1 / 32

European Investor Update

European Investor Update. June/July 2004. Safe Harbor Statement.

vielka-huffman
Download Presentation

European Investor Update

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. European Investor Update June/July 2004

  2. Safe Harbor Statement 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 press release 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, timing and extent of changes in interest rates; access to the capital markets and capital market conditions and other financing efforts which can be affected by credit agency ratings requirements; ability to utilize Section 29 tax credits or sell interest in facilities producing such credits; the level of borrowings; the effects of weather and other natural phenomena on operations and actual sales; economic climate and growth in the geographic areas in which DTE Energy does business; unplanned outages; the cost of protecting assets against or damage due to terrorism; nuclear regulations and risks associated with nuclear operations; the grant of rate relief by the MPSC for the utilities; changes in the cost of fuel, purchased power and natural gas; the effects of competition; the implementation of electric and gas customer choice programs; the implementation of electric and gas utility restructuring in Michigan; environmental issues, including changes in the climate, and regulations, and the contributions to earnings by non-regulated businesses. This press release should also be read in conjunction with the forward-looking statements in DTE Energy’s, MichCon’s and Detroit Edison’s 2003 Form 10-K Item 1, and in conjunction with other SEC reports filed by DTE Energy, MichCon and Detroit Edison.

  3. Participants • Anthony F. Earley, Jr. • Chairman and Chief Executive Officer • David E. Meador • Senior Vice President and Chief Financial Officer • Peter J. Pintar • Director of Investor Relations and Technology Investments

  4. Outline • DTE Energy is a solid company with a consistent long-term strategy • DTE Energy is addressing its current challenges • DTE Energy represents an attractive investment opportunity

  5. DTE Energy Overview Utility Platform Non-RegulatedPlatform • On-site Energy Projects • Steel-Related Projects • Power Generation with Services • Waste Coal Recovery • Michigan Gas Production • Shale and Coalbed Methane • Landfill Gas • Coal Transportation and Marketing • Gas Pipelines and Storage • Energy Trading and Marketing Power and Industrial Projects Generates and distributes electricity throughout Southeastern Michigan Non-conventional Gas Production Fuel Transportation and Marketing Produces, gathers, transmits, stores and distributes natural gas throughout Michigan

  6. DTE Energy Geography Regional Area of Focus Synfuels On-Site Energy Projects Coke Batteries Biomass

  7. Consistent Business Strategy • Since 1997, DTE Energy has had a consistent business strategy – a strong regulated utility base coupled with consistent growth in our non-regulated portfolio • The regulated utility base is formed by two companies: • Detroit Edison, an integrated electric utility • MichCon, a natural gas distribution company • The non-regulated portfolio is a group of inter-related businesses that leverage the knowledge and expertise originally developed in the regulated businesses • Anchoring this strategy is a commitment to balance sheet strength • On a long-term basis, this model has provided consistent shareholder value

  8. DTE Energy’s Solid Asset Portfolio – Detroit Edison • Detroit Edison is an integrated electric utility primarily serving the metropolitan Detroit area • Ninth largest U.S. electric utility • Although the region has a strong industrial concentration, the company’s revenue base is diverse, with no single customer comprising more than 5% of revenues • Both Detroit Edison’s generating and distribution assets are fully regulated • Currently ~60% of customers are subject to rate caps which fully expire on 1/1/2006 • As the rate caps expire, all customers will be effectively transitioned to the Power Supply Recovery Clause (PSCR), a mechanism that passes fuel and purchased power costs through to customers • Detroit Edison has a history of reasonable returns and is currently undergoing its first rate case in 10 years Detroit Edison Historical ROE 13.6% 11.8% 11.8% 11.7% 11.1% 9.7% 1998 1999 2000 2001 2002 2003

  9. DTE Energy’s Solid Asset Portfolio – Detroit Edison Generation Assets Generation Fuel Mix (2003) ~46,000 GWh Gas/Oil 1% • Low cost western coal is the dominant fuel source of Detroit Edison’s efficient generating fleet • The company’s expertise in coal sourcing and transportation enhances the fleet’s cost profile • Our single nuclear unit, Fermi 2, is well regarded in the industry • In 2001, the company securitized the Fermi 2 nuclear plant which essentially removed $1.8 billion in risk from the balance sheet • Detroit Edison’s generation fleet compares favorably versus others in the region Nuclear 18% Coal 81% ECAR* Dispatch Curve Summer 2005 $80 Detroit Edison power plants $60 Represents ~67% of total generating capacity $/MWh $40 $20 Summer Peak Demand Min Annual Demand Avg. Annual Demand 0 25,000 50,000 75,000 100,000 * East Central Area Reliability Region comprised primarily of Michigan, Indiana, Ohio and western Pennsylvania Cumulative MW

  10. DTE Energy’s Solid Asset Portfolio – MichCon • MichCon is a natural gas local distribution company serving the metropolitan Detroit area and western Michigan • Fifth largest U.S. natural gas LDC • Has a large residential customer base, that produces a stable revenue stream • 124 bcf of gas storage assets, in addition, DTE Energy owns 51 bcf of non-regulated storage • MichCon’s profit margins derive from the physical distribution of natural gas, not from the commodity itself. The commodity price impacts are passed through to customers • The primary economic driver of MichCon is weather. Given the large residential base, general economic conditions have a much smaller impact • MichCon has a history of reasonable returns, but is currently undergoing its first rate case in 10 years MichCon Historical ROE 15.3% 14.9% 12.2% 8.9% 6.6% 5.3% 1998 1999 2000 2001 2002 2003

  11. Overview of DTE Energy’s Non-Regulated Businesses

  12. DTE Energy’s Approach to Building Non-Regulated Businesses Core Skills • DTE Energy’s non-regulated businesses leverage our core skills • Investments are generally made in incremental steps in order to better understand the business before making more substantial investments • As these businesses mature, they serve as the platform to develop future businesses • This approach has helped DTE Energy avoid the recent industry pitfalls Detroit Edison’s knowledge of industrial sector Coke Battery Business On-Site Energy Projects Experience with tax-advantaged businesses at DTE Biomass Coal handling expertise at Detroit Edison Waste Coal Recovery Synthetic Fuels Business Coal Services/ Transport.

  13. DTE Energy’s Approach to Non-Regulated Businesses has Produced Solid Growth and Returns Non-Regulated Returns Non-Regulated Net Income ($ millions) Average 2001-2003 Invested Return on After-Tax $194- $249 Capital Capital ROE Energy $228 $810 21% 28% $207 Services $162 Coal Services $60 23% >30% Biomass $84 $40 14% 16% $68 Energy Gas Production & $440 7% 7% 2004E 1999 2000 2001 2002 2003 Midstream

  14. DTE Energy’s Business Strategy is Anchored by a Strong Balance Sheet DTE Energy Leverage* • Despite the problems that have plagued the industry, DTE Energy has been able to maintain a strong balance sheet • This was achieved without having to resort to a ‘back-to-basics’ strategy • Despite the current challenges, DTE Energy’s leverage has not been negatively impacted • Compared to industry peers with similar credit profiles, DTE Energy’s leverage compares favorably 60% 55% 50% 45% 40% 1999 2000 2001 2002 2003 Leverage of Industry Peers 70% 60% 50% 40% 30% 20% TXU AEP PPL Exelon Cinergy DTE Energy* Alliant Energy Progress Energy Wisconsin Energy * Excludes securitization debt, MichCon short-term debt and quasi-equity instruments

  15. Outline • DTE Energy is a solid company with a consistent long-term strategy • DTE Energy is addressing its current challenges • DTE Energy represents an attractive investment opportunity

  16. Current Challenges • Currently, DTE Energy is working through a number of regulatory issues • Pending rate cases at both Detroit Edison and MichCon • Repairing Michigan’s Electric Choice program

  17. Current Challenges -Utility Rate Cases Detroit Edison Residential Rates versus Inflation Rates ¢/KWh • Currently there are rate cases pending at Detroit Edison and MichCon • Neither utility has had a rate case in over 10 years • Underlying both of these rate cases are standard cost-of-service issues driven by general inflationary pressures and rising health care and pension costs • Both rate requests are reasonable. Relative to inflation, rates at both Detroit Edison and MichCon have declined substantially Consumer Price Index (CPI) 12 11 10 9 Rates 8 1994 1996 1998 2000 2002 MichCon Residential Rates versus Inflation Rates $/Mcf Consumer Price Index (CPI) 2.75 2.50 2.25 Rates 2.00 1.75 1994 1996 1998 2000 2002

  18. Current Challenges -Status of Rate Requests

  19. Current Challenges -Development of the Electric Choice Program • In June 2000, Michigan passed Public Act 141 (PA 141) which was intended to be an initial step toward full deregulation • PA 141 authorized the electric choice program, which allowed all customers to select their generation supplier as of January 1, 2002 • In addition, all customer rates were frozen through 2003, with caps in place for small commercial and industrial customers through 2004 and residential customers through 2005 • PA 141 also authorized the securitization of the Fermi 2 nuclear power plant. The proceeds of $1.8 billion were used to repay debt and repurchase stock • Although the law was a well-intended economic development tool for Michigan, it produced a set of unintended consequences

  20. Current Challenges -Development of the Electric Choice Program (cont.) • The Michigan Public Service Commission (MPSC) undertook a series of actions to promote a robust choice program: • No return to service provisions were authorized, customers essentially had a free option to switch between Detroit Edison and alternative suppliers • No transition surcharges were authorized for customers opting for alternative suppliers • Some customers received transition credits when opting for alternative suppliers • Historically in Michigan, commercial rates are skewed higher, resulting in a customer group that was very vulnerable to alternative suppliers • These factors produced an artificial Electric Choice market that is not sustainable on a long-term basis • This artificial market creates a substantial negative financial impact for Detroit Edison. It is estimated that the net lost margin for 2004 will be $200-220 million

  21. Current Challenges -Recent Activity Regarding Choice • Through the rate case and legislative efforts, Detroit Edison has been actively working to resolve this issue • Recent regulatory activity has produced some positive developments • The interim rate order eliminated the transition credits and imposed a small transition charge • The MPSC staff recommended a series of return to service rules • The Michigan Senate Energy & Technology Committee held extensive hearings regarding the implementation of PA 141 and the Electric Choice program • These steps have resulted in the leveling off of Electric Choice levels • Despite these developments, the issue is not fully resolved. Detroit Edison will continue to work on the regulatory and legislative fronts to ensure a level playing field for a competitive Electric Choice program Detroit Edison Electric Choice Program (Gwh) 10,000 8,000 6,000 4,000 2,000 0 Jan 2004 Mar 2004 Apr 2004 Dec 2003 Aug 2003 May 2003 Nov 2003 May 2004 Feb 2004

  22. Outline • DTE Energy is a solid company with a consistent long-term strategy • DTE Energy is addressing its current challenges • DTE Energy represents an attractive investment opportunity

  23. DTE Energy Represents an Attractive Investment Opportunity • DTE Energy is currently undervalued versus its peers • The stock has a strong dividend yield of 5.2% • Utility returns are expected to improve upon resolution of the rate cases • Non-regulated businesses will generate significant cash flows • Non-regulated businesses will continue their growth • The balance sheet will remain strong

  24. DTE Energy is Currently Trading at a Significant Discount to its Peers S&P Electrics’ P/E Multiples Based on 2005 First Call Estimates 18 16 14 Median 12.7 12 10 8 6 4 2 0 FPL AEP DTE TXU PPL Teco CMS PG&E Exelon Entergy CINergy Ameren ConEd Southern Allegheny Dominion FirstEnergy Pinnacle West Xcel Energy Centerpoint Progress Energy Edison International

  25. DTE is Currently Providing a Strong Dividend Yield Versus Other U.S. Utilities S&P Electrics’ Dividend Yield June 2004 6% 5% Median: 4.2% 4% 3% 2% 1% 0% TXU DTE Teco CMS AEP Xcel PP&L PG&E Exelon Con Ed Ameren CINergy Entergy Allegheny Southern Dominion Edison Int. FPL Group Centerpoint FirstEnergy Pinnacle West Progress Energy

  26. Utility Returns are Expected to Improve Illustrative Range of Outcomes (assuming a full year of increased rates) • 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 role off • Ultimately the utilities will be allowed to earn reasonable returns Detroit Edison Equity Ratio 50% 50% 55% Equity Level (Billion) $3.0 $3.0 $3.3 Earned ROE 11.0% 11.5% 11.0% Net Income (Million) $330 $345 $363 MichCon Equity Ratio 50% 50% 52% Equity Level (Billion) $0.82 $0.82 $0.85 Earned ROE 11.5% 12.0% 12.0% Net Income (Million) $94 $98 $102 NOTE: This should not be construed as earnings guidance

  27. The Sale of our Synthetic Fuel Facilities Will Provide Significant Cash Flows Expected Net Cash Flow from Synfuels ($US millions) • Through 2008 our synfuel business is expected to generate $1.8 billion in net cash flow • The synthetic fuel facilities transform marginal coal into high quality coal. The favorable economics of this business are driven by tax credits • DTE Energy is selling our interests in these facilities in order to optimize the cash generated • The redeployment of this cash will be consistent with our overall investment strategy. Options include: • New business opportunities • Debt paydown • Share repurchase $510 $530 $445 $135 $135 ($200) 2003A 2004E 2005E 2006E 2007E 2008E Expected Net Income from Synfuels ($US millions) $200-230 $200-230 $200-230 $150-190 $197 $0 2003A 2004E 2005E 2006E 2007E 2008E

  28. Waste Coal Recovery is an Exciting New Growth Opportunity Target Regions for Waste Coal Recovery Technology • In the United States, over one billion tons of coal is sitting in waste ponds, with 30 million tons added each year • In its current state this coal is unusable and is an environmental liability • DTE Energy owns the right to a proprietary technology that refines this waste coal into a high quality product that can be burned in power plants • Our first plant is operational, and producing at a rate of ~250,000 tons per year • We believe that net income of $20-40M is achievable by 2008 Site of DTE’s first waste coal recovery plant

  29. Opportunities in Non-Conventional Gas • Very high gas prices and a tight supply situation in North America requires a larger role for non-conventional gas production • DTE Energy is well-established in both Landfill Gas (Biomass) and in Michigan Gas Production and is looking to make additional incremental investments in these areas • A newer area of focus is coalbed methane where we can leverage our Michigan Gas Production experience Michigan Gas Production Region Coalbed Methane Focus Areas Cherokee Basin Arkoma Basin Landfill Gas (Biomass) Facilities

  30. Other Non-Regulated Opportunities On-Site Energy Projects • Recently closed two on-site energy transactions • Acquired the utility service assets at eight DaimlerChrysler sites. Services include steam, chilled water and compressed air under a 20-year contract • Acquired the on-site energy assets that provide steam and electricity at a Kimberly-Clark tissue mill under a 15-year contract Coke Batteries • Currently, we own interests in three coke batteries which produce metallurgical coke for the steel industry • The global coke shortage has created new opportunities in this business and we expect the strong prices and tight markets to continue for the longer term

  31. Balance Sheet Strength and Stability Will be Maintained • Cash from operations is expected to improve as the rate cases are resolved and the synfuel facilities are fully monetized • Going forward, the utilities will be expected to cover their capital expenditures and dividends • Currently DTE Energy is engaged in a cash improvement initiative to help ensure that after capital expenditures and dividends, the company is breakeven on a cash basis • DTE has $1.5B in credit facilities of which only $500M is currently utilized 2004E ($ millions) Low High $800 $1,050 Cash from Operations 175 225 Synfuel Production Payment* Adjusted Cash from Operations $975 $1,275 (750) (1,060) Capital Expenditures 100 100 Cash Improvement Initiative 40 40 Asset Sales (353) (353) Dividends $2 $12 Cash Flow * Accounted for as ‘investing activity’

  32. Summary • DTE Energy is a strong company with a consistent strategy and a solid asset base • There are current challenges, but these are being managed with resolution expected in the near future • The company represents an attractive investment opportunity

More Related