Why did DTE Energy's earnings decline in 2003?

Diluted EPS fell to $3.09 from $3.83. The main causes were milder weather that reduced demand, lost electric Customer Choice margins, catastrophic storms and the August 2003 blackout, double-digit increases in operating costs, and higher pension and health care expenses. These offset growth in the non-regulated Energy Services business.

What is the Customer Choice program's impact on DTE?

Customers can buy electricity from alternative suppliers while Detroit Edison's rates remain regulated, which makes the program unfavorable to the utility. Detroit Edison lost 16% of retail sales in 2003 (versus 6% in 2002), about $120 million in margins, and expects 17% to 20% losses in 2004 absent regulatory or legislative fixes.

How much of the pending rate increases will show up in 2004 results?

Detroit Edison received an interim order for a $248 million annual base-rate increase, but because of rate caps and other adjustments it is designed to add only about $71 million of revenue in 2004. Full benefits are not expected until 2006 when caps expire. MichCon's $194 million request has an interim order expected in mid-2004 and a final order by January 2005.

What risks does the synfuel business carry?

Synfuel earnings depend heavily on Section 29 tax credits, which expire in 2007 for synfuel plants. The IRS suspended private letter rulings in 2003 before resuming them in October, four synfuel facilities are under IRS audit for 2001, and the company has about $300 million in guarantees tied to synfuel sales. Future credit value could also be affected by new tax legislation.

Is DTE's balance sheet and liquidity under pressure?

Liquidity is adequate: the company had about $1.2 billion of available revolver borrowing at year-end and a debt-to-capitalization ratio of about 0.50 to 1 under covenant terms. However, rating agencies have negative outlooks, a downgrade could raise borrowing costs, and about $500 million of debt matures in 2004, so management plans to keep leverage within 50% to 55%.

DTE Energy 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 3, 2004. Cited figures are marked; the original filing is the authoritative source.

DTE Energy's 2003 10-K shows a year of lower earnings driven by a weak utility segment, partly offset by growth in non-regulated businesses.

Net income fell 18% to $521 million^a ($3.09 diluted EPS) from $632 million ($3.83) in 2002. Income from continuing operations declined to $480 million ($2.85 per share) from $586 million ($3.55). The drivers were milder weather, lost margins from electric Customer Choice migration (Detroit Edison lost 16% of retail sales in 2003), storm and blackout costs, and rising operating and pension costs.

Regulated net income dropped to $281 million^b from $418 million. The main positives were a stronger non-regulated contribution of $199 million, up from $168 million, driven by synfuel production and Section 29 tax credits, and about $758 million of asset-sale proceeds (including the $610 million ITC sale). Operating cash flow held near $950 million, and capital spending fell.

The balance sheet improved, with the debt-to-capitalization ratio at about 50% and total assets of $20.8 billion^c. The outlook is challenging. Electric and gas rate cases are pending: Detroit Edison's interim increase is $248 million annually (only about $71 million recognized in 2004 because of rate caps), and MichCon has requested $194 million.

Customer Choice migration is expected to reach 17%^d to 20% of retail sales in 2004. Several agencies have placed negative outlooks on DTE's credit ratings, and synfuel exposure to IRS audit and tax-credit uncertainty remains a key risk.

02—Key points

Key Highlights

Net income fell 18% to $521 million ($3.09 diluted EPS) from $632 million ($3.83) in 2002, reflecting weaker utility earnings.
Regulated net income declined to $281 million from $418 million, driven by weather (a $64 million hit), Customer Choice lost margins (about $120 million), and storm and blackout costs.
Non-regulated income rose to $199 million from $168 million, led by synfuel production and Section 29 tax credits.
Operating cash flow was $950 million, roughly flat year over year, despite a $222 million pension contribution.
About $758 million in proceeds came from asset sales, including the $610 million ITC sale, and 2003 capital expenditures fell significantly.
Pending rate cases: Detroit Edison's interim $248 million increase (about $71 million realized in 2004) with a final order expected in Q3 2004, and MichCon's $194 million request.
Credit ratings carry negative outlooks at DTE Energy and Detroit Edison, and the company expects Customer Choice losses of 17% to 20% of retail sales in 2004.

03—Questions

Frequently Asked Questions

Why did DTE Energy's earnings decline in 2003?
Diluted EPS fell to $3.09 from $3.83. The main causes were milder weather that reduced demand, lost electric Customer Choice margins, catastrophic storms and the August 2003 blackout, double-digit increases in operating costs, and higher pension and health care expenses. These offset growth in the non-regulated Energy Services business.
What is the Customer Choice program's impact on DTE?
Customers can buy electricity from alternative suppliers while Detroit Edison's rates remain regulated, which makes the program unfavorable to the utility. Detroit Edison lost 16% of retail sales in 2003 (versus 6% in 2002), about $120 million in margins, and expects 17% to 20% losses in 2004 absent regulatory or legislative fixes.
How much of the pending rate increases will show up in 2004 results?
Detroit Edison received an interim order for a $248 million annual base-rate increase, but because of rate caps and other adjustments it is designed to add only about $71 million of revenue in 2004. Full benefits are not expected until 2006 when caps expire. MichCon's $194 million request has an interim order expected in mid-2004 and a final order by January 2005.
What risks does the synfuel business carry?
Synfuel earnings depend heavily on Section 29 tax credits, which expire in 2007 for synfuel plants. The IRS suspended private letter rulings in 2003 before resuming them in October, four synfuel facilities are under IRS audit for 2001, and the company has about $300 million in guarantees tied to synfuel sales. Future credit value could also be affected by new tax legislation.
Is DTE's balance sheet and liquidity under pressure?
Liquidity is adequate: the company had about $1.2 billion of available revolver borrowing at year-end and a debt-to-capitalization ratio of about 0.50 to 1 under covenant terms. However, rating agencies have negative outlooks, a downgrade could raise borrowing costs, and about $500 million of debt matures in 2004, so management plans to keep leverage within 50% to 55%.

04—Continue

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