% of capacity sold to other investors, whereby DTE realizes cash proceeds as synfuel is produced Tax credits expire in 200
Slide 16: 2005-2008 Cash Redeployment Framework
2005-2008 Cash Redeployment Framework Balance Sheet Targets Excess Cash Share Repurchase Growth Investment Our objectives for cash redeployment are: Strengthen coverage ratios to improve current and long-term credit ratings Replace and exceed ~$7.50 of value that synfuel cash flows currently represe
Slide 17: Cash Available for Redeployment after Debt Reduction
Cash Available for Redeployment after Debt Reduction Cash Available for Redeployment ($ millions) $450-500 Cash Available for Redeployment Parent Debt Retirement Target Cash Available for Investment or Stock Buyback $200 $250-300 $1,650 Cash Available for Redeployment Parent Debt Retirement Target C
Slide 18: Power and Industrial Projects
Power and Industrial Projects Total Cumulative 2005-2008 Capital ($ millions) $300 - 450 $600 - 900 Range of Expected Investment Returns* 10-20% * After-tax return on DTE Energy capital Fuel Transportation and Marketing $50 - 100 10-15% Coal transportation and marketing Gas pipelines and storage Ene
Slide 19: 2005 Investment Opportunity Update
2005 Investment Opportunity Update On-site energy projects Looking at 6 site transaction for auto manufacturer, similar to 2004 DaimlerChrysler transaction In negotiations on 2 projects in pulp and paper industry Constructing facility in Vicksburg, Mississippi, to supply multiple pulp and paper mill
Slide 20: 2005 Investment Opportunity Update (cont.)
2005 Investment Opportunity Update (cont.) Gas pipelines and storage Playing an active role in developing the Millennium pipeline to give Michigan storage better access to the Northeast Pursuing economic expansion opportunities for ~50 Bcf of non-utility gas storage Plan to expand storage capacity b
Slide 21: Established History in Unconventional Gas Production
2004A 2005E 2006E 2007E 2008E Existing business 6.6 5.4 4.6 5.5 8.3 Growth projects 1.1 2.1 4.4 8.9 10.1 DTE Energy Has an Established History in Unconventional Gas Production Involvement in Antrim shale has given us more than 15 years of unconventional gas experience Earnings projected to more than
Slide 22: Second Largest Antrim Producer in Michigan
Leasehold in excess of 290,000 net acres 79,000 net acres undeveloped Own Interest in 1,900 wells Operate 1,400 wells Drill 80-100 wells per year Produce 23 Bcf/year Own 325 Bcf of proven reserves DTE Energy is the Second Largest Antrim Producer in Michigan Biogenic High Fracture Density Mixing Mod-
Slide 23: Barnett Position Could Represent a Significant Growth Opportunity
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Our Barnett Position Could Represent a Significant Growth Opportunity DTE Energy has leased more than 50,000 net acres in the Barnett Continue to add to this position Most of DTE's acreage is located in the southern portion of the expan
Slide 24: Summary: Maintain Balance Sheet Strength
Sound Regulated Utility Base Continued Non-Utility Growth Maintain Balance Sheet Strength Summary
Slide 25: Balance Sheet Leverage Target
2003A 2004A 2005E 2006E Non-Regulated 49 48 50.5 49 3 3 Balance Sheet Leverage Target * Excludes securitization debt, MichCon short-term debt, for 2003 & 2004 the QUIDS are included in the calculation to provide comparability with 2005 & 2006 52% 51% 50-51% 48-50% DTE Energy Leverage* Leverage has r
Slide 26: DTE Energy Has an Attractive Dividend Yield
DTE Energy Has an Attractive Dividend Yield PGN 0.0563 ED 0.0525 AEE 0.0495 CIN 0.0481 XEL 0.0478 TE 0.0459 SO 0.0451 DTE 0.0448 PNW 0.0447 AEP 0.0396 FE 0.0385 FPL 0.0346 PCG 0.0346 PPL 0.0337 EXC 0.0336 CNP 0.0331 ETR 0.0302 EIX 0.0277 AYE 0 We are currently paying a dividend of $2.06 per share pe
Slide 27: DTE Energy Has a Consistent Dividend
In Addition, DTE Energy Has a Consistent Dividend For the past 10 years, we have paid a consistent dividend or $2.06 per share During this period, the average dividend for the group declined significantly and only begun to recover recently Currently the average S&P Electric dividend is 12% lower tha
Slide 28: Summary
Sound Regulated Utility Base Continued Non-Utility Growth Maintain Balance Sheet Strength Summary
Slide 29: Management Additions
Management Additions Paul Hillegonds Senior Vice President, Corporate Affairs Chris Brown Executive Vice President, Energy Resources & Vice President, DTE Energy David Ruud Vice President, Enterprise Performance Management Bill Mallory Vice President, Environmental Engineering Steve Mabry President
Slide 30: Our Challenges are Manageable
Our Challenges are Manageable Regulatory uncertainty is relatively limited Electric Rate Restructuring Proposal is a revenue neutral filing, not a full rate case We recently received the final rate order for MichCon The value of the synfuel tax credits is linked to oil prices 75% of 2005 synfuel cas
Slide 31: DTE Energy Is Well Positioned
DTE Energy Is Well Positioned With the recovery of the utilities, we expect earnings to rebound significantly in 2005 Our strategy effective over the long-term Expected cash flows provide a high degree of flexibility Our balance sheet remains solid with metrics expected to improve over the next few
Slide 32: Appendix
Appendix DTE Energy
Slide 33: Q1 2005 Earnings Summary
DTE Energy Q1 2005 Earnings Summary Operating Earnings per Share* * Reconciliation to GAAP reported earnings included in the appendix 2004 Electric Utility Gas Utility Non-Utility Holding Company 2005 0.9 0.87 0.87 0.89 0.1 0.13 0.02 0 Non Ute 0.27 0.3 Gas Ute 0.41 0.28 Electric Ute 0.22 0.32 -0.03
Slide 34: Electric Utility Q1 2004 vs. Q1 2005 Variance
Electric Utility Q1 2004 vs. Q1 2005 Variance Incremental rate relief and further expiration of rate caps Soft economy (lower on-system sales backfilled with choice migration) Choice volumes down but margins flat due to unfavorable sales mix Other margin and power supply changes Lower regulatory def
Slide 35: Non-Utility Q1 2004 vs. Q1 2005 Variance
Q1 2004 Net Synfuel Gas Midstream Coke Trading/CTC Other Q1 2005 45 45 69 74 50 48 51 24 5 7 26 5 5 Non-Utility Q1 2004 vs. Q1 2005 Variance Increased synfuel contribution: Higher production (3.0M vs. 4.9M tons) resulting in $19M of incremental net income Revenue deferred due to oil prices volatilit
Slide 36: Q1 2005 DTE Energy Underlying Operating Earnings
Q1 2005 DTE Energy Underlying Operating Earnings Adjusting for timing related accounting items yields a better understand of the true earnings power of Q1 2005 Positive $32M mark-to-market for 2005 oil options. Synfuel revenue deferred for recognition is $27M Mark-to-market accounting timing at CoEn
Slide 37: Non-Utility Q1 2004 vs. Q1 2005 Variance
Non-Utility Q1 2004 vs. Q1 2005 Variance Operating Earnings (after tax)* ($ millions) * Reconciliation to GAAP reported earnings included in the appendix
Slide 38: Q1 Cash Flow
Q1 Cash Flow ($ millions) * Accounted for as 'investing activity' on statement of cash flows Q1 2004 Q1 2005 Adjusted cash from operations reached $476M in the first quarter, up over 50% from 2004 Synfuel production payments was $63M in the quarter, up $37M from the prior year Stronger cash from ope
Slide 39: Q1 Capital Expenditures
Q1 Capital Expenditures Q1 2004 Detroit Edison Operation $129 - - 5 6 MichCon 15 Non-Utility Corporate 6 Total $179 ($ millions) 9 9 Environmental - - SAP Implementation - - Maintenance - - Growth - - Q1 2005 $118 3 23 20 9 $205 15 17 Most of the increase due to the ramp-up in spending for implement
Slide 40: The Balance Sheet Remains Strong
The Balance Sheet Remains Strong * Leverage ratios exclude securitization debt, MichCon short-term debt and quasi-equity instruments, calculation included in the appendix ** $1,875M total credit lines less $150M outstanding letters of credit Q1 2004 Q1 2005 49 52 3 Leverage* at 3/31 52% 49% 2003 200
Slide 41: 2005 Non-Utility Operating Earnings Guidance
2005 Non-Utility Operating Earnings Guidance Synfuels Coke Batteries On Site Energy Projects Power Generation Coal Services Biomass Energy Energy Trading & CoEnergy Portfolio Energy Resources overhead & development Upstream & Midstream Gas DTE Energy Technologies Energy Technology Investments & Othe
Slide 42: 2005 Guidance Cash Flow
2005 Guidance 2005 Cash Flow ($ millions) * Accounted for as 'investing activity' on statement of cash flows 2004 Actuals ** Excludes potential growth capital
Slide 43: 2005 Capital Expenditures
2004 Actual 2005 Capital Expenditures Detroit Edison Operation $546 - - 22 77 MichCon 113 Non-Utility Corporate 57 Total $940 ($ millions) 45 80 Environmental - - SAP Implementation - - Maintenance - - Growth* - - 2005 Guidance $540-560 100 130-135 110-115 65-75 $1,020-1,070 75-85 - - * 2005 growth
Slide 44: Synfuel Earnings Background
Synfuel Earnings Background Quarterly earnings from synfuels primarily come from two sources: Quarterly payments received from partners in our projects as tax credits are allocated to them These payments are subject to gain recognition accounting Mark-to-market gains/losses from the oil options we p
Slide 45: Recognition of Synfuel Earnings: Payments Received from Buyers
Recognition of Synfuel Earnings: Payments Received from Buyers Accounting principles for gain recognition of our synfuel sales proceeds are very conservative Sale proceeds cannot be recognized until there is evidence they have become determinable and collectability has been reasonably assured Due to
Slide 46: Recognition of 2005 Synfuel Earnings
Recognition of 2005 Synfuel Earnings * Assumes average oil price for the calendar year remains below the phase-out threshold ($ millions, after-tax)
Slide 47: Recognition of Synfuel Earnings Payments (Cont.)
Recognition of Synfuel Earnings Payments Received from Buyers (Cont.) Synfuel sale proceeds are received from our partners on a quarterly basis, and are comprised of two parts: Fixed Note Payments of principal and interest, which are not tied to tax credits generated Earnings from these payments are
Slide 48: Recognition of 2005 Synfuel Earnings: Illustrative
Recognition of 2005 Synfuel Earnings: Payments Received from Buyers No Recognition Issues Payments Received, but Remote Probability of Phase-Out Until Q3 Fixed Note Payment Variable Note Payment ILLUSTRATIVE Total Net Income: $215-225M Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Slide 49: Synfuel Cash Flow Update
Synfuel Cash Flow Update 2005 Approximately 70-75% of the $420M in synfuel cash flow is protected through a combination of the following: use of prior year tax credits, cash payments received to date, and the purchase of option contracts* We spent $17M after-tax in option premiums; $7M impacted 2004
Slide 50: CoEnergy Storage Optimization
CoEnergy Storage Optimization DTE Energy holds 55 Bcf of non-utility storage, 30 Bcf is contracted and 25 Bcf is optimized by CoEnergy by buying gas in the summer and simultaneously selling it forward for delivery Economic profit is locked in at the time of the transaction Inventory is accounted for
Slide 51: Margin Storage Cycle Illustration
Margin Storage Cycle Illustration 1/1/2005 2/1/2005 3/1/2005 4/1/2005 5/1/2005 6/1/2005 7/1/2005 8/1/2005 9/1/2005 10/1/2005 11/1/2005 12/1/2005 3/31/2005 6.178 6.378 6.457 7.542 7.866 7.918 7.998 8.028 8.043 8.088 8.364 8.692 9/30/2004 6.712 6.852 6.757 6.195 6.058 6.069 6.101 6.118 6.11 6.153 6.35
Slide 52: Regulatory Calendar
Regulatory Calendar Rate Restructuring Proposal Stranded Cost/PSCR Reconciliation Other Post Employment Benefits Tracker June 9, Staff and Intervenor Testimony October 27, ALJ Proposal for Decision (tent.) By Year-End, Anticipated Final Order (U-14399) (U-14474) (U-14428) July 28, Staff and Interven
Slide 53: Automotive Production Data
Automotive Production Data Thousands of Vehicles Produced The automobile sector accounts for ~14% of Detroit Edison's sales and ~10% of revenue Within Detroit Edison's service territory, the Big 3 automakers generally produce more popular and higher margin vehicles Over the past 15 years, area auto
Slide 54: Reconciliation of Q1 Reported Earnings to Operating Earnings
Reconciliation of Q1 Reported Earnings to Operating 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 performanc
Slide 55: Reconciliation of Total Year Operating Earnings to Reported Earnings
Reconciliation of Total Year 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 pe