eei financial conference discussion document october 2004 san diego, california

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




• Redeployment of synfuel cash flow



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







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

14

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







17

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

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

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

19

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







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

26

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)

28

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

*

29

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

30

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

31

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)

33

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



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



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

eei financial conference discussion document october 2004 san diego, california

Documents

forwardlooking statements

nuclear regulations

dte energys financial

regulations contributions

extent of changes

terrorism changes

future results

business issues