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DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 1
DTE ENERGY CO.
MARCH 7, 2001
9:00 A.M. CST
Coordinator Good morning and welcome to the DTE Energy and MCN Energy
Group merger/financial review conference call. Our leader on
today's call will be Mr. Dave Meador, Senior Vice President of
Finance and Treasurer. All lines will be on listen only until
the question and answer session. At the end of today's
presentation, instructions will be given should anyone wish to
ask a question. Sir, you may begin.
D. Meador Thank you, Rosie. Good morning, everybody and welcome to
our conference call. Before we get started, I'd like to
introduce the team here today. First of all, last
Wednesday, DTE's Board of Directors promoted two of our
outstanding financial team members, and I'd like to
introduce them this morning. First, Dan Brudzynski, who
joined us in 1997 from Chrysler Corporation, was promoted
to Vice President and Controller; and Nick Corey, who Larry
Garbarding introduced at our last conference call, was
promoted to Vice President and Treasurer. Congratulations
to both of you. They are with us this morning.
Also with me is Lisa Muschong, DTE's Director of Investor
Relations; and from MCN Energy we have Lee Dow, the Executive
Vice President and Chief Financial Officer; and Stewart
Lawrence, who is MCN's Director of Investor Relations.
Before we go any further, I'll ask Lisa to read the standard
disclosure required by the SEC.
L. Muschong This conference call and following question and answer
session will contain forward-looking statements. These
statements will involve risks and uncertainties that may
cause the actual results to vary materially. These risks
and uncertainties may pertain to, but are not limited to,
earnings forecasts, projected merger close, projected
merger related operating cost synergies and actual
operating results. Other factors that might cause actual
results to vary, but are not limited to, are those
discussed in DTE Energy's and MCN Energy Group's most
recent filings with the Securities and Exchange Commission.
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 2
D. Meador Thank you, Lisa. This morning we're doing a simulcast
over the Web, and hopefully you've been able to pull up the
Web site with the presentation and either you'll scroll
through it with us or print it out. But you will have to turn
the pages as we go through this, and we will reference to the
pages that we're on. I'm going to start on page 4, which is
the Agenda.
This morning, we'd like to cover a handful of topics. The
first one talking a little bit about DTE as an outstanding
investment profile, talk about securitization and provide an
update on the merger. Then we'll talk about 2001 and 2002
earnings guidance, we'll touch on our non-regulated growth and
tax credits, and then we'll wrap up with a summary and move on
to questions and answers.
If you'll turn to page 5, this is a summary that we've used
before, but we're updating it for some of the events that have
happened recently. We have believed and represented for some
time that we believe that DTE is under-valued and continues to
be an outstanding investment opportunity.
Some of the features that I'd like to emphasize, and we'll
talk more about this, is that we have continued earnings per
share growth, and our growth has been very consistent and very
credible. Our non-regulated earnings growth continues to move
along very well and we've gone from zero to $100 million in
four short years.
Today, we have regulatory certainty and we have a good
relationship, not only with our regulators, but with some of
the stakeholders in the state of Michigan. Now, we have merger
certainty and improved economics from that merger, and we
continue to make technology investments that differentiate DTE
from our competitors.
If you'll turn to page 6, this slide shows our earnings per
share growth from 1997 to 2000. DTE's net income has increased
from $2.88 per share in 1997 to $3.39 in 2000. We've adjusted
the 2000 earnings to reflect one-time merger related costs
that now are spread over two years because of the delay in the
merger, and we think it's fair to represent that this way.
As you can see here, our earnings have grown, on a compounded
basis, at 6% during this period. We have been consistent and
credible, and hopefully we are getting a reputation for
communicating our objectives clearly to you and then
delivering on those targets.
Our non-regulated earnings continue to increase as a percent
of total earnings, and that group of earnings has grown at a
compounded growth rate of 30% since 1997. It is with this
success that we feel very comfortable in setting more
aggressive targets going forward, as we phase into our 8%
growth rate.
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 3
Now, if you'll turn to page 7, I'll touch base on
securitization and stranded cost recovery. DTE is currently
issuing securitization bonds to fully and immediately recover
100% of our stranded costs. Last Friday, we priced $1.75
billion of securitization bonds with an average interest rate
of 6.1%, with a settlement date for this Friday, March 9th.
Between the passage of legislation and the issuance of bonds,
DTE Energy achieved the shortest time interval of any utility
nationwide, and also we were the only utility to move forward
with issuing bonds with no appeal. And I think that speaks to
our relationship with the various stakeholders in the state of
Michigan.
The securitization proceeds will be used to strengthen our
balance sheet and increase shareholder value, and consistent
with our prior guidance, we'll be using the proceeds to retire
existing debt, in the range of $1.3 billion, and repurchase
outstanding stock in the range of $0.4 billion.
Next, I'd like to talk a little bit about the merger, and if
you could turn to page 8. This is an illustration of some of
the steps that we will take as we move forward to close the
merger. This is building on some of what we talked about last
week in MCN's conference call. Some of the steps that you can
see in this chart include filing of the revised S-4, the
revised U-1 filing with the SEC, and then the MCN shareholder
vote process.
We will aggressively pursue this timetable jointly with MCN,
and where possible, we will run concurrent processes to
compress time where possible.
Please note that it's our intention to move very quickly after
receiving FTC approval to initiate the integration process,
including initiating the process to reduce our work force
through early retirement and voluntary separation, and we
anticipate doing that before close. However, during this whole
process, we will respect the FTC requirements and we will
avoid anything that could create a perception of gun jumping.
While we can't predict the timing or the outcome of the FTC
and the SEC, this chart is consistent with the four to five
month guideline that we provided last week on the MCN earnings
call.
Now, I'd like to turn it over to Lee Dow, who'll offer some
comments on MCN's stand-alone earnings for 2001, and then
we'll pick up after that on page 9 with Dan Brudzynski.
Lee?
L. Dow Thank you, Dave, and good morning. As promised last week,
we're going to provide a little overview of 2001 guidance for
MCN. Our expectation is about one dollar to $1.10 per diluted
share for the full year 2001, on a standalone basis for MCN.
It's important to note that this would exclude the unusual
items or merger costs, as well as it assumes normal weather.
Also, as discussed before, it continues to presume that we
believe that we'll get through the 2001 calendar
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 4
year process with a gross margin of break-even as opposed to
what we had in 2000 and 1999 of profit.
I would also note that the one dollar to $1.10 we will be
recognizing as part of the adoption of the Statement of
Financial Accounting Standard 133, as it applies to accounting
board derivatives, that we will be implementing that in the
first quarter of 2001, and in conjunction therewith, we'll
recognize about $100 million net of tax charge, primarily
associated with the marking to market of the pipeline capacity
contracts that co-energy trading has. These are contracts that
have been an historical drag on co-energy's earnings, and in
large measure are costs that we likely would have been
accruing and recognizing as part of the purchase accounting
process with the merger anyway. So although it's a big number
and it is not new information, we're just getting it out as
part of the adoption of FAS-133.
And I'll also emphasize that the standalone numbers for full
year 2001 don't reflect any impact of the coal finds or ...
fueled facilities that MCN has, either the four that it has
sold as well as the two additional that have been declared to
be in service by the IRS, those amounts will be reflected in
the comments that Dan Brudzynski will have, who now will speak
next.
D. Brudzynski Thanks, Lee and good morning everyone. What I'd like to
cover next on pages 9 through 11 are summaries of the
combined DTE/MCN earnings outlook for 2001 and 2002.
Let's begin with 2001 on page 9. Starting with an adjusted
2000 base of $3.39 per share, we are targeting improvements in
the base electric business of $0.06 per share, which includes
the impacts of legislation and securitization, also new growth
in coal transportation and energy trading activities, energy
related projects and merchant generation, should also add
another $0.15 per share to 2001's results. This brings us to a
stand-alone DTE Energy projection of $3.60 per share.
Assuming a July 1st close of the MCN merger, 29 million new
DTE shares will be issued, having a dilutive effect on 2001's
earnings. Average shares for the year are assumed to be 148
million. Incremental interest expense on $1.2 billion of
merger debt is offset by six months of MCN earnings and income
generated from the syn fuel projects.
Cost synergies are targeted for the second half of the year,
as integration efforts will be initiated shortly after we
receive the FTC go-ahead. The overall half-year impact of the
merger has a dilutive effect on earnings, at $3.40 to $3.50
per share, primarily because of the seasonality of MCN's
earnings.
We anticipate one-time merger related costs of $0.60 per share
as a result of the early retirement program that will be
initiated as part of our integration efforts,
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 5
and facilities costs related to the consolidation of our
headquarters in Detroit. Adding back the effective goodwill
amortization, an accounting practice which is expected to be
discontinued by the Financial Accounting Standards Board,
brings 2001's earnings picture into the $2.90 to $3.00 range.
Moving on to page 10 and the combined earnings picture for
2002. Beginning with the stand-alone DTE base for 2001, which
I outlined on page 9, base growth for DTE is again targeted in
the 6% to 7% range or $3.80 to $3.90 per share. The impact of
the MCN merger has similar effects as 2001, but is on a full
year basis.
The additional DTE shares issued and incremental interest
expense have a downward effect on the 2002 stand-alone base.
Average shares for the year are assumed to be 160 million.
Full year MCN and syn fuel projected earnings, coupled with
the first full year of cost synergies, contribute to the
accretive nature of the merger, resulting in a combined
earnings projection in the $3.90 to $4.00 range. Adding back
the effective goodwill amortization brings 2002's earnings
picture into the $4.10 to $4.20 range.
Moving on to page 11, this is a summary of the projected 2001
and 2002 time frames. Two thousand and one can be viewed under
the context of a partial year MCN earnings and the one-time
restructuring charges related to merger synergies. Two
thousand and two's earnings growth is in the 8% range off of
the stand-alone DTE base of $3.60 with goodwill included, and
about 14% following the anticipated change in accounting.
The impact of the goodwill accounting change steps us to a new
basis in 2002. Going forward, we expect to continue from this
basis in the 6% to 8% growth range.
Now, I'd like to turn it back to Dave Meador, who will finish
off today's agenda.
D. Meador Thanks, Dan. If you can turn to page 12. On this slide we
have a couple of messages that we'd like to convey. This
shows DTE earnings in 1998 versus 2002. The first point is
on the bottom. You can see that our earnings in 1998 were
$3.05 a share and we have grown our earnings on a steady
and consistent basis, and we will continue to do that,
coming up with earnings per share, as Dan indicated, in '02
of $4.10 to $4.20 per share.
But more importantly, you can see the dramatic change in mix
in earnings. If you went back to 1998, Detroit Edison
comprised 93% of DTE's earnings, but if you go out into 2002,
Detroit Edison only represents 59%. And you can see the
remainder there with Mich-Con at 16% and then the combination
of DTE's non-regulated earnings, which have continued to grow,
combined with MCN's non-regulated operations put together,
will represent 25% of our earnings in 2002, and we feel that
that's an important point.
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 6
Now, if you can turn to page 13, I'd like to talk a little bit
about tax credits. This has come up in a prior call and we've
gotten other individual calls about this and we'd like to
cover this in a little bit of detail.
This is a chart that is meant for illustrative purposes, and
I'll talk to some of the elements. DTE generates tax credits
for Syn Fuel operations, coke batteries, and bio-mass plants.
The coke battery credits expire in 2003, and that's the hashed
chart on this, I think it's actually in color on your slide,
while the remaining credits extend to 2007, and that's under
current law. But there is some anticipation that the new
administration might extend some of these credits, but we'll
have to wait and see how that plays out.
Now, to talk a little bit about of credits and how these work.
First of all, credits cannot be generated in excess of regular
tax. For example, you cannot generate credits in excess of
35%, which would be your standard tax rate. The alternative
minimum tax, which is referred to as "AMT" sets the usage
limit. If you generate credits over the AMT level but below
your cap, you in essence carry forward credits. Currently, our
AMT level is in the $60 million range and it rises in forward
years to over $150 million as we're projecting.
As I mentioned, and this line that's in this chart, the limit
on credit uses is meant to represent our AMT limit, so credits
over that dark line going across this chart, in essence become
carry forward credits.
Our appetite for these credits have been impacted in the last
year by securitization, which reduces our taxable income, and
have been further impacted by MCN merger debt and MCN net
operating loss carry-forwards. Going forward, our appetite
will be impacted by MCN asset sales and also by the potential
divestiture by DTE of our transmission operations.
We will manage our portfolio of credits by watching the
overall cap and making sure that we never are in a situation
where we actually lose a credit, and also we will manage our
carry forward, and being mindful of the time value of money.
And if we anticipate that we would be in a loss position for a
credit or if we anticipated that our carry forward was too
large, we will be monetizing credits. There's a ready market
for credits, with major players interested in buying
partnership interest that would give them access to these
credits.
So, there's actually a competitive marketplace where we can
monetize credits and because of the nature of the marketplace,
we have a lot of flexibility in how we structure the sale of
these credits, all the way from on one end of the spectrum to
structuring these in a way where you have a one-time gain, to
on the other end of the spectrum structuring tax credit sales
to create an earnings stream that is very similar to as if I
earned and booked the credits myself.
The first point here is that we have excess credits and we
anticipate monetizing those credits and we have a lot of
flexibility in how to do those.
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 7
The second issue that has come up is regarding the Section 29
credits on syn fuels, which are different than the bio-mass
and coke battery credits. The IRS has previously issued over
35 rulings on syn fuel projects, and we believe our projects
comply with those rulings.
Last year, because of some alleged abuses in the industry, the
IRS temporarily suspended issuing new private letter rulings
on these types of projects. They issued a notice on October
26th and had comments received by the 27th. We anticipate that
the IRS will be issuing new guidance on these projects and
then eventually issuing private letter rulings, and that our
projects that we have will comply with the guidance that they
provide, as they try to eliminate some of the extreme abuses
in the industry.
However, there's been a delay in this whole process, partly
because of the administration change, which is resulting in
the appointment of a new chief tax counsel, and then also the
President's proposed tax legislation will also cause some
delay in the private letter ruling process and the new
guidance on syn fuel credits.
Despite that, we have a proprietary approach that I will not
be able to go into much detail on, but it provides us
certainty through this whole process and gives us enough
certainty to have confidence to actually run the machines and
book the credits prior to getting private letter ruling. So,
relative to the syn fuel operations that we have, we had
several machines that we had purchased from...that we are
currently running and then regarding the four machines that we
purchased from MCN, two of the four we will initiate
operations in the first quarter of this year, and the other
two of the original four would be put into operations in the
fourth quarter of this year.
Now, there's still two additional machines that Lee had
indicated that MCN currently owns, and we would anticipate
that they would be placed into service late this year or early
next year.
When Dan Brudzynski provided earnings guidance, I'd just like
to point out that 2001 earnings guidance is very conservative,
there's very little syn fuel credits in that number. So I
would describe the 2001 guidance as having upside potential
and not at risk relative to these types of credits.
In addition to these credits, there's much discussion going on
in Washington relative to energy and taxes, and we anticipate
additional business opportunities unfolding as those
discussions further.
Now, if you could turn to page 14. We've mentioned this a
couple of times, but you can see in this chart our
non-regulated earnings have grown dramatically, and we expect
this to continue in the future, in the area of energy
services, energy trading and coal services. Also, working
together with MCN on revenue
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 8
synergies, which currently are not in our numbers, we see
additional growth in the area of gas-fired merchant operations
and then we will also continue to invest in our distributed
generation business, DTE Technology, which we believe
differentiates us from many other companies.
Our targeted earnings for our non-regulated business in 2005
is $300 million.
In summary, on page 15, as I mentioned when I opened up our
comments, we believe that DTE is currently under-valued and is
a very attractive investment. Part of our thinking around this
is that we now have regulatory certainty, something we've
pursued for many years, and we have merger certainty. Our
non-regulated earnings continue to grow and will not only
continue to grow in the absolute dollar amount, but as a
percent of DTE's earnings will continue to increase as the
base of our earnings.
As a follow up to this call, we anticipate having a two-day
analyst meeting in late spring. The focus of that meeting will
be to get into more of our tactics and strategies around our
non-regulated earnings. We also will focus on technology
development and also at that time would be at more liberty to
talk about revenue related synergies that we've not been able
to talk to at this point in time because we don't have FTC
approval.
So with that, we'd like to open it up for questions and
answers.
Coordinator Our first question comes from Paul Patterson of Credit
Suisse First Boston.
P. Patterson Two thousand and three, I'd like to focus a little bit on
that. This tax credit monetization and what have you,
could you just please give us an idea of what the net
income that you're getting from tax credits in 2002 and
what they would be in 2003? It looks like there would be a
fall-off. Can you just give us, there's no net income on
that graph or any dollar value on it and I was wondering if
you could give us a little bit more clarity on that.
D. Meador This is Dave Meador, and then I'll ask for Dan's help,
too. The tax credit graph shows that the syn fuel and
bio-mass credits will continue, so we anticipate monetizing
a combination of coke battery credits that will go away,
but our objective would be to hold as many of the syn fuel
credits as possible. We can structure sales and
arrangements where we own certain percentages in one year
and that changes in forward years.
So, right now the earnings for 2002, Dan, would include
approximately how much for syn fuel related credits?
D. Brudzynski The '02 guidance is in the neighborhood of $40 to $45
million of net income. What happens in '03 is that you
have a drop-off of credits of about a similar amount, kind
of reflective of the graph. What's back-filling that in
'03 and going forward is our strategy around an increased
presence regionally in the merchant
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 9
generation side, a growing trading business, Plug Power begins
to become fully written off and we see some upside there,
increased merger synergies. So there's a whole host of things
that are in the queue to back-fill that drop-off in 2003, to
keep us on our 6% to 8% trajectory.
P. Patterson Okay, now when you mention that Plug Power is fully written
off, could you give us an idea about what the, I mean, are you
expecting the earnings to go positive there? I believe you
guys are right now getting some sort of loss associated with
that on your income statement, associated with Plug Power's
losses. What are you expecting on the profitability of Plug
Power in 2003?
D. Brudzynski Currently, as planned at least, is that the losses
that we're going to be recognizing in '01 are very similar to
the amounts in '02. The '02 losses are about roughly one-third
or $5 to $6 million of net loss, and then they drop off in '03
completely, because the equity position in Plug is completely
written off.
D. Meador So the way the accounting works is that we recognize Plug
losses until our position that's on the balance sheet is
written down to zero. Plug will continue to have losses
for several years after that and then as they turn
profitable, we would start recognizing income from Plug.
So we will go from a loss position to a neutral position
for a couple of years, and then it'll reverse and you'll
start actually picking up income in the forward years.
P. Patterson Okay, and could you give me an idea about what you think
pro forma in 2002, the capital structure of the combined
company will be?
N. Corey This is Nick Corey. We have provided in the past our
balance sheet targets for '02, and they haven't changed.
We are targeting a solid Bbb, high Bbb rating for both the
utility and the holding company. We'll have leverage of
below 50% for the utility and slightly above that for the
holding company as a whole.
P. Patterson I'll jump off and let other people ask questions. Thanks a
lot.
D. Meador Thanks, Paul.
Coordinator Our next question comes from Carlota Shen of JK Utility
Advisory.
C. Shen Good morning, Dave. Can you give just a guidance of your
cost synergy numbers for '02 What are you assuming in
terms of synergies and is there a concession there for
sharing on that?
D. Meador Well, first of all, there is no concession on sharing. We
are in a rate freeze environment, so our anticipation is
that there is not sharing. When we originally announced
the merger in October of '99, we referred to a pre-tax ten
year number of one billion dollars in savings, and actually
we've worked pretty hard at this, and now the ten year
nominal number is about $1.1 billion. And the timing
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 10
change is also, originally when we announced the merger,
our cost to achieve was going to be in 2000 and then we
were going to have a ramp up of positive synergies in '01.
So, this year the way that this will work is that we'll have a
cost to achieve this year, but the pre-tax synergies that we
are anticipating this year are in the $90 million range and
then that ramps up to $130 million next year, and then
eventually it levels off in the high $140's to 150 million.
Coordinator Our next question comes from Paul Debas of Value Line.
P. Debas Hello, I've got a couple of questions, three really. Could you
please talk about your position in non-regulated generation,
how many megawatts you have now and what's coming online and
how much you're spending there? And talk about each company's
cap ex plans for this year and next, and also the combined
company's dividend policy.
D. Meador On the non-regulated side, we have several operations that
we had started in DTE. We have a peaker project in
Indianapolis, it's referred to as the Georgetown Project.
We also had brought an old Detroit Edison plant back, it
was an idle plant and we converted it to gas and it's
called our River Rouge Project. In addition to that, we
right now have a JV that we've entered into that we're not
at liberty to discuss a lot of details about right now,
that has four turbines with it, I believe, in the 320
megawatt range, and then we also have four additional
turbines that we have placed an order with GE for early
2002 delivery.
We are entering this whole gas-fired arena very cautiously and
only looking for opportunities that provide a financial
profile, risk-adjusted, that we feel is prudent, so we are not
necessarily going long on turbines as others have.
Regarding capital spending, we can give you guidance on the
combined company and the utility, non-regulated, but then if
you're interested we can break that down into Detroit Edison
and Mich-Con. Dan, why don't you go ahead and take that?
D. Brudzynski Cap ex for stand alone DTE, or Detroit Edison for this year
is about $650 million. That includes about $150 million of
anticipated spending around the environmental front for
compliance with the new EPA standards. We have a bandwidth,
I believe, going forward, of about $200 to $300 million on the
non-regulated side, Base business, typical energy project
related type spending and then opportunities present
themselves and obviously the shareholder value created around
that, we will evaluate them as they come on the front.
The 2002 combined number for the two regulated utilities will
be about $800 million; Mich-Con brings about $100 to $150
million of incremental capital spending. We should see a
drop-off, though, in the regulated capital spending
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 11
after 2003, as we begin to see some of these environmental
expenditures dropping off, we anticipate about $400 million of
going forward capital investments over the next two to three
years, to get ourselves compliant with the new standards. Then
you should probably see regulated electric and gas capital
spending sort of dropping back down into the $500 to $600
range.
P. Debas That $200 to $300 million non-regulated spending, is that
always looked at with the alternative being the stock buyback
if you can't find attractive investments for that money?
D. Brudzynski Yes.
P. Debas And the last question was about the dividend policy.
D. Meador There is no change anticipated at this point in time in the
dividend policy. We look at that at least once a year, with a
variety of other broad financial policy decisions and with our
board of directors, and at this point in time we anticipate no
change.
P. Debas Thank you.
Coordinator Our next question comes from Terry Shu of JP Morgan.
T. Shu I have a couple of questions. First, on the MCN guidance
for 2001, the one dollar to $1.10, I got a little confused
when you talk about the adoption of FAS-133, the $100
million net of charge for the co-energy contracts. Is that
an additional amount? That's not inclusive of the one
dollar to $1.10, right?
L. Dow That's correct. The one dollar to $1.10 is exclusive of
that charge.
T. Shu That charge comes as a one-time charge that you would
report?
L. Dow The $100 million net of tax would be a one-time charge that's
the impact of a change in accounting to adopt 133.
T. Shu When you talk about gas margin assumptions, that it's
break-even versus profits in prior years. Can you explain
that again, which gas margins are you talking about
specifically? And you gave the 2001 outlook, what is
incorporated in the 2002 outlook if you look at MCN on a
standalone basis? I just want to get a better idea of what
is the earning power, normalized earnings, pre-cost
synergies and such?
L. Dow Turning to the first question, in terms of gas cost
margins, what I was referring to there was that Mich-Con
has an experimental program in place under a gas cost
freeze that expires at 12/31/01. It's a three-year program
and we're now in its last year of it. In '99 as well as
2000, Mich-Con made around $70 million pre-
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 12
tax in that program. In '01, my guidance presumes that we
either wind down the program under its natural course or the
gas cost recovery mechanism is implemented pursuant to
Mich-Con filing this spring. In either event, the assumption
inherent in my guidance is that we're able to cover our
costs of gas in 2001.
T. Shu And then the 2002 stand-alone entity and earnings prior to
cost synergies would be what, incorporated in the combined
forecast?
L. Dow I would expect that they would have one dollar to $1.10 with
probably a 5%...increase inherent into it.
T. Shu So the dollar to $1.10, in fact, is the pure earning power
with 5% type growth pre-merger, pre-synergies, etc.?
L. Dow That is correct.
T. Shu Just to question again on the consolidated company, on a
pro forma basis, what is the total amount of goodwill which
will be on the books after the closing?
D. Brudzynski Right now, based on our current work, we're about $1.4 billion
of goodwill, I believe it's $1.36 billion.
T. Shu And if we go back to the non-regulated earnings contribution
graph, which is on page 14, the $40 to $45 million that you
talked about a total tax credit in '02, it's all part of this,
right? In 2001, what is the tax credit part of the 2001
earnings?
D. Meador Are you talking about 2001, Terry?
T. Shu Right, the $125 million of net income from non-regulated
sources. Is there about $50 million of tax credits?
D. Meador No, Terry. There's only really the two machines that are
the non-MCN machines, it's a relatively small dollar amount
in the $125 million. The $45-ish million that we referenced is
a 2002 number, this chart only goes through 2001.
T. Shu So 2001 is a small number, whatever it is, $20 million or
something.
D. Meador Right.
D. Brudzynski Less than that.
D. Meador On a net income basis, it's less than that.
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 13
T. Shu Then, finally just the 2005 earnings goal of $300 million.
Of the $300 million, if you could give us a rough
breakdown, how much would be syn fuel type tax credit type
earnings and how much trading, coal projects, etc.?
Merchant energy? Just in broad terms, what would be the
rough breakdown?
D. Meador Terry, I hate to do this, but I think I'm going to have to
defer to our two day meeting. We see this business, in
essence, transforming in many ways. This started out, in
many ways, as a tax structured business that had very quick
paybacks and high returns. Right now, we see a shift in
areas such as coal services and trading, starting to put in
some gas-fired operations, but not trying to go too long on
assets. So right now we are looking at what I describe as
the different phases of the business as it grows. We're
going through a phase right now that is less capital
intensive and generating a fair amount of earnings, and the
example would be our trading operations that we expect to
ramp up.
T. Shu But you'll elaborate on all of that at your meeting?
D. Meador Yes.
T. Shu Which is in a couple of months, you said?
D. Meador Right, we're looking right now, we're trying to finalize a
date, late April, early to mid-May.
T. Shu Thank you.
D. Meador Thank you.
Coordinator Our next question comes from Paul Ridson of McDonald
Investments.
P. Ridson Good morning. I just wanted to clarify one point on the
last question. I had a couple of other questions. The one
dollar to $1.10 guidance assumes early reinstatement of the
fuel clause, ahead of the 12/31 expiration of the plan?
L. Dow No, it does not.
P. Ridson So there's upside there?
L. Dow Not so much upside, what it assumes is that we break-even in
2001 without regard to whether we get the early GCR
implemented.
P. Ridson And on page 9 of the handout, I was wondering what line
goodwill amortization is on in there? Is it bundled with
share dilution?
D. Meador No, it's in the incremental earnings. That's the line it's
included on, on both pages, both 9 and 10.
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 14
P. Ridson And lastly, the 360 stand-alone guidance, what does that
assume regarding the monetization of...tax credits?
D. Meador You're looking at 2001?
P. Ridson Yes.
D. Meador Actually, that is very similar to the answer that we
previously have given. There are coke battery credits and
bio-mass credits in that number that are not an issue right
now, and there's a very small amount of syn fuel related
credits related to the two pieces of equipment that we
acquired from Co-Val and then two of the four MCN machines
that we will book this year, we'll actually operate and
book credits this year. So there's a small amount of syn
fuel related credits in the stand-alone 360 number.
P. Ridson And just on an earlier point, you mentioned $90 million
of pre-tax synergies in 2001. Is that a full year basis or is
that what you expect to realize given a July '01 close?
D. Meador That is what we expect. It's more than a half year because we
are going to immediately start working on what I described as
harvesting synergies post-FTC approval, so it is 2001, a full
year number, but it's actually more than six months of
synergies.
P. Ridson Thank you very much.
D. Meador Thank you.
Coordinator Our next question comes from Vidula Murti of SAC Capital.
V. Murti Good morning.
D. Meador Good morning.
V. Murti We kind of keep going back to this tax credit overview
chart. I think you'd indicated an answer to an earlier
question that the drop-off from 2002/2003 is approximately $40
to $45 million, correct?
D. Meador Right.
V. Murti In terms of this bar chart, then I think the question then is
what is the dollar value in total? If we're droppin off $40 to
$45 million from '02 to '03, how much is the total in '02?
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 15
D. Meador We are not going to provide that level of detail,
unfortunately. This is a bundled value that we think that
we have differentiated ourselves in the marketplace, and
some of these credits, and the mixture of credits, how they
will be sold, when they will be sold, we would put
ourselves at a disadvantage to provide too much detail
relative to trying to create value for our shareholders.
So, at this point in time we're not going to give details
as to how much credits, types of credits are there by year,
and that's why this graph was drawn the way it was, without
dollar amounts on the scale.
V. Murti Okay. Well, maybe if we kind of go out to 2005, since this
is fairly stable post '02 here, when you take a look at
your earnings target for $300 million from the
non-regulated here, what percentage did the syn fuel and
bio-mass account for out there?
D. Meador Dan, can we answer that now?
D. Brudzynski I can answer it in the context that it will be becoming a
smaller and smaller percentage of the total, but you're
probably, as I mentioned earlier, the syn fuel credits are
targeted in the neighborhood of $40 to $45 million and you
probably have another $10 to $15 million in bio-mass
credits, so you're in, if you think in terms of a bread
basket of fuel, 20% to 25% of the $300 million probably, or
maybe more 20% would probably be more appropriate.
D. Meador But building upon Terry Shue's question, I think when we get
together for the two day meeting we'll provide some insights
as to, if you went out several years from now, what is the
mixture of businesses and what are the quality of earning
streams in that mixture of business that we see in 2005.
V. Murti But we're basically talking about somewhere in the aggregate
of about between $50 to $60 million roughly, and that would
be about 20% to 25% of the target.
D. Meador I think that's reasonable guidance, but actually we're getting
farther down the path of getting too precise about this at
this point in time than I would rather do.
V. Murti Another question that I had was in terms of fueling the
growth of non-regulated and meeting the internal
construction. Is there any reason to expect to need to
externally access capital markets during the period through
'05 or do you feel that internally generated cash should be
sufficient for both utility cap ex as well as non-reg cap
ex?
N. Corey It will be a combination of both, internally generated
funds and external finance.
V. Murti Can you give us a sense as to whether any time in the
forecast through '05 period that you look at, whether any
common equity financing would be contemplated?
N. Corey Not at this point. We, of course, will evaluate it on a
year by year basis.
V. Murti Thank you very much.
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 16
Coordinator Our next question comes from David Cohen of Farallon
Capital.
D. Cohen A couple of questions. On page 8, the merger timetable,
when do you expect to file the revised S-4?
D. Meador Mid-March is our target right now.
D. Cohen And then, am I misunderstanding this, does this imply that you
will have had the shareholder vote in June, but that you're
going to wait two months to close while you work on
integration synergies? That's what this chart looks like,
unless I'm misunderstanding it.
L. Dow This is Lee Dow speaking. I wouldn't assume any sort of
meaningful precision in this graph. I would say with
absolute confidence that there's no waiting for anything to
close, that we will close as soon as we get all the
requisite approvals to do so. This just highlights that a
timeline of how we get four to five months out. Clearly,
we need shareholder approval by MCN shareholders, the
mailing of the proxy and the need to have a meeting, so
that we do have some pretty broad time bars on this. But
there is no waiting for us to get anything done in this
time frame.
D. Cohen So there really shouldn't be a gap between the end of the
MCN proxy line and the closing, as there is in this chart?
There's no reason for that gap?
D. Meador No, but we have an idea about how long the proxy will take,
but I can't tell you when it's going to start. So the
placement of that bar on this chart was a little bit
arbitrary because it's not clear exactly how long the
revised S-4 process will take with the SEC. So, as you can
see in here, when we gave the four to five month guidance,
we were being conservative, and if everything worked out,
there would be a chance to accelerate this. But we've been
so off in our projection of timings, we wanted to give the
guidance of four to five months, taking everything into
consideration and being as reasonable as possible.
D. Cohen Thank you very much.
Coordinator Our next question comes from Alan Sapitan of...
A. Sapitan Thank you. You've answered most of my questions. Getting
back to the issue of the syn fuel tax credits. You gave us
a brief overview of what's going on at the IRS, in terms of
the review of Section 29 rules, but you're highly confident
that you're going to be able to take advantage of these
credits. Could you explain where that confidence comes
from, given what is apparently a review process going on at
the IRS?
D. Meador I really can't do that, Alan. I'm sorry. We feel that the
approach that we're taking, and the reason I use the word
"proprietary" it's something that we believe
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 17
is unique and it provides us a competitive advantage, and I
would rather not tip my hat off to our competitors.
A. Sapitan As a practical matter, wouldn't the secondary price, if you
were to monetize these credits, wouldn't they be affected by
an IRS ruling? Or are you suggesting that whatever it is that
you're doing in a proprietary manner would insulate yourself
from that risk as well?
D. Meador You're right, it would insulate us, whether we were using
and booking the credits or whether we were in a sale
process or a monetization process.
A. Sapitan And one last question on the table, actually it's on both
eight and nine, from a financial pro forma standpoint you're
assuming that the transaction with MCN closed July1?
D. Meador Yes.
A. Sapitan But that's as arbitrary as the table on page 8, you're just
hoping and guessing?
D. Meador Right, it was a reasonable start point. As soon as we get an
understanding of close dates, we can revise our guidance for
2001 with more precision, but we just picked that date because
we thought it was reasonable and it's quarter end.
A. Sapitan One last question about the table on page 8, is it
your expectation or do you just not know that the final event
will be a shareholder approval or the public utility holding
company act approval?
L. Dow We just don't know.
A. Sapitan Thank you very much.
D. Meador Thank you.
Coordinator Our next question comes from Steven Korn of Goldman Sachs
Asset Management.
S. Korn Good morning.
D. Meador Good morning.
S. Korn I had a question regarding the, you mentioned that there's
potential upside to the 2001 syn fuel credits if the IRS goes
forward and rules on the PLR. Can you quantify what that
upside would be?
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 18
D. Meador I don't think so at this time. I'd rather just leave our
guidance where it is and when we get more insights, we can
provide updated guidance at that point in time.
S. Korn Then, the estimates that you gave on page 8 and 9, do
those include the $400 million share repurchase and the $1.3
billion debt retirement? And if so, what are your share price
assumptions?
D. Meador I can tell you that they do include assumptions around debt
retirement and share buyback, but at this point I don't have
the specific share assumptions, the price that is.
S. Korn But does it include the full $400 million?
D. Meador Yes.
S. Korn And then can you also quantify what you anticipate
additional investments in Plug Power for 2001 and 2002 are
expected to be?
D. Meador At this point in time, no decision has been made as to
how Plug will meet its cash needs, which I believe are a 2002
item. I think they have sufficient funds to get them through
this year and the choices they have in front of them, there's
been no final decision at this point in time, so we are not
anticipating additional funding in the numbers that we're
projecting at this point in time.
S. Korn Thank you very much.
Coordinator Our next question comes from Zack Schreiber of Solcorp.
Z. Schreiber Actually, my questions have been asked and answered. Thank
you.
D. Meador Thanks, Zack.
Coordinator Our next question comes from Greg Orrill of Lehman Brothers.
G. Orrill Good morning.
D. Meador Good morning, Greg.
G. Orrill I was wondering, just on the stock buyback, you have authority
to go up to 750 million, I was wondering if you're going to
stop at the 400 million level or do you have plans to keep
going?
D. Meador As I indicated before, we had an outstanding authorization
from our board at 10 million shares, which we have used 3
million of the 10 million, so there was roughly 7 million
left on that authorization. As part of the securitization
process, we were looking for authorization for 13 million,
and what we asked our board to
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 19
do was to leave the remaining 7 million to give us some
flexibility. At this time, we don't anticipate going at that
higher level, but to build on a prior question, and this has
been DTE's position for some time, we're going to continue to
grow our non-regulated side of the business, however, if we do
not find attractive projects on a risk adjusted basis, we're
also committed to using our excess cash flow to buy back
stock. So we wanted some flexibility going forward, in our
authorization from our board, if we chose to do that. So
at this point, we don't anticipate going beyond the 13
million, roughly, shares but we wanted that authorization
in place.
G. Orrill Thanks a lot.
D. Meador Thank you.
Coordinator Our next question comes from Craig Lucas of Zimmer-Lucas
Partners.
C. Lucas Good morning, everyone.
D. Meador Hello, Craig.
C. Lucas I've got a couple of questions. The first is about the
FAS-133 write-down. If I understand, this is writing down
the value of the capacity from the Michigan to the Henry
hub, is that the pipeline capacity we're writing down?
L. Dow It would be upstream pipeline capacity serving
predominantly the Midwest, not so much Henry hub as more
likely mid-Continent area. But generally, from the supply
basins to the Michigan market.
C. Lucas So essentially this is capacity that's become uneconomic
due to this change in the geographic spread differential?
L. Dow It has become out of market, we're paying more for it than
the current..., so I guess if that's uneconomic, yes.
C. Lucas What is the earnings increase that comes from the
write-down of the capacity? Is it millions of dollars?
L. Dow The net of tax impact of eliminating that drag on future
year's earnings is probably around $20 million in the
energy marketing segment.
C. Lucas I'm sorry, that's $20 million net or pre-tax?
L. Dow Net.
C. Lucas So you guys, before, had something like standalone shares
or something like, I can't remember, 91 million shares or
something?
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 20
L. Dow 90.2 million.
C. Lucas Alright, so this is a big increase in terms of earnings pop
from this, what $0.22 or something?
D. Meador Craig, I think you described this correctly last week when
we were talking about this on MCN's call. In many ways
this is the pre-booking of goodwill.
C. Lucas So this $100 million goes into the goodwill figure that was
previously mentioned and amortized?
D. Meador Yes.
L. Dow Or not.
C. Lucas Or not, that's right, depending upon the ultimate decision,
which looks like it's not. But going back, someone had
asked earlier about earnings growth from one dollar to
$1.10, that's 5% off of that, you're getting a, let's say a
$0.20 pop just from this. Was that factored into that
previously mentioned '02 earnings guidance?
L. Dow Absolutely, because remember this is, in many respects, how
you get from $0.75 in the year 2000 for MCN to the one
dollar to $1.10, so we bake that into this change that is
not recognized in 2001's guidance. It doesn't become an
additive increment in future years, it just becomes all of
our capacity is baked in at market prices rather than what
we're paying for it. So you can't add $0.20 to the, this
is not a year over year thing once we get past 2001, this
is only a one-time addition that will eliminate...
C. Lucas It's a permanent increase in earnings?
L. Dow A permanent increase, but not a compounding increase, I
guess is what I was...
C. Lucas Okay. The other problem that the company's had has been in
the storage area. Could you talk about the changes in
accounting there and the prospect for storage? I think
you're actually losing money in storage, do you expect to
break-even in storage or to have positive earnings in
storage ultimately?
L. Dow We believe ultimately that storage will be a valuable
asset. Unfortunately, in the last two years, with summer
prices higher than winter prices, as we go into the
summers, it has made storage not look very attractive to
folks. We believe, however, that storage will ultimately
have the value that it's had in the past. But our guidance
for 2001 does not assume any meaningful change in the value
of storage.
C. Lucas What was the loss in the storage in 2000?
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 21
L. Dow I don't know it off the top of my head.
C. Lucas It seems like it was a pretty large number, actually.
L. Dow It's hard to tell because that was the inventory accounting
methodology as well as how we dealt with the trading around
the storage assets.
C. Lucas I did a little back-hand calculation, and it looks like
it's $0.15, is that something that I can use?
L. Dow That seems high to me.
C. Lucas So maybe it's a dime.
L. Dow That seems high, but I mean storage we have not built in
any meaningful improvement in the storage operations...
C. Lucas There's two things, I mean getting rid of the loss is one
thing and actually earning a return on the asset. So in the
guidance you're saying that you assume that it continues to
lose money as opposed to, you're going to have a positive
return. Is that correct?
L. Dow Directionally correct. We assume no major improvement.
Determining the cost of storage throughout all the business
segments at MCN, it's difficult to isolate.
C. Lucas And in terms of the assumption that you're making regarding
cash and the use of cash in the MCN forecast, what can you say
about that, you've assumed that all cash is used to pay off
debt? How is cash used in your forecast of MCN?
L. Dow At MCN we are continuing, as we did in the year 2000 and as
we sell assets, use the proceeds to pay down the debt. In
2001, we would expect capital expenditures of probably $160
million for MCN, full year, but we would also expect to
continue to sell down when the opportunities arise, outer
region assets and we would use those proceeds to pay down
MCN debt.
C. Lucas My last question is just regarding the 2000 earnings at
MCN. How much did the utility earn? Is there an assumption
that the utility earned $1.14 or something, does that sound
reasonable?
L. Dow Yes.
C. Lucas So, out of the total number, all other operations were
something like a $0.40 drag or something?
L. Dow Yes.
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 22
C. Lucas How much of that drag was just in terms of parent debt, in
terms of millions of dollars, could you attribute to just
parent level?
L. Dow That's difficult to...
C. Lucas Something like $15 million? Do you think that's reasonable?
L. Dow It wouldn't be useful for me to guess. Maybe we can get to you
after.
C. Lucas Thank you very much for your help.
L. Dow Thank you.
D. Meador Thanks, Craig.
Coordinator Our next question comes from Luka Ipolito of Chesapeake
Partners.
L. Ipolito Actually, it was just answered a minute ago, so thank you
and good luck.
D. Meador Thank you.
Coordinator Our next question comes from Paul Patterson of Credit
Suisse First Boston.
P. Patterson Just a clarification. I'm sorry if it was answered
earlier, I had to jump off briefly. But what's the ROE
that you guys are expecting MCN will earn at the utility
for 2002?
L. Dow Mich-Con has a long tradition of earning more than its
authorized cost of equity, so in the year 2000 we would
have earned about 15%, even with the warmer than normal
weather, I would expect in my earnings guidance in 2001
that we will continue to have return on equity of 12% to
13%.
P. Patterson Twelve to thirteen percent is what you're thinking about?
L. Dow Yes.
P. Patterson And then the other thing I wanted to ask was in terms of what
the cost of electricity that you guys are planning on
spending, that's DTE, for your net short position in 2002, and
what you guys exactly expect the net position to be for
2002/2003, or some sort of guidance thereon in terms of how
that filled in and what have you, and can you give us sort
of a prize per megawatt hour, what that might equate to?
D. Meador We usually don't provide the price per megawatt hour.
We'll talk a little bit about our hedging strategy and
basically our coverage. Dan, do you have that handy?
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 23
D. Brudzynski Two thousand and two's position will depend on assumptions
around customer choice, in other words, how many customers
leave our system. But if you take a position that a lot of
them stay or a more conservative position, about 1,640
megawatts will be our short position for '02. Now, we have
a small piece of that that's financially covered, but also
keep in mind that Dave mentioned we're beginning to develop
more of a natural hedge, in other words putting additional
generation into service through some of our non-regulated
subsidiaries. So, we could be approaching approximately
40% to50% covered in '02. We're currently looking at our
options around covering '02 completely, or being 100%
hedged, and I just don't have the data, unfortunately, in
front of me, around '03.
P. Patterson But that net short position, I guess, would go down as you
guys build up more of your own generation. Is that what
you're saying on the non-regulated side?
D. Brudzynski Absolutely.
D. Meador And as we lose customers to the customer choice program.
P. Patterson Right, but I guess what I'm wondering, though, you must have
some market price assumption then that the price of power will
be lower for those customers to leave, isn't that correct?
D. Meador We do, and since we're in the market buying electricity, I
don't think it would be to my advantage to show my cards, of
what my assumptions are on my price. We are in the market
buying electricity every day and we just would rather not
disclose that.
P. Patterson Sure, no problem. Could you give us an idea about what the
dollar value that you guys are expecting for '01 or that
you guys spent in '00?
D. Meador No, I can't do that. I'm sorry.
P. Patterson You can't tell us historically what you spent in 2000?
D. Meador We could, we just don't have that readily available. There
is a dollar amount and an average cost per megawatt hour
that I think we'll disclose on an historical basis.
P. Patterson Could you give us any idea about the sensitivity of
earnings to pricing volatility or variation?
D. Meador Well, for this year there will be none because we've
basically locked in our short position.
P. Patterson I meant in '02.
DTE ENERGY CO.
MODERATOR: DAVE MEADOR
MARCH 7, 2001/9:00 A.M. CST
PAGE 24
D. Meador We don't have the detail. We do anticipate, when
appropriately, locking in our short position, and at the
forward curve today we could lock in at favorable margins that
are embedded in our earnings guidance. So our anticipation is
that we'll be able to protect the guidance that we've provided
or even get better.
P. Patterson Great.
D. Meador Thank you.
Coordinator Mr. Meador, I'd like to turn the meeting back over to you
for any closing comments.
D. Meador I'd like to thank everybody for participating and bearing
with us, including the simultaneous Webcast. We look
forward to seeing everybody at our two-day meeting later on
this spring. Thank you.