UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002
Commission file number 1-11607
DTE ENERGY COMPANY(Exact name of registrant as specified in its charter)
313-235-4000(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
At July 31, 2002, 167,466,850 shares of DTE Energy’s Common Stock, substantially all held by non-affiliates, were outstanding.
TABLE OF CONTENTS
DTE Energy Company
Quarterly Report on Form 10-QQuarter Ended June 30, 2002
Table of Contents
DEFINITIONS
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DTE Energy CompanyManagement’s Discussion and Analysisof Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Certain information presented herein includes forward-looking statements. Forward-looking statements involve certain risks and uncertainties that may cause actual future results to differ materially from those contemplated, projected, estimated or budgeted in such forward-looking statements. Factors that may impact forward-looking statements include, but are not limited to, interest rates, effects of new accounting pronouncements, access to the capital markets, the level of borrowings, weather, actual sales, changes in the cost of fuel and purchased power due to the suspension of the PSCR mechanism, changes in the cost of natural gas, the effects of competition and the implementation of electric and gas Customer Choice programs, the implementation of electric and gas utility restructuring in Michigan, the impact of changes in and interpretations of tax laws, environmental and nuclear requirements, the impact of FERC and MPSC proceedings and regulations, the timing of the accretive effects of DTE Energy’s merger with MCN Energy, and the contributions to earnings by non-regulated businesses.
RESULTS OF OPERATIONS
DTE Energy reported earnings of $68 million or $.42 per diluted share for the 2002 second quarter, compared to losses of $87 million or $.60 per diluted share for the 2001 second quarter. For the 2002 six-month period, net income was $268 million or $1.66 per diluted share, compared to $51 million or .36 per diluted share for the same period in 2001. The comparability of earnings was affected by merger and restructuring charges and goodwill amortization associated with the MCN Energy merger that reduced after-tax earnings for the 2001 second quarter by $168 million or $1.15 per diluted share and the 2001 six-month period by $169 million or $1.17 per diluted share. Excluding merger and restructuring charges and goodwill amortization, earnings decreased $13 million in the 2002 second quarter and increased by $48 million in the 2002 six-month period as compared to the corresponding 2001 periods. Both periods were affected by increased contributions from the Energy Resources — Regulated segment and the Energy Gas business unit, and reduced earnings from the Wholesale Marketing & Trading segment and Corporate & Other. The issuance of 29 million shares in conjunction with the May 2001 MCN Energy merger, net of 10.5 million shares repurchased in 2001, also impacted the earnings per share comparison.
New reporting alignment - Beginning in 2002, DTE Energy realigned its internal and external financial reporting structure into three strategic business units (Energy Resources, Energy Distribution and Energy Gas) that have both regulated and non-regulated operations. This structure is how management sets strategic goals, allocates resources and evaluates performance. The realignment resulted in the following nine reportable segments:
Energy Resources
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Management’s Discussion and Analysis
Energy Distribution
Energy Gas
Corporate & Other includes administrative and general expenses, and interest costs of DTE Energy corporate that have not been allocated to the regulated and non-regulated businesses. Corporate & Other also includes various other non-regulated operations, including investments in new emerging energy technologies.
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The following tables and related discussion depicts the operations of each of these segments.
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Regulated earnings increased $45 million and $40 million during the 2002 second quarter and six-month period reflecting higher gross margins due to lower fuel and purchased power costs, partially offset by a decrease in operating revenue. Fuel and purchased power costs reflect favorable energy market prices and an increase in unrealized mark to market gains. The operating revenues decrease was attributable to the impact of a 5% legislatively mandated, securitization based, rate reduction for commercial and industrial customers that began in April 2001. The higher gross margins were partially offset by increased operations and maintenance expenses for health care and pension costs. Depreciation and amortization expense decreased reflecting the extension of the amortization period from seven years to 15 years for certain regulatory assets that were securitized in 2001.
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System output and average fuel and purchased power costs were as follows:
Non-regulated earnings decreased $33 million and $17 million for the 2002 second quarter and six-month period, respectively, reflecting the operations of the Wholesale Marketing & Trading segment. In the 2001 second quarter, this segment had substantial mark to market gains, largely on gas supply contracts. In late 2001, these gas contracts were hedged, reducing future earnings volatility due to swings in gas prices.
Outlook - Regulatory changes have resulted and will continue to result in increased competition in the electric generation business. Effective January 1, 2002, the electric Customer Choice Program was expanded whereby all electric customers can choose to purchase their electricity from suppliers other than their local utility. Detroit Edison expects to lose 5% to 8% of its retail sales as a result of customers choosing to participate in the electric Choice Program during 2002. To the extent Detroit Edison experiences net stranded costs as a result of customers switching to an alternative electric supplier, Michigan legislation provides for the recovery of such stranded costs. Detroit Edison disagrees with the MPSC’s methodology for determining and recovering net stranded costs and has asked for rehearing, clarification and substantial changes on certain aspects of the applicable order. In May 2002, the MPSC denied Detroit Edison’s request for rehearing and clarification on certain aspects of the order. In June 2002, Detroit Edison filed an appeal of the MPSC order at the Michigan Court of Appeals. See Note 4.
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Regulated earnings declined $3 million and $15 million during the 2002 second quarter and six-month period, respectively, due primarily to increased operation and maintenance expenses. The increased operation and maintenance expenses are attributable to higher health care and pension costs, heat-related maintenance costs on the distribution system and costs associated with restoring power to customers who lost service during two storms in the 2002 six-month period. Operating revenues increased due primarily to higher residential sales due to warm June weather.
Non-regulated results declined $1 million and $2 million during the 2002 second quarter and six-month period, respectively, due primarily to expenses associated with the establishment of new sales offices in the distributed generation business.
Outlook - Regulated electric system deliveries are expected to increase in 2002 due to the economic recovery and continue to grow modestly in 2003. Operating results will vary as a result of various external factors such as weather, changes in economic conditions and the severity and frequency of storms. As a result of the continued restructuring of the electric industry, DTE Energy is currently negotiating the sale of ITC. Any divestiture will be independently evaluated to maximize shareholder value.
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Regulated had a loss of $1 million for the 2002 second quarter and had earnings of $53 million for the 2002 six-month period compared to income of $1 million in both the 2001 comparable periods, reflecting primarily the operations of MichCon, DTE Energy’s natural gas utility. MichCon was acquired in conjunction with the MCN Energy merger in May 2001, and was part of DTE Energy’s operations for only one month in the 2001 second quarter and six-month period. Due to the seasonal nature of the gas utility business, MichCon’s earnings in the second quarter of each year are typically negligible.
Non-regulated earnings were $8 million and $14 million for the 2002 second quarter and six-month period, respectively, compared to earnings of $1 million in both the 2001 comparable periods, reflecting the operations of the gas exploration and production business, and pipeline and processing activities.
Outlook - In December 2001, the MPSC issued an order that continues the Gas Customer Choice Program on a permanent and expanding basis. Beginning April 1, 2002, up to 40% of customers can elect to purchase gas from suppliers other than MichCon. Beginning in April 2003, up to 60% of customers could participate and beginning April 2004, all 1.2 million of MichCon’s gas customers could choose to participate. As of June 2002, approximately 127,000 customers are participating in the gas Customer Choice program. Since MichCon continues to transport and deliver the gas to the participating customers’ premises at prices comparable to the non-gas sales prices, customers switching to other suppliers have no impact on MichCon’s margins.
Weather is the most significant factor that will effect Energy Gas’ sales and therefore its earnings.
Corporate & Other
The net loss attributable to Corporate & Other increased $26 million and $23 million for the 2002 second quarter and six-month period, respectively, due to unfavorable effective income tax rate adjustments and
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higher interest costs. The income tax provisions of the segments are determined on a stand alone basis. Corporate & Other records necessary adjustments in order that the consolidated income tax expense during the quarter reflects the estimated calendar year 2002 effective rate. Interest expense increased due to the debt assumed in the MCN Energy merger.
CAPITAL RESOURCES AND LIQUIDITY
Operating Activities
Net cash from operating activities decreased $19 million during the 2002 six-month period as compared to the same 2001 period. The decline reflects a $21 million increase in working capital and other assets and liabilities, partially offset by an increase of $2 million in net income, after adjusting for depreciation, depletion and amortization and $223 million in non-cash merger and restructuring charges in the 2001 six-month period. Partially offsetting this decline was the incremental contribution of Enterprises’ operating cash inflows in 2002, tempered somewhat by the impact of the recently implemented gas cost recovery mechanism (GCR). Cash flow was negatively impacted by the under-recovery of gas costs totaling $38 million, as part of the GCR mechanism implemented in January 2002, where MichCon is allowed to recover its actual gas costs from gas customers. Over the balance of 2002 this amount is expected to reverse with a small remaining under-recovery balance by year-end that will be trued-up as part of 2002’s GCR reconciliation process.
Higher working capital levels reflect increased accounts receivables of $148 million, largely the result of the impact of the economy on collections and the under-recovery of gas costs. Management expects lower receivables outstanding by year end. Increased electric sales due to warm June weather also contributed to the higher receivable balance. In addition, lower accounts payable levels represent the internal focus on managing external payments and taking greater advantage of purchase discounts.
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Investing Activities
Net cash used for investing activities decreased $1.22 billion during the 2002 six-month period as compared to the same 2001 period. The decrease is primarily due to the acquisition of MCN Energy in the 2001 six-month period.
Financing Activities
Net cash from financing activities decreased $1.67 billion during the 2002 six-month period as compared to the same 2001 period. The decrease is primarily due to the issuance of $1.75 billion of securitization bonds in March 2001 and the issuance of $1.35 billion of long-term debt to finance the cash consideration portion of the acquisition of MCN Energy.
In April 2002, DTE Energy issued $200 million of 6.65% senior notes due 2009. The proceeds were used to retire MCN Energy Enterprises Remarketed Securities, which had an aggregate principal amount of $100 million, and to reduce short-term borrowings.
In June 2002, DTE Energy issued 6.9 million equity security units at $25 per unit. An equity security unit consists of a stock purchase contract and a senior note of DTE Energy. DTE Energy used the net proceeds of $166.9 million from this issuance for general corporate purposes, including the repayment of short-term borrowings.
In June 2002, DTE Energy also issued 6.325 million shares of common stock at $43.25 per share, grossing $273.6 million. Net proceeds from the common stock offering were approximately $265 million and are recorded in the accompanying consolidated statement of shareholders’ equity.
ENVIRONMENTAL MATTERS
EPA ozone transport regulations and final new air quality standards relating to ozone and particulate air pollution will impact the Company. Detroit Edison has spent approximately $348 million through June 2002 and estimates that it will incur an additional $400 to $500 million of future capital expenditures over the next three years to comply.
NEW ACCOUNTING PRONOUNCEMENTS
During 2001, the Financial Accounting Standards Board (FASB) issued new accounting pronouncements concerning business combinations, goodwill and other intangible assets, asset retirement obligations and impairment or disposal of long-lived assets. See Note 9 for a discussion of the Company’s evaluation of the adoption of these new accounting pronouncements.
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FAIR VALUE OF CONTRACTS
The following table reflects the maturity and sources of the net fair value gain (loss) of contracts at June 30, 2002:
The “Prices from quotes” category represents the Company’s positions for which forward price curves were developed using published NYMEX exchange prices and over the counter (OTC) gas and power quotes. The NYMEX currently publishes gas futures prices for the next six years.
The “Prices from external sources” category represents the Company’s forward positions in power at points for which OTC broker quotes are not always directly available. The Company values these positions against internally developed forward market price curves that are constantly validated and recalibrated against OTC broker quotes for closely correlated points. This category also includes “strip” transactions whose prices are obtained from external sources and then modeled to daily or monthly prices as appropriate.
A reconciliation of the Company’s estimated net fair value of trading contracts follows:
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Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk
Risk Management Activities
DTE Energy is subject to commodity price risk in conjunction with the anticipated purchase of electricity to meet reliability obligations. Exposure to commodity price risk arises from market fluctuations in commodity prices.
To limit the sensitivity to commodity price fluctuations, DTE Energy has entered into a series of forward electricity contracts and option contracts.
The Company is exposed to the risk of market price fluctuations on gas sale and purchase contracts, gas production and gas inventories. To manage this risk, the Company uses natural gas futures, options, forwards and swap agreements.
The Company performed a sensitivity analysis to calculate the impact of changes in fair values utilizing applicable forward commodity rates in effect at June 30, 2002. The Company estimates that if commodity prices were 10% higher or lower, the net fair value of commodity contracts would decrease $8.6 million and increase $8.6 million, respectively.
Trading Activities
Wholesale Marketing & Trading trades electricity, gas and related fuels, in addition to providing price risk management services using energy commodity derivatives. Wholesale Marketing & Trading performed a sensitivity analysis to calculate the impact of changes in fair values utilizing applicable forward commodity rates in effect at June 30, 2002. The Company estimates that if commodity prices were 10% higher or lower, the net fair value of commodity contracts would decrease $10.3 million and increase $11.3 million, respectively.
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DTE Energy CompanyConsolidated Statement of Operations (unaudited)
See Notes to Consolidated Financial Statements (Unaudited)
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DTE Energy CompanyConsolidated Statement of Financial Position
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DTE Energy CompanyConsolidated Statement of Cash Flows (unaudited)
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DTE Energy CompanyConsolidated Statement of Changes in Shareholders’ Equity (unaudited)
The following table displays comprehensive income (loss) for the six-month periods in 2002 and 2001:
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DTE ENERGY COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 — GENERAL
These consolidated financial statements (unaudited) should be read in conjunction with the notes to consolidated financial statements included in the Annual Report to the Securities and Exchange Commission on Form 10-K.
The accompanying consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America. In connection with their preparation, management makes estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
The consolidated financial statements are unaudited, but in the opinion of the Company’s management, include all adjustments necessary for a fair statement of the results for the interim periods. Financial results for this interim period are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year.
Certain prior year balances have been reclassified to conform to the current year’s presentation.
NOTE 2 — MCN ENERGY ACQUISITION
On May 31, 2001, the Company completed the acquisition of MCN Energy by acquiring all of its outstanding shares of common stock for a combination of cash and shares of the Company’s common stock. The Company purchased the outstanding common stock of MCN Energy for $2.3 billion and assumed existing MCN Energy debt and preferred securities of $1.5 billion.
The Company accounted for the acquisition using the purchase method. The excess purchase price over the fair value of net assets acquired totaled $2.1 billion and was classified as goodwill. The Company began amortizing goodwill on June 1, 2001, on a straight-line basis using a 40-year life. In accordance with the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002, the amortization of goodwill ceased, and is tested for impairment on an annual basis.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
NOTE 3 — MERGER AND RESTRUCTURING CHARGES
On May 31, 2001, the Company completed the acquisition of MCN Energy. The Company incurred merger-related charges and restructuring charges associated with the acquisition. The merger-related charges of $16 million ($10 million after tax) in the 2001 second quarter and $18 million ($12 million after tax) in the 2001 six-month period, consisted primarily of system integration, relocation, legal, accounting and consulting costs. Restructuring charges of $236 million ($153 million after tax) in the 2001 second quarter, were primarily associated with a work force reduction plan. The plan included early retirement incentives along with voluntary separation arrangements for 1,184 employees, primarily in overlapping corporate support functions. The merger and restructuring costs had the effect of decreasing earnings by $252 million ($164 million after tax) and $254 million ($165 million after tax) for the 2001 second quarter and six-month period, respectively.
NOTE 4 — REGULATORY MATTERS
Electric Industry Restructuring
The MPSC initiated a case to determine the methodology of calculating net stranded costs as required by Public Act (PA) 141. As a result of an MPSC order in December 2001, Detroit Edison would recover the net stranded costs associated with its electric generation operations. Specifically, there would be an annual filing with the MPSC comparing actual revenues from generation services to the revenue requirements, including an allowance for the cost of capital, to recover the costs of generation services. The MPSC, in its orders, determined that Detroit Edison had no stranded costs using 2000 data, and consequently established a zero 2002 transition charge. The MPSC authorized Detroit Edison to establish a deferred regulatory asset in order to recover its 2002 incurred stranded cost in a subsequent annual net stranded cost filing. The MPSC also determined that Detroit Edison should provide a full and offsetting credit for the securitization and tax charges applied to electric Customer Choice bills in 2002 and maintained an additional credit on
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electric Customer Choice bills equivalent to the 5% rate reduction benefiting full service customers, both funded by savings derived from securitization. This order combined with lower wholesale power prices has encouraged additional customer participation in the electric Customer Choice program and has resulted in the loss of margins from providing generation services. In May 2002, the MPSC denied Detroit Edison’s request for rehearing and clarification on certain aspects of the order. In June 2002, Detroit Edison filed an appeal of the MPSC order at the Michigan Court of Appeals, challenging the legality of the MPSC order.
In May 2002, Detroit Edison submitted its 2002 annual net stranded cost filing with the MPSC. The filing provides refinements to the MPSC Staff’s calculation of net stranded costs, seeks more timely recovery of stranded costs and responds to the issue of securitization offsets and rate equalization credits. Detroit Edison’s filing supports the following conclusions: (i) Detroit Edison had no recoverable stranded costs in 2000, however when 2001 data is incorporated into the approved methodology, Detroit Edison has recoverable stranded costs attributable to electric Customer Choice of $13 million for 2001; (ii) Detroit Edison requested the recovery of 2001 net stranded costs through use of excess residual securitization savings; (iii) Detroit Edison expects to incur additive net stranded costs during 2002 and 2003 as a result of increased electric Customer Choice participation; and (iv) a pro-forma transition charge should be approved for billing during the remainder of 2002 and for 2003 to eliminate the time lag between the incidence and recovery of stranded costs inherent in the previously approved methodology.
In another December 2001 order, the MPSC finalized the prices, terms and conditions contained in the Retail Access Service Tariff (RAST). Detroit Edison requested rehearing and clarification on certain aspects of the order. In an order issued in April 2002, the MPSC modified its December 2001 order approving Detroit Edison’s RAST and reduced the requirements imposed on Detroit Edison in the December 2001 order concerning meter installation, meter reading and computer system enhancements for customers that elect to participate in the electric Customer Choice program.
In several orders issued in June 2000, the MPSC determined that adjusting rates for changes in fuel and purchased power expenses through continuance of the PSCR clause would be inconsistent with the rate freeze required by PA 141. Detroit Edison was not permitted to collect the 1998 PSCR under-recovery of $9 million, plus accrued interest of $3 million. Also, Detroit Edison was not required to refund approximately $55 million of liabilities for over-recoveries of PSCR expenses for 1999 and 2000, and disallowances under the Fermi 2 performance standard mechanism. In January and March 2002, the Michigan Court of Appeals rejected appeals and motions for rehearing filed by parties opposing the MPSC’s actions in this proceeding. In March 2002, the Michigan Attorney General applied for leave to appeal at the Michigan Supreme Court. The court has not yet determined whether or not it will hear the case.
Gas Industry Restructuring
MichCon returned to the gas cost recovery (GCR) mechanism in January 2002 when the Gas Sales Program expired. Under the GCR mechanism, the gas commodity component of MichCon’s gas sales rates is designed to recover the actual costs of reasonably and prudently incurred gas purchases. In December 2001, the Michigan Public Service Commission (MPSC) issued an order that permitted MichCon to implement GCR factors up to $3.62 per Mcf for January 2002 billings and up to $4.38 per Mcf for the remainder of 2002. The order also allowed MichCon to recognize a regulatory asset of approximately $14 million representing the difference between the $4.38 factor and the $3.62 factor for volumes that were unbilled at December 31, 2001. The regulatory asset will be subject to the 2002 GCR reconciliation process. As of June 30, 2002, MichCon has accrued a $52.4 million regulatory asset representing the under-recovery of actual gas costs incurred. In July 2002, in response to a petition for rehearing filed by the Michigan Attorney General, the MPSC directed the parties to address MichCon’s implementation of the December 2001 order and the impact of that implementation on rates charged to MichCon’s customers. In addition, parties are to address the advisability and lawfulness of
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granting MichCon’s request to record a regulatory asset. In July 2002, an MPSC Administrative Law Judge (ALJ) issued a Proposal for Decision on MichCon’s 2002 GCR plan case. In that decision the ALJ recommended the adoption the MPSC Staff’s proposed $26.5 million reduction in gas cost due to MichCon’s decision to utilize storage gas during 2001 that resulted in a gas inventory decrement for the 2001 calendar year.
In December 2001, the MPSC also approved MichCon’s application for a voluntary, expanded permanent gas Customer Choice program, which would replace the experimental program that expired in March 2002. Effective April 2002, up to 40% of MichCon’s customers could elect to purchase gas from suppliers other than MichCon. Effective April 2003, up to 60% of customers would be eligible and by April 2004, all of MichCon’s 1.2 million customers can participate in the program. The MPSC also approved the use of deferred accounting for the recovery of implementation costs of the gas Customer Choice program. As of June 2002, approximately 127,000 customers are participating in the gas Customer Choice program.
Through December 2001, MichCon was operating under an MPSC-approved Regulatory Reform Plan which included an income sharing mechanism. The income sharing mechanism allowed customers to share in profits when actual returns on equity from utility operations exceed predetermined thresholds. Based on the MPSC approved formula, the Company believes that no income sharing is required in 2001. In July 2002, the MPSC issued an order regarding MichCon’s 2001 income sharing. The MPSC ordered a hearing be held to determine the issue of the appropriate treatment of $766,000 of pipeline refunds received by MichCon during 2001. MichCon is directed to make a filing setting forth a refund methodology in August 2002.
Other
In accordance with a November 1997 MPSC order, Detroit Edison reduced rates by $53 million annually to reflect the scheduled reduction in the revenue requirement for Fermi 2. The $53 million reduction was effective in January 1999. In addition, the November 1997 MPSC order authorized the deferral of $30 million of storm damage costs and amortization and recovery of the costs over a 24-month period commencing January 1998. After various legal appeals, the Michigan Court of Appeals remanded back to the MPSC for hearing the November 1997 order. In December 2000, the MPSC issued an order reopening the case for hearing. The parties in the case have agreed to a stipulation of fact and waiver of hearing. In June 2002, the MPSC issued an order modifying in part, and reaffirming in part, previous orders which allowed Detroit Edison to amortize and collect in rates the storm damage costs incurred in 1997. The MPSC modified its 1997 order regarding the calculation of the storm damage costs, and in doing so ordered Detroit Edison to refund approximately $1.5 million after January 1, 2004. The 2004 refund will also include interest accrued from January 1, 2000 at Detroit Edison’s authorized rate of return. In July 2002, the Michigan Attorney General filed a claim of appeal at the Michigan Court of Appeals regarding the June 2002 MPSC order.
The Company is unable to predict the outcome of the regulatory matters discussed herein. Resolution of these matters is dependent upon future MPSC orders, which may impact the financial position and results of operations of the Company.
NOTE 5 — PREFERRED SECURITIES OF SUBSIDIARIES
In January 2002, DTE Energy Trust I, a wholly owned trust of the Company, issued $180 million of 7.8% Trust Preferred Securities with a liquidation value of $25 per share due February 2032. The earliest date the securities can be redeemed is February 2007. The proceeds were used to redeem 8-5/8% Trust Originated Preferred Securities and 9-3/8% Redeemable Cumulative Preferred Securities in February 2002.
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NOTE 6 — DEBT AND EQUITY TRANSACTIONS
Long-term Debt
During the first six months of 2002, DTE issued long-term debt consisting of:
During the first six months of 2002, DTE Energy and its subsidiaries repaid $339 million of long-term debt securities.
Equity-Linked Debt Securities
In June 2002, DTE Energy issued 6.9 million equity-linked debt securities that yield 8.75% with a stated amount of $25 per security. Gross proceeds from the issuance totaled $172.5 million. A security unit consists of a stock purchase contract and a senior note of DTE Energy. Under each stock purchase contract, DTE Energy is obligated to sell, and the security unit holder is obligated to purchase between 0.4817 and 0.578 shares of DTE Energy common stock in August 2005 for $25. The exact number of DTE Energy common shares to be sold is dependent on the market value of a share in August 2005, but will not be less than 3.3 million or more than 4.0 million shares. DTE Energy is also obligated to pay the security unit holders a quarterly contract adjustment payment at an annual rate of 4.15% of the stated amount. DTE Energy has recorded $21 million as the present value of the contract adjustment payments in long-term debt with an offsetting reduction in common shareholders’ equity. The liability is reduced as the contract adjustment payments are made.
Each senior note has a stated value of $25, pays an annual interest rate of 4.60% and matures in August 2007. The senior notes are pledged as collateral to secure the security unit holders’ obligation to purchase DTE Energy common stock under the stock purchase contracts. The security unit holders may satisfy their obligations under the stock purchase contracts by allowing the senior notes to be remarketed with proceeds being paid to DTE Energy as consideration for the purchase of stock under the stock purchase contracts. Alternatively, holders may choose to continue holding the senior notes and use cash as consideration for the purchase of stock under the stock purchase contracts.
Net proceeds from the equity security issuance totaled $166.9 million. Expenses incurred in connection with this issuance totaled $5.6 million and were allocated between the senior notes and the stock purchase contracts. The amount allocated to the senior notes was deferred and will be recognized as interest expense over the term of the notes. The amount allocated to the purchase contracts was charged to equity.
Debt Covenants
The Company’s bank financing arrangements require it to maintain a debt to total capitalization ratio (as defined) of no more than .65 to 1 and an “earnings before interest, taxes, depreciation and amortization (EBITDA)” to interest ratio of no less than 2 to 1. Additionally, financing arrangements contain cross-default provisions which would occur if the Company or any of its significant subsidiaries fail to pay principal or interest on a timely basis. The Company is currently in compliance with these financial covenants.
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Common Stock
DTE Energy issued 6.325 million shares of common stock at $43.25 per share, grossing $273.6 million. Net proceeds from the offering were approximately $265 million. The total fees charged to equity relative to this issuance of common stock and the offering of the equity-linked debt securities described above, amounted to $9.1 million and $4.9 million, respectively.
NOTE 7 — EARNINGS PER SHARE
The Company reports both basic and diluted earnings per share. Basic earnings per share is computed by dividing income before accounting changes by the weighted average number of common shares outstanding during the period. Diluted earnings per share assumes the issuance of potentially dilutive common shares outstanding during the period and the repurchase of common shares that would have occurred with proceeds from the assumed issuance. These include the assumed exercise of stock options, vesting of non-vested stock awards and the issuance of common shares for performance share awards.
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A reconciliation of both calculations for the 2002 and 2001 quarter and six-month period is presented in the table below. In each period presented, potentially dilutive securities have been excluded from the diluted EPS calculation since their inclusion would have been antidilutive based on average market prices during the respective periods.
NOTE 8 — CONTINGENCIES
Personal Property Taxes
Detroit Edison, MichCon and other Michigan utilities have asserted that Michigan’s valuation tables result in the substantial overvaluation of utility personal property. Valuation tables established by the Michigan State Tax Commission (STC) are used to determine the taxable value of personal property based on the property’s age. In November 1999, the STC approved new valuation tables that more accurately recognize the value of a utility’s personal property. The new tables became effective in 2000 and are currently used to calculate property tax expense. However, several local taxing jurisdictions have taken legal action attempting to prevent the STC from implementing the new valuation tables and have continued to prepare assessments based on the superseded tables. The legal actions regarding the appropriateness of the new tables were before the Michigan Tax Tribunal (MTT) which, in April 2002, issued its decision essentially affirming the validity of the STC’s new tables. In June 2002, petitioners in the case filed an appeal of the MTT’s decision with the Michigan Court of Appeals.
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DTE Energy subsidiaries purchase and sell electricity and gas to numerous companies operating in the steel, automotive, energy and retail industries. During 2001 and 2002, a number of customers have filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, including certain Enron Corporation affiliates, National Steel Company and Bethlehem Steel Company. Management regularly reviews contingent matters relating to purchase and sale contracts and records provisions for amounts considered probable of loss. Management believes its previously accrued amounts are adequate for losses that are probable of occurring. The final resolution of these matters are not expected to have a material effect on the Company’s financial statements in the period they are resolved.
NOTE 9 — NEW ACCOUNTING PRONOUNCEMENTS
Business Combinations - Effective July 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations.” SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The adoption of SFAS 141 did not have an impact on the consolidated financial statements.
Goodwill and Other Intangible Assets - Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the balance sheet, and no longer be amortized, but requires that goodwill be reviewed at least annually for impairment. The provisions of this accounting standard also require the completion of a transitional impairment test within six months of adoption, with any impairment treated as a cumulative effect of a change in accounting principle. The Company has completed the transitional goodwill impairment test and determined that no potential impairment existed at January 1, 2002.
In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective January 1, 2002. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization follows:
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In connection with the adoption of SFAS No. 142, the Company also reassessed the useful lives and the classification of identifiable intangible assets and determined that they continue to be appropriate. The Company’s intangible assets consist primarily of software and are subject to amortization. Intangible assets amortization expense was approximately $11 million and $23 million in the 2002 second quarter and six-month period, respectively, compared with approximately $12 million and $23 million for the comparable 2001 periods. There were no material acquisitions of intangible assets during the six-month period of 2002. The gross carrying amount and accumulated amortization of intangible assets at June 30, 2002 were $493 million and $291 million, respectively. Amortization expense of intangible assets is estimated to be $46 million annually for 2002 through 2006.
Asset Retirement Obligations - In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement requires that the fair value of an asset retirement obligation be recognized in the period in which it is incurred. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset. It would apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company will adopt the statement in January 2003 and has not yet determined the impact of this statement on the consolidated financial statements.
Long-Lived Assets - On January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long- Lived Assets.” SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” but retains the fundamental provisions for recognizing and measuring impairment of long-lived assets to be held and used or disposed of by sale. The statement also supersedes the accounting and reporting provisions for the disposal of a segment of a business. SFAS No. 144 eliminates the conflict between accounting models for treating the disposition of long-lived assets that existed between SFAS No. 121 and the guidance for a segment of a business accounted for as a discontinued operation by adopting the methodology established in SFAS No. 121, and also resolves implementation issues related to SFAS No. 121. The adoption of the statement did not have an impact on the consolidated financial statements of the Company.
Energy Trading Contracts - In June 2002, the FASB’s Emerging Issues Task Force (EITF) reached a partial consensus on Issue No. 02-03 “Recognition and Reporting of Gains and Losses on Energy Trading Contracts” under EITF Issues No. 98-10, “Accounting for Contracts Involved in Energy Trading and Risk
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Management Activities,” and No. 00-17, “Measuring the Fair Value of Energy-Related Contracts in Applying Issue No. 98-10.” The EITF concluded that, effective for periods ending after July 15, 2002, mark to market gains and losses on energy trading contracts (including those to be physically settled) must be presented on a net basis in earnings, with prior periods reclassified on a consistent basis. Also, companies must disclose volumes of physically settled energy trading contracts. The Company is evaluating the impact of this new consensus on the presentation of its consolidated statement of operations. The consensus will have no impact on net income, but could have a material impact on total revenues and expenses.
NOTE 10 — SEGMENT INFORMATION
During 2002, DTE Energy realigned its financial reporting structure into strategic business units that provide various regulated and non-regulated energy services. The realignment resulted in nine reportable segments and the financial data for such segments follows. Inter-segment revenues are not material.
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NOTE 11 — CONSOLIDATING FINANCIAL STATEMENTS
Debt securities issued by Enterprises are subject to a full and unconditional guaranty between DTE Energy and Enterprises. The following DTE Energy consolidating financial statements are presented and include separately Corporate & Other, Enterprises and all other subsidiaries. Enterprises includes MichCon and other non-regulated gas subsidiaries. The other subsidiaries include Detroit Edison and other non-regulated electric subsidiaries.
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DTE ENERGY COMPANYCONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
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DTE ENERGY COMPANYCONSOLIDATING STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
DTE ENERGY COMPANYCONSOLIDATING STATEMENTS OF FINANCIAL POSITION
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DTE ENERGY COMPANYCONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
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INDEPENDENT ACCOUNTANTS’ REPORT
To the Board of Directors and Shareholders ofDTE Energy Company:
We have reviewed the accompanying condensed consolidated statement of financial position of DTE Energy Company and subsidiaries as of June 30, 2002, and the related condensed consolidated statement of operations for the three-month and six-month periods ended June 30, 2002 and 2001, and the condensed consolidated statement of cash flows for the six-month periods ended June 30, 2002 and 2001, and the condensed consolidated statement of changes in shareholders’ equity for the six-month period ended June 30, 2002. These financial statements are the responsibility of DTE Energy Company’s management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of financial position of DTE Energy Company and subsidiaries as of December 31, 2001, and the related consolidated statements of operations, cash flows and changes in shareholders’ equity for the year then ended (not presented herein); and in our report dated February 26, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2001 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.
/S/ DELOITTE & TOUCHE LLP
Detroit, MichiganJuly 30, 2002
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
OTHER INFORMATION
Effective June 25, 2002, Bruce D. Peterson was elected Senior Vice President and General Counsel. Prior to joining DTE Energy he was a partner in the law firm of Hunton and Williams of Washington, D.C. for 15 years.
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EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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DTE Energy CompanyQuarterly Report on Form 10-Q for Quarter Ended June 30, 2002File No. 1-11607
Exhibit Index