NRC-03-0030, Annual Financial Report
| ML030980833 | |
| Person / Time | |
|---|---|
| Site: | Fermi  |
| Issue date: | 03/24/2003 |
| From: | Peterson N Detroit Edison |
| To: | Document Control Desk, Office of Nuclear Reactor Regulation |
| References | |
| NRC-03-0030 | |
| Download: ML030980833 (77) | |
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{{#Wiki_filter:Fermi 2 6400 North Dixie Hwy., Newport, Al 48166 Detroit Edison 10CFR50.71(b) March 24, 2003 NRC-03-0030 U. S. Nuclear Regulatory Commission Attention: Document Control Desk Washington D C 20555-0001
Reference:
Fermi 2 NRC Docket No. 50-341 NRC License No. NPF-43
Subject:
Annual Financial Report Pursuant to 10 CRF 50.71(b), please find enclosed the 2002 Annual Financial Report for the DTE Energy Company, the parent corporation of the Detroit Edison Company. Should you have any questions or require additional information, please contact me at (734) 586-4258. Sincerel orman K. Peterson Manager - Nuclear Licensing Enclosure cc: w/enclosure M. A. Ring J. F. Stang, Jr. NRC Resident Office Regional Administrator, Region III Supervisor, Electric Operators, Michigan Public Service Commission Qkcyba ADTE Energy Company
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lg,. . Our vision is to establish DTE Energy as the premier regional integrated energy company by providing sustained earnings growth. Core values of respect, integrity, learning, customer service and business success will be our guide.
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Overview Customers Regulated Power Generation [ utility, Power generated from DTE Energy's electric Detroit Edison, by its eight fossil plants, 2.1 million residential, commercial, industrial and wholesale customers in Southeastern Michigan. Fermi 2 nuclear plant, and hydroelectric facility. Non-Regulated Energy Services Various businesses that develop and manage Energy intensive companies (industrial, commercial energy-related assets and services, including and institutional), such as automotive, and pulp industrial coke production, synfuels production, and paper; industrial coke users, utilities and independent power plants, on-site energy projects, independent power producers. cogeneration facilities and utility services. Energy Marketing The electric and natural gas marketing and trading Gas wholesalers, marketers, utilities, aggregators,
&Trading operations of DTE Energy. The focus is on physical trading companies and pipeline customers.
power marketing and structured transactions, as well as enhancing returns from DTE Energy's powver plant, pipeline and storage assets. Coal Services Businesses involved in coal services and landfill Utilities, industrial customers in North America, and Biomass gas recovery. owners and operators of rail fleets, rail shippers; landfill owners, utilities and industries located close to landfills.
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Regulated Power The electric distribution services of Detroit Edison. 2.1 million residential, commercial, industrial and Distribution wholesale customers in Southeastern Michigan. Non-Regulated Distributed The business that markets and distributes a broad Commercial, institutional and industrial customers; Generation portfolio of distributed generation products, provides utilities, municipalities, cooperatives and 3 application engineering, and monitors and manages government agencies. distributed energy systems. Regulated Gas Gas distribution services primarily provided 1.2 million residential, commercial and industrial Distribution by MichCon, the company's gas utility that customers as well as retail marketers. purchases, stores and distributes natural gas throughout Michigan. Non-Regulated Exploration & Gas exploration and production primarily develops Gas wholesalers, marketers, utilities, aggregators, Production and and produces gas in northern Michigan; and the trading companies and pipeline customers who Gas Storage, pipeline and processing business primarily transports transport large volumes of gas on behalf of Pipelines & Processing and stores gas, and has carbon dioxide facilities. other companies. 2 0 0 2 - DTE Energy Annual Report
perating Revenues Regulated Energy Resources $ 2,711 $ 2,788 (3)% Energy Distribution 1,365 1,263 8% Energy Gas 1,369 615 N/M Non-Regulated 1,304 1,125 16%
$ 6,749 $ 5,791 17 %
Net Income Regulated Energy Resources $ 241 $ 183 32 % Energy Distribution 153 186 (18)% Energy Gas 66 15 N/M Non-Regulated 224 166 35 % Corporate & Other (52 (14) N/M 632 536 18 % Merger and Restructuring Charges (175) MCN Energy Merger Goodwill Amortization (29) _ 632 $ 332 90 % Diluted Earnings Per Share Regulated Energy Resources $ 1.46 $ 1.19 23 % Energy Distribution 0.93 1.21 (23)% Energy Gas 0.40 0.10 N/M Non-Regulated 1.35 1.07 26 % Corporate & Other (0.31) (0.09) N/M 3.83 3.48 10 % Merger and Restructuring Charges (1.13) MCN Energy Merger Goodwill Amortization (0.19)
- 3.83 S Z.1b 77 %
4 4 Dividends Declared Per Share $ 2.06 $ 2.06 Dividend Yield 4.4% 4.9% (10)% Average Common Shares Outstanding (Millions) Basic 164 153 7% Diluted 165 154 7% Book Value Per Share $ 27.26 $ 28.48 (4)% Market Price at Year End $ 46.40 $ 41.94 11 % Total Market Capitalization $ 7,770 $ 6,758 15% Capital Expenditures $ 984 $ 1,096 (10)% Total Assets $ 19,238 $ 18,881 2%
I t Edison's centennial celebration Ralph Bigelow Detroi ArYork Stock Exchange Detroit Edison Linesman at Nei I am extremely proud of our track record. DTE Energy is Net income increased 18 percent over 2001 earnings. one of only 37 Standard & Poor's 500 companies to generate This excludes the impact of merger and restructuring positive stock performance in each of the past three years. charges, and goodwill amortization. We maintained a In fact, just one other member of the S&P Electric Index strong balance sheet with a debt-to-capital ratio in a shares this honor. target range of 50 percent to 55 percent. We generated
$974 million in cash from operations. Wo'e maintained our Our approach to success is simple: stick to a clear strategy solid credit rating and our dividend.
and don't stray. For DTE Energy, that means:
- Demonstrating credible, consistent and While I believe DTE Energy is in a strong position to balanced growth continue the momentum of the past several years, cost
- Sustaining a stable utility base pressures are mounting. Weather, war and continuing
- Creating a diverse portfolio of non-regulated businesses weakness in the economy could slow our growth in 2003.
that complement existing businesses and build on our But of greater immediate concern are rapidly rising core strengths health care and pension costs.
- Maintaining a strong balance sheet and cash flows 6
- And having an unwavering commitment to our core DTE Energy - along with many other U.S. companies - faces values of respect, integrity, learning, customer its third year of double digit health care premium increases satisfaction and business success. in 2003. W'e expect to spend more than $155 million in medical and prescription expenses, alone, for employees This strategy worked wvell for us in 2002. We met our and retirees. To put that into perspective, that's more than earnings per share target of $3.75-$3.95 and established the annual cost to operate, maintain and fuel our Fermi 2 a goal of $3.90-$4.10 for 2003. Revenues increased nuclear plant. We are in the process of developing a health 17 percent, driven by our gas business and continued care strategy to address this long-term issue.
non-regulated growth. Our market capitalization reached
$7.8 billion, ranking us among the top 10 utility companies Wo'e also face a number of regulatory challenges. Developing in the United States. a permanent framework for Michigan's unique approach to 2 0 0 2
- DTE Energy Annual Report
electric restructuring is one of them. Customer choice has We raised $450 million in an equity offering of 6 million become a permanent part of our business environment, and shares of DTE Energy common stock and 7 million with it comes a number of challenges. convertible securities. This offering was significantly over subscribed. Proceeds were used to pay down debt and In the short term, DTE Energy is focused on recovering reinvest in the company. costs resulting from increased customer choice penetration, as well as costs for environmental compliance. The recovery Wle began pursuing coal bed methane to leverage our oil and of these costs is allowed by Michigan's restructuring gas production experience and our coal expertise. Coal bed legislation, however, the specific methodology and mechanism methane is a largely untapped resource with substantial for recovery is still being developed. We are currently earnings potential. In this business, we extract natural gas working with the Michigan Public Service Commission to from unmined coal seams, gather it at the wellhead, then finalize these issues. In the long term, we seek to build a transport it directly to existing natural gas pipelines. permanent regulatory model that ensures the health of Michigan's utilities while providing customer options. The U.S. Department of Energy selected DTE Energy as its partner in a first-ever hydrogen power park. The Right now, our strongest line of defense is convincing customers project will demonstrate the generation of hydrogen, its that DTE Energy is their best energy choice. After all, we transmission, storage, distribution and, ultimately, its have more than a century of service in our core businesses. conversion into electricity or fuel for transportation. In 2003, we celebrate the centennial of our electric utility, This project is an exciting first step in laying the foundation Detroit Edison. Our gas utility, MichCon, is more than 150 for a hydrogen economy that could someday power our years old. The last few pages of this annual report showcase world. We are always looking for new and cleaner the events and people who helped shape Detroit Edison and energy sources. ... energize our communities over the past century. We continued integration of the DTE Energy Operating Looking back on the past year, we took a number of steps System into our daily work. This process is a highly effective to strengthen our balance sheet and build our business tool to reduce costs and improve productivity across portfolio. We signed a definitive agreement to sell our our company. transmission subsidiary, International Transmission Company, for approximately $610 million in cash. The Several organizations recognized our efforts in the transaction is expected to close in the first quarter of 2003. community, the workplace and in cleaning the environment. We also sold our thermal energy business. Neither of these For example, DTE Energy was ranked by Fortune magazine businesses is strategic to our future growth. as one of "The 50 Best Companies for Minorities." 2 0 0 2
- DTE Energy Annual Report
My vision is to establish DTE Energy as the premier 4. People effectiveness. Everyone plays a role in helping regional integrated energy company by providing sustained our company succeed. There is no greater driver than the earnings growth. This is no easy task in today's fiercely men and women of DTE Energy. We need to take full competitive business environment, but I believe we can do it. advantage of their talents and provide them with the tools they need to work to their potential every single day. To achieve this vision, we are concentrating on the items that can make the biggest impact on the way we operate It is easy to fall into the mindset of growth at any cost. our company: That kind of pressure has made other companies lose sight of their core values. And when that happens, businesses 1.Balancing continued growth with financial stability. crumble, employees lose jobs and shareholder value disappears. Woe expect our non-regulated businesses to contribute $215-$225 million to net income in 2003. When it comes to Avoiding this trap is what has made DTE Energy so strong. growth, however, we will not "follow the herd." Wle will stick We will not waver. to our beliefs and invest prudently. The rest of this annual report describes our belief that it's
- 2. Customer focus. We recognize that the best way to retain not just what we do, it's how we do it that sets us apart in customers is to serve them better. Wle have a long way to go a very positive way. We are a strategically disciplined and to get where we need to be. We are working extremely hard values-centered enterprise.
to improve customer service levels across the board. Thank you for your confidence in our company. We have worked
- 3. Process excellence. In 2003, we expect to realize 9
hard to earn your trust and we will not compromise it. .. . savings of at least $50 million by implementing process improvements. More importantly, these improvements should establish consistency throughout our operations. This effort translates into saved time and money, improved Anthony F. Earley, Jr. quality, and a better, safer work environment for all of Chairman and Chief Executive Officer our employees. January 31, 2003 2 0 0 2 . DTE Energy Annual Report
We're balancing continued growth with financial stability DTE Energy is focused on steady business growth. Section 29 tax credits. Credits are earned for the But not at the expense of our balance sheet. Our production of energy from nonconventional sources. strategy is disciplined and focused. W'e began this business with one biomass site and today operate 30 projects in 13 states. We build around our unique strengths. Power generation. Coal sourcing and transportation, Building on this experience, we launched a highly Energy Distribution. Natural gas gathering, profitable coke battery business, which also processing, distribution and storage. Energy generates Section 29 tax credits. Industrial coke and fuel management. is a key ingredient in making steel. W"le are now one of the largest producers of coke for that industry. Wite focus on opportunities that complement our These operations continue to provide solid cash flow, existing business lines and play off our core even after tax credits expire. capabilities. Not in overcrowded segments. Not when the price of entry is too high. Only when Next, we branched into synthetic fuels. "Synfuels" the competitive dynamics work to our advantage. are made by capturing particles of coal and Often these are niches with less competition and processing them into a product burned to produce better profitability. energy at power plants or in coke batteries. Today we operate nine units and are one of the nation's Following these guidelines, we aim for diversity in largest synfuel producers. our business mix and earnings stream. This includes balancing our mix of fuel, geography, economic and Our latest venture is the commercialization of a new regulatory risk. technology that removes clay and dirt from waste coal. If the technology develops as we hope it will, Typically, we start with small investments, prove them it could contribute $25-$50 million annually to net 10. .. out, then think big. For example, entry into landfill income over time and will provide a significant gas recovery in 1988 gave us our first exposure to environmental benefit. DTE Energy is laying a strong foundation for the future through our investments in emerging energy technologies such as fuel cells and distributed generation (DG). Our DTE Energy Technologies subsidiary launched a number of new products during 2002 to provide continuous on-site generation of electricity ranging from 25kW to 1MW. Total revenues doubled compared to 2001, with sales offices ramping up in key east and west coast markets and distribution agreements being finalized in Europe and Asia. DTE Energy Technologies Systems Operation Center 2 0 0 2 . DTE Energy Annual Report
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I(eeping customers means serving them better Customer service takes many forms: It's being our automated toll-free service line, and its messages available when you're needed. Responding courteously are now shorter and easier to understand. And we've and quickly. Preventing problems that could affect invested in additional training and staffing in key our customers and promptly resolving them as they service functions. Soon we'll roll out online billing, occur. Meeting commitments. Simple and clear automated account transactions, and a new bill communications. It's showing that you care. design. While we still have a long way to go, we are making improvements on many fronts. We recognize that the best way to retain customers is to fulfill their expectations. Delivering gas and We've also discovered that sometimes the simple electricity safely and reliably is critical and here, solutions have the biggest impact. Take our we shine. DTE Energy provides best-in-class appliance service process, for example. Several electrical reliability and gas leak response. teams of employees who service gas appliances and electric and gas air conditioners collaborated to Beyond safety and reliability, customers want quality reach more customers at home on the first service service ... and their expectations get higher each call. The solution was simple - service technicians year. That's why we're sharpening our focus on the call ahead before going to an appointment to make customer in 2003. We avant them to experience sure the customer will be present at the service timely, accurate and courteous service - with location at the scheduled time. This small step, resolution on the first contact. coupled with a few other minor improvements, produced dramatic results - a 60 percent reduction To bolster our service levels in 2003, we're improving in wasted service calls. The team also removed every point of the process that touches the customer. excess inventory from storage and reduced vehicle We've ramped up quality control efforts, including inventory for a total savings of $142,000. call monitoring and billing systems. We've upgraded 'THANK YOU for your speedy efforts to restore electrical service to the [300] homeowners in our neighborhood. ... The mature trees, heavy ice and high winds combined to knock out virtually the entire neighborhood. It also made for extremely difficult working conditions for the field crews ... [yet] almost everyone was restored within as little as 20-48 hours. Your customer service reps were courteous, reassuring and even followed up after service was restored. Thanks for making us all comfortable again!"
- David Kwan, treasurer, Oxbridge Neighborhood Association Bianca Tyus, customer care specialist 2 0 0 2
- DTE Energy Annual Report
There's always a better way and we're finding it In this industry, standing still means falling behind. or repair at an increasing rate, costing the plant lost That's why it's so important to continuously improve. power and revenue. The team evaluated the mill
'We're using a standardized approach to drive results. maintenance schedule, tools, supplies and procedures.
It's called the DTE Energy Operating System. It also looked at training and communications. Based on what it learned, the team implemented a variety of It's a framework of concepts, principles and tools improvements. As a result, the number of megawatt to help run our business more effectively. The hours lost because of mill inefficiency dropped operating system is designed to establish commonality 50 percent. This means the mills run closer to throughout the company. It does not tolerate waste capacity and our cost of generation decreases. or the processes that generate it. It requires confronting problems, taking action and Another team of represented and nonrepresented sharing solutions. employees looked at ways to streamline repair of distribution and power transformers. About We believe the DTE Energy Operating System can 2,200 units are reconditioned at the Warren Service make dramatic, positive change to job satisfaction, Center electrical shop each year, but the process quality, safety, productivity and bottom line results. was umvieldy and inefficient. Throughout 2002 we launched a series of demonstration projects to prove the effectiveness of this new way of By eliminating unnecessary steps, re-sequencing operating. The results are extremely encouraging workflow and reorganizing the work area, the team and we are accelerating our efforts in 2003. achieved dramatic results. It reduced process time and floor space requirements, and decreased by a For example, a team from the Monroe Power Plant half-mile the distance each power transformer travels was challenged to find more efficient ways to operate in the reconditioning process. These improvements its coal mills. The mills were down for maintenance are expected to save the company $2 million annually. A corrective action process at the Monroe Power Plant identifies and resolves problems quickly and permanently. Employees complete a simple form when they see problems in their work areas. This ensures issues are documented and addressed. In2002, the plant identified more than 800 opportunities to improve, of which 300 have already been resolved. Imagine the impact on our company if every employee had the tools to look at his or her work with a more discerning eye. That is our ultimate goal. Mary Webb, maintenance general foreman 2 0 0 2
- DTE Energy Annual Report
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Every employee contributes to our success The difference between a good company and a great During construction projects - such as laying new company is its people. At DTE Energy, our goal pipe - backfill was loaded onto trucks and dumped in is to have employees who understand the business, the station yard. Then a contractor was paid to haul fully contribute, are committed to success, and have the dirt away. The team recommended a new system. the opportunity to work to their potential every Now DTE Energy crews load backfill onto trucks at the single day. job sites, then haul and dump it at our own quarry. When this process change rolls out to all stations, it Employees who are engaged in what they do are less will achieve projected cost savings of $1million per year. likely to have an accident on the job. They are more productive. They are more committed to their With teamwork, the capabilities of our people are organization because they believe they can make an unlimited. The company's electric distribution impact on business outcomes. And that translates operations launched 33 projects in 2002 aimed at into a more successful company with greater rewards streamlining processes and cutting costs. One major for all stakeholders. initiative under way is reducing restoration times for day-to-day power outages. Ten sub-teams are working Every day, somewhere in our company, employees together to reduce customer restoration times by an demonstrate the potent competitive advantage of having average of one hour per case. Emphasis is on an informed, engaged and empowered work force. improving restoration estimates, meeting those estimates, reducing restoration times and ultimately, Often, a very simple idea can yield profound results. improving customer satisfaction. When a team at the Allen Road natural gas complex took a closer look at their work processes, they It's projects like these that exemplify the meaningful identified dirt as an area of tremendous waste. role of all our employees in helping our company succeed. Employees at the Allen Road warehouse were frustrated by slow and cumbersome workflow and a cluttered work environment. A team of employees joined forces to focus on workplace organization. Simply by identifying and removing nonessential material and waste, the team freed up 15,000 square feet of storage space and will eliminate the need for a third-party contract warehouse. Estimated savings: $70,000 in 2003. Having a clean and organized work area was also a big boost to morale. Employees tell us that now they enjoy coming to work. Ella Bradley, Allen Road warehouse 2 0 0 2
- DTE Encrgy Annual Report
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- a 3 0 6 Anthony F.Earley, Jr., 53, is chairman, president, chief executive Susan M.Beale officer and chief operating officer (COO) of DIE Energy. He joined Vice President Corporate Secretary Detroit Edison in 1994 as president and COO and that same year was elected a company director. He was elected to his current position in 1998. Before joining DIE Energy, Earley served as president and COO of Long Island Lighting Company where he Pamela A.Biesecker had worked since 1985. Vice President lax Gerard M.Anderson, 44, is president and chief operating officer Daniel G.Brudzynski of DIE Energy Resources Group. He was named to his present Vice President and position in 1998. Previously he was executive vice president of Controller DIE Energy. Anderson joined the company in 1993 from McKinsey & Co., where he was a consultant in energy and finance.
Michael E. Champley Senior Vice President Energy Marketing & Trading Robert J. Buckler, 53, is president and chief operating officer of DTE Energy Distribution Group. He joined the company in 1974 and Lynne Ellyn was named to his current post in 1998. He has held numerous Senior Vice President and Chief Information positions throughout the organization including power plant Officer engineering, construction and operation, fuel supply management, transmission and distribution operation, customer service, marketing and strategic planning. Harold Gardner Senior Vice President Corporate Services 18 Stephen E. Ewing, 58, is president and chief operating officer of DIE Energy Gas Group. He joined the company in 2001 from Douglas R.Gipson MCN Energy, where he served as its president and chief operating Executive Vice officer, and president and chief executive officer of its primary President and Chief subsidiary, MichCon. Ewing joined MichCon in 1971, holding Nuclear Officer Detroit Edison executive positions in corporate planning, personnel, administration and customer service.
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Select Subsidiary Presidents Joyce V.Hayes-Giles Sharon E. O'Niel Randall D. Balhorn Senior Vice President Vice President President Customer Service Information DTE Energy Trading Detroit Edison and Technology Services MichCon Thomas A. Hughes Bruce D. Peterson G. Paul Horst Vice President and Senior Vice President President General Counsel and General Counsel DTE Energy Detroit Edison and Technologies MichCon Nick A. Khouri Michael C. Porter Barry G. Markowitz Vice President and Vice President President Treasurer Corporate DTE Energy Services Communications Steven E. Kurmas Frederick E. Shell Gerardo Norcia Senior Vice President Vice President President Gas Operations Corporate and DTE Gas Storage, DTE Energy Gas Governmental Affairs Pipelines & Processing MichCon Ron A. May Larry E. Steward Evan J. O'Neil Senior Vice President Vice President President Energy Distribution Human Resources DTE Coal Services Detroit Edison DaNid E. Meador S. Martin Taylor Curtis T. Ranger Senior Vice President Senior Vice President President and Chief Financial Human Resources DTE Biomass Energy Officer and Corporate Affairs William T. O'Connor Laura A. Winiarski Richard L. Redmond, Jr. Vice President General Auditor President Nuclear Generation DTE Gas and Oil Detroit Edison Fred L. Shusterich President Midwest Energy Resources (MERC) 11 4 - 0 1 11 - I 3 -11 1i;j'o !, 1. . I
m~w ----- 0 0 0 Terence E. Adderley, 69, is chairman Frank M. Hennessey, 64, is chairman of and chief executive officer of Kelly EMCO Limited. Prior to that he served as Services Inc. He was elected its vice chairman and chief executive officer president and CEO in 1967 and has served of MascoTech. He served on the board of as the company's chairman since 1998. He MCN Energy since 1988 and joined the was elected to the DTE Energy Board in DTE Energy Board in 2001. (A, P) 1987. (C,E,F,O) Lillian Bauder, 63, is vice president of Theodore S. Leipprandt, 69, is owner of Corporate Affairs for Masco Corporation Leipprandt Orchards and retired president and president of the Masco Corporation and chief executive officer of Cooperative Foundation since 1996. She joined Elevator Co. He was elected to the DTE Energy's Board in 1986. (A,E, N, P) DTE Energy Board in 1990. (A, N, P) David Bing, 59, is chairman of the board John E. Lobbia, 61, retired as chairman of Bing Group Inc., a position he has held and chief executive officer of DTE Energy since 1980. Mr. Bing joined the DTE Energy and Detroit Edison in 1998. He joined the Board in 1985. (0, P,S) company in 1965 and has served on the DTE Energy Board since 1988. (F, N) Anthony F. Earley, Jr., 53, is chairman, Eugene A. Miller, 65, is retired chairman, president, chief executive officer and president and chief executive officer of chief operating officer of DTE Energy since Comerica Incorporated and Comerica 1998. He joined DTE Energy in 1994 as Bank. Mr. Miller joined the DTE Energy president and chief operating officer, Board in 1989. (C, E, F,0) the same year he was elected to the DTE Energy Board. (E) Allan D. Gilnmour, 68, is vice chairman Charles W.Pryor, Jr., 58, is chief executive and chief financial officer of Ford Motor officer of Utility Service Business Group, Company. He was elected to the BNFL which includes the Westinghouse DTE Energy Board in 1995. (C, E,F, 0, S) Electric Company. Dr. Pryor joined the DTE Energy Board in 1999. (A,N) Alfred R. Glancy III, 64, former chairman Howard F. Sims, 69, is chairman and chief and chief executive officer of MCN Energy executive officer of Sims Design Group Inc. Group, served in that position from 1988 He also serves as chairman of The SVA until 2001. He was chairman of MichCon Group and SVAssociates LLC. He served from 1984-2001 and served as its CEO from on the board of MCN Energy since 1988 1984-1992. He joined DTE Energy's Board and joined the DTE Energy Board in 2001. (F,P) in 2001. (C, N) Committee Membership: A - Audit C - Corporate Governance, E - Executive, F - Finance, N - Nuclear Review, 0 - Organization and Compensation, P - Public Responsibility, S - Special Committee on Compensation
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Letter from Chief Financial Officer ( I believe ) r" r76tN6C, rr LIKE or ts DTE Energy Chief Financial Officer Dave Meador Credibility builds value. Arrogance destroys it. At We have a well-established, long-standing internal audit DTE Energy, we take our commitments very seriously. function. We have a code of ethics and an ethics council. We are careful not to over promise. We take a realistic We have a disclosure committee and an internal controls view of the future and try to minimize surprises. committee. We have procedures to protect whistle blowers. Director and officer stock transactions require We don't stray from our strategy. This straightforward preclearance. The audit committee of our board of directors approach helped us ride out the storm in 2002. - all independent members - oversees our financial reporting. Its priority is full disclosure and transparency. We did not overpay for generation assets auctioned at a premium when the market was riding high. We These controls - among others - help ensure our policies believed the over-build of merchant generation was and procedures are adhered to consistently and with beginning and minimized our exposure. We avoided integrity. They also help to ensure proper documentation international investments in an uncertain global and account reconciliation of all financial transactions. economy. We did not overextend our energy trading business. We did not pursue growth at the expense of Every quarter I sign a certification filed with the our balance sheet. Most importantly, we do not promote Securities and Exchange Commission attesting to the unrealistic earnings growth expectations. Nor do we accuracy and completeness of the financial information use questionable financial structures. we report. My signature is my pledge to you that what you see is what you get. It's not just what we do, it's how we do it. 21 Ultimately, the buck stops here. I am fully accountable We refuse to be pressured by what other companies do. for the numbers on these pages. It's a responsibility I do We are clear on how we make our money and where we not take lightly. will and won't invest. We understand that to maintain your trust we must be forthright. That means telling it like it is - whether the news is good or bad. Qwc H David E. Meador We use a series of checks and balances to ensure we Senior Vice President and Chief Financial Officer do what's right for our company and our shareholders. Accountability is the key. So are internal controls and disclosure guidelines. I a 191W! _ i ' ", ;!i 't t M1
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---- _..-I I Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS We operate our businesses through three strategic business units (Energy Resources, Energy Distribution and Energy Gas).
Diluted Earnings Per Share Increased- Our earnings in Each business unit has regulated and non-regulated operations. 2002 were $632 million, or $3.83 per diluted share, compared The balance of our business consists of Corporate & Other. to earnings of $332 million, or $2.16 per diluted share in 2001. Based on this structure, we set strategic goals, allocate The comparability of earnings was affected by merger and resources and evaluate performance. restructuring charges and goodwill amortization associated with the MCN Energy merger that reduced 2001 after-tax (inMillions, except per share amounts) 2002 2001(1) 2000 earnings by $204 million, or $1.32 per diluted share. Excluding Net Income (Loss) merger and restructuring charges and goodwill amortization, Energy Resources operating earnings increased $96 million or $.35 per diluted Regulated - Power Generation $ 241 $ 183 $ 252 share in 2002 compared to 2001. The increase was due to Non-regulated improved margins in our regulated Energy Resources Energy Services 182 115 100 business, a full year of contributions from our Energy Gas Energy Marketing & Trading 25 44 10 business that was acquired in May 2001 in conjunction with Other 7 6 (71' ,, the MCN Energy aquisition and increased contribution from Total Non-regulated 214 165 103 our non-regulated businesses, primarily synfuels. Partially 455 348 355 offsetting these improvements were higher operation and Energy Distribution maintenance expenses, and interest expense. The issuance Regulated - Power Distribution of 29 million shares of DTE Energy common stock in & Transmission 153 186 175 conjunction with the May 2001 MCN Energy aquisition, net of Non-regulated (16) (10) (10) 10.5 million shares repurchased in2001, and the issuance 137 176 165 of 6.325 million shares in June 2002, also impacted the Energy Gas earnings per share comparison. Regulated - Gas Distribution 66 15 - Non-regulated 26 11 - Earnings in 2001 decreased $136 million, or $1.11 per diluted 92 26 - share from 2000. As previously discussed, the earnings decline Corporate & Other (52) (141 (36) was due to significant merger and restructuring charges and Total goodwill amortization recorded in 2001. Additionally, merger Regulated 460 384 427 and restructuring charges were recorded in 2000 reducing Non-regulated (2) 172 152 57 income by $16 million, or$.12 per diluted share. Excluding merger and restructuring charges and goodwill amortization, 632 536 484 earnings increased $52 million, or $.09 per diluted share in Merger and Restructuring Charges - (175) (16) 2001 compared to 2000. The improvement in earnings primarily MCN Energy Merger Goodwill Amortization - (29) - reflects contributions from our Energy Gas business and from 22 our non-regulated businesses. Partially offsetting these $ 632 $ 332 $ 468 ... improvements were increased interest on long-term debt Diluted Earnings Per Share and lower margins from regulated electricity operations. Regulated $ Z79 $ 2.50 $ 2.99 Strategic direction -We are committed to increasing our Non-regulated (2) 1.04 .98 .40 annual earnings at a 6% average rate. Our growth strategy 3.83 3.48 3.39 is to strengthen the core electric and gas utilities, add to our Merger and Restructuring Charges - (1.13) (.12) portfolio of non-regulated businesses and leverage investments MCN Energy Merger in energy technology. Non-regulated growth is expected to Goodwill Amortization - (.19) - shift over the next few years from profits from tax advantaged $ 3.83 $ 2.16 $ 3.27 coal-based fuels businesses that generate Section 29 tax credits to growth from energy technologies, on-site energy (11) 2001 earnings were favorably impacted by $3million, or $.02 per share, due to an accounting change. projects, generation projects, energy trading, coal services, (2)Includes Corporate & Other. waste coal recovery and coal bed methane. I
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( I believe ) IA C1VIA/C BOX Jerome Christian Print Coordinator Design Resources ENERGY RESOURCES industrial customers were lowered by the 5% rate reduction in April 2001. Commercial and industrial sales decreased due Power Generation to increased participation of customers inthe electric The power generation plants of Detroit Edison comprise our Customer Choice program. Industrial sales also reflect reduced regulated power generation business. Electricity is generated auto and steel production, and the end of a special energy from Detroit Edison's numerous fossil plants, its hydroelectric sales agreement with a large steel manufacturer in March pumped storage plant and its nuclear plant and sold principally of 2001. Partially offsetting these declines were increased throughout Michigan and the Midwest to residential, revenues from residential and wholesale customers as well commercial, industrial and wholesale customers. as higher revenues from providing other energy related services. Residential customer revenues reflect higher Factors impacting income: Power Generation earnings demand resulting from weather, partially offset by the impact increased $58 million in 2002 and decreased $69 million in of a 5%rate reduction that began in June 2000. Revenues 2001, compared to the prior year. As subsequently discussed, from wholesale customers increased due to gains from settling these results reflect changes in gross margins, increased forward sales contracts. The sales contracts were entered operation and maintenance expenses, lower depreciation into to effectively close forward purchase contracts that and amortization expenses and reduced property taxes. hedged power supply costs. Accordingly, the gains from (inMillions) 2002 2001 2000 forward sales contracts were substantially offset by losses from forward purchase contracts, which are recorded as part Operating Revenues $ 2,711 $ 2,788 $ 2,911 of fuel and purchased power costs. Fuel and purchased power Fuel and Purchased Power (1,048) (1,231) (1,242) costs were also affected by lower system output resulting from Gross Margin 1,663 1,557 1,669 reduced electric sales, as well as the result of using a more Operation and Maintenance (1) 1626) (571) (492) favorable power supply mix. The supply mix reflects an Depreciation and Amortization (331) 1385) (468) increased usage of lower-cost power from our generating Taxes other than Income (156) (148) (176) plants and reduced usage of higher-cost purchased power. Operating Income 550 453 533 Other Income and (Deductions) (189) (184) (161) (in Thousands of MWh) 202 2001 2000 Income Tax Provision (120) (83) (120) Power Generated and Purchased Cumulative Effect of Power Plant Generation Accounting Change (Note 15) - (3) - Fossil Net Income $ 241 $ 183 $ 252 Coal 37,381 6400 38,424 69% 40,039 67% Operating Income as a Natural Gas 1,414 2 1,283 2 1,667 3 Percent of Operating Revenues 20% 16% 18% Other 222 1 4 394 1 (1)Excludes merger and restructuring charges in2001 and 2000. Nuclear (Fermi 2) 9,301 16 8,555 16 8,239 14 48,318 83 48,266 87 50,339 85 Gross marginsin 2002 improved $106 million due primarily to Purchased Power 9,807 17 7,482 13 8,877 15 significantly lower purchased power costs, partially offset System Output 58,125 100%o 55,748 100% 59,216 100% by reduced operating revenues. Average purchased power 23 cost per unit in 2002 declined $39.08 per Megawatthour (MWh) .. . from 2001 levels. The decline in revenues was due to a full Average Unit Cost ($/MWh) year impact of a 5% legislatively mandated rate reduction for Generation (1) 5 12.53 $ 12.31 $ 12.78 commercial and industrial customers that began in April 2001. Purchased Power (2) $ 39.16 S 78.24 $ 62.57 Revenues from wholesale customers were reduced reflecting Overall Average lower power prices. Revenues from retail customers were Unit Cost S 17.02 $ 21.15 S 20.24 affected by customers switching to alternative suppliers (1)Represents fuel costs associated with power plants. underthe electric Customer Choice program (Note 6). Partially (2)Includes amounts associated with hedging activities. offsetting these revenue reductions was the impact of weather, Operation and maintenance expense increased $55 million resulting in a 10% increase in cooling demand during 2002. in 2002 and $79 million in 2001. Expense in both periods reflect an increase in planned and unplanned maintenance and Gross margins in 2001 declined by $112 million reflecting lower reliability work for our power generation facilities, which operating revenues, slightly offset by lower fuel and purchased reduces random outages at power plants and our reliance power costs. The reduced operating revenues were due to the on purchased power. Additionally, both periods include impact of an economic recession, the electric Customer Choice higher employee pension and health care benefit costs, program and securitization. Sales rates for commercial and costs allocated from DTE Energy corporate for corporate
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I----------- 0)_C:IL--' {g_"' & -fjv support services, as well as the cost of funding the low income Generation owns and operates four gas-fired peaking and energy efficiency fund. The funding of the low income electric generating plants and develops and acquires gas and energy efficiency program was required under Michigan and coal-fired generation. Jo legislation and is recovered in current sales rates. (inMinlions) 2002 2001 2000 Depreciation and amortization expense decreased $54 million Operating Revenues in 2002 and $83 million in 2001. The declines reflect the Coal-Based Fuels $ 599 $ 365 $ 293 extension of the amortization period from seven years to On-Site Energy Projects 63 53 33 14 years for certain regulatory assets that were securitized Merchant Generation 20 16 12 in 2001. See Note 6 - Regulatory Matters. 682 434 338 Fuel and Purchased Power (380) (116) (61); Taxes other than income increased $8million in2002 and Operation and Maintenance (320) (323) (260) decreased $28 million in 2001. The 2001 decrease was due Depreciation, Depletion and Amortization (23) (36] (29) to lower property taxes resulting from new valuation tables approved by the Michigan State Tax Commission (STC). Several Taxes other than Income (14) (6) (1) local taxing jurisdictions have taken legal action against the state Operating Loss (55) (47) (13) of Michigan to prevent the STC from implementing the new Other Income and (Deductions) (27) 111) (15) valuation tables. See Note 16- Commitments and Contingencies. Income Tax Benefit 264 173 128 Net Income S 182 $ 115 $ 100 Outlook- Electric restructuring is expected to continue to result in increased customer choice inthe retail electric generation Factors impacting income: Earnings increased $67 million in business. Effective January 1,2002, the electric Customer 2002 and $15 million in 2001. Both periods reflect an increase Choice program in Michigan was expanded to allow all electric in synfuel production, partially offset by a reduction in coke customers to purchase their electricity from suppliers other battery ownership. Four new synfuel production facilities than their local utility. As a result of customers choosing to became operational in 2002, compared to three new facilities participate in the electric Customer Choice program, Detroit in 2001. We sold a 95% interest in two of our synfuel projects Edison lost 6%of retail sales in 2002 and estimates losing 10% during 2002. Tax credits from coke battery production to 13% of such sales in 2003. If Detroit Edison is unable to decreased in both years reflecting the sale of a 49% interest recover its fixed costs from retail customers due to lost sales in two of our coke battery projects in 2001. In 2002, consistent under electric Customer Choice (stranded costs), Michigan with the original purchase and sale agreement, our interest law allows for the recovery of all such amounts from electric in the third coke battery was reduced from 95% to 5%. Customer Choice customers. Detroit Edison recorded a $21 million regulatory asset in 2002 representing stranded costs Operating revenues and expenses increased significantly in and other recoverable costs under Michigan legislation. 2002 and 2001 reflecting higher synfuel production. Synfuel The regulatory asset was calculated based on a refinement projects generate operating losses which are offset by the to the methodology approved by the Michigan Public Service resulting tax credits. Commission (MPSC). The regulatory asset will be subject to (Dollars inMillions) 2002 2001 2000 review in future regulatory proceedings and we cannot predict Coal-Based Fuels Statistics the outcome of this matter. See Note 6- Regulatory Matters. Synfuel Plants: Operating results are expected to vary as a result of various Operational 9 5 2
- 2*4* external factors such as, weather, changes in economic Tax Credits Generated (1) S 180.2 $ 64.1 $ 11.7 conditions and the level of customer participation inthe Coke Battery Plants:
electric Customer Choice program. Operational 3 3 3 Energy Services Tax Credits Generated (1) $ 57.4 $ 88.6 $ 106.5 (1)DTE Energys portion of total tax credits generated Energy Services is comprised of Coal-Based Fuels, On-Site Energy Projects and Merchant Generation. Coal-Based Fuels Outlook - Energy Services strategy is to continue leveraging operations include producing synthetic fuel from nine synfuel our extensive energy-related operating experience, and plants and producing coke from three coke battery plants. Both construction management capability to develop and grow processes generate tax credits under Section 29 of the Internal the on-site energy and merchant generating businesses. Revenue Code. On-Site Energy Projects include pulverized We continue to evaluate opportunities to sell interests in some coal, power generation, steam production, chilled water, or all of our synfuel plants. Sales of interests in synfuel projects wastewater treatment and compressed air. Merchant allow us to accelerate cash flow while maintaining a stable net income base. Coke battery tax credits expired at two of our three facilities in 2002 and the synfuel tax credits are scheduled to expire in 2007.
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( I bell e v f1V PLEAVI/V Cd*TOMFPC Energy Marketing &Trading the segment is able to capture seasonal price spreads. As forward prices change, the timing of the physical flow of Energy Marketing & Trading consists of the electric and gas gas is optimized to obtain the highest margin. Trades under marketing and trading operations of DTE Energy Trading this strategy are marked to market against the forward curve. Company and CoEnergy Trading Company, which was acquired Through December 2002, physical gas in storage was marked as part of the MCN Energy acquisition in May 2001. Energy to the current spot price under fair value accounting rules. Marketing & Trading focuses on physical power marketing and This difference in accounting for forward trades and gas in structured transactions, as well as the enhancement of returns storage resulted in earnings volatility in 2002 and 2001 when from DTE Energy's natural gas pipeline and storage assets. price changes in the spot month did not correspond with those To this end, Energy Marketing & Trading enters into forwards, infuture delivery months. Gas in storage in December 2002 futures, swaps and option contracts as part of its trading strategy. was priced at a spot market rate of $5.10 per thousand cubic Factorsimpacting income: Earnings decreased $19 million feet (Mcf), compared to $2.77 per Mcf in December 2001 in 2002 and increased $34 million in 2001 due to varying and a May 31, 2001, acquisition date rate of $4.10 per Mcf. mark-to-market gains resulting from changes in gas and Significantly smaller changes in forward prices occurred electric prices. Commodity price risk of the Energy Marketing during these same periods. As a result, the mark-to-market
& Trading segment ismanaged by utilizing derivative financial gains and losses on gas inventory were only partially.
contracts to offset the risk inherent in the segment's portfolio of offset by mark-to-market losses and gains on the electric and gas supply and sales agreements. The segment's storage-related derivatives. objective isto enter into new transactions that can be hedged Outlook - Energy Marketing & Trading will seek to gradually and profitable from an economic standpoint. Energy Marketing expand this business in a manner consistent with and [ & Trading accounts for this risk minimization strategy by complementary to the growth of our other business segments. marking to market its commodity forwards and financial Gas storage and transportation capacity enhances its ability derivatives so they substantially offset. This fair value to provide reliable and custom-tailored, bundled services to accounting better aligns financial reporting with the way large-volume end users and utilities. This capacity, coupled the business ismanaged and its performance measured. with the synergies from DTE Energy's other businesses, In2001, Energy Marketing & Trading experienced earnings positions the segmentto capitalize on opportunities for volatility as a result of its production-related gas supply as expansion of its market base. well as from open positions related to its long-term gas Energy Marketing & Trading manages commodity price risk transportation and storage assets. The segment receives gas by utilizing derivative financial contracts to more fully balance produced from DTE Energy's Exploration & Production (E&P) its portfolio of gas and electric supply and sales agreements. operations which is used to meet its commitments under Energy Marketing & Trading attempts to maintain a balanced, long- term contracts with cogeneration customers. The E&P or flat book from an economic standpoint. However, Energy gas does not qualify for mark-to-market accounting. Energy Marketing & Trading will experience earnings volatility as a Marketing & Trading recorded a gain in 2001 totaling approxi- result of its gas inventories and associated hedges. As dis-mately $50 million, net of taxes, primarily attributable to marking cussed in Note 2,effective January 1,2003, gas inventory to market sales contracts with power generation customers does not qualify for mark-to-market accounting as a result without recording an offsetting loss from marking to market of the rescission of Financial Accounting Standards Board the production-related gas supply. In December 2001, Energy Emerging Issues Task Force (EITF) Issue No. 98-10. Marketing & Trading entered into hedge transactions that substantially mitigate the earnings volatility related to the Non-Regulated - Other gas contracts with power generation customers. Our other non-regulated businesses are comprised of our Energy Marketing & Trading deploys a gas storage, marketing Coal Services and Biomass units. Coal Services specializes and trading strategy primarily utilizing the facilities owned and in minimizing energy production costs and maximizing operated by DTE Energy. Employing a combination of reliability of supply for energy-intensive use customers. physical and financial contracts, in conjunction with the Biomass develops, owns and operates landfill recovery injection and withdrawal capabilities of the storage fields, systems in the U.S. Gas produced from these landfill sites qualifies for Section 29 tax credits.
o I IC- i CqC 1S" " 11 MX Factors impacting income: Earnings rose $1million in 2002 and The 2001 earnings improvement is due primarily to higher
$13 million in 2001, reflecting higher revenues from an increase residential sales resulting from weather, partially offset by in the shipment of coal, as well as an increase in revenues and the impact of a 5% rate reduction that began in June 2000.
tax credits resulting from an increase in gas produced. Below are volumes associated with the regulated power Outlook - We expect to continue to grow our Coal Services distribution and transmission business: and Biomass units. Biomass currently has 30 operating sites (inThousands of MWh) 2002 2001 2000 and other projects under development Section 29 tax credits related to Biomass operations expire in 2007. Electric Deliveries Residential 15,958 14,503 13,903 ENERGY DISTRIBUTION Commercial 18,395 18,777 19,762 Industrial 13,590 14,430 16,090 Power Distribution & Transmission Wholesale
- 2,249 2,159 2,277 Power Distribution & Transmission operations include the 50,192 49,869 52,032 electric distribution services and steam heating businesses Electric Choice 3,510 1,268 202 of Detroit Edison, and the electric transmission services Total Electric Deliveries 53,702 51,137 52,234 of the International Transmission Company (ITC).
Energy Distribution distributes electricity generated by Outlook - Regulated electric system deliveries are expected Energy Resources and alternative electric suppliers to to continue to increase in 2003 due to continued territory and Detroit Edison's 2.1 million customers. economic growth. Operating results are expected to vary as a (inMillions) 2002 2001 2000 result of various external factors such as weather, changes in Operating Revenues S 1,365 $ 1,263 $ 1,218 economic conditions and the severity and frequency of storms. Fuel and Purchased Power (26) (10) (29) In January 2003, we sold our steam business and will record Operation and Maintenance (1) (568) (477) (460) a net of tax loss inthe 2003 first quarter of approximately
$13 million. In the fourth quarter of 2002, we entered into an Depreciation, Depletion and Amorfization (268) (259) (251) agreement to sell ITC for $610 million. Following receipt of Taxes other than Income (135) (126) (113) regulatory approvals and resolution of other contingencies, it is Operating Income 368 391 365 anticipated that the transaction will close inthe first quarter of Other Income and (Deductions) (135) (131) (129) 2003 and generate a net of tax gain of approximately $75 million.
Income Tax Provision (80) (74) 161) Net Income S 153 $ 186 $ 175 Several Midwest utilities seek to recover lost transmission Operating Income as a Percent revenues associated with the creation of multiple regional of Operating Revenues 270/o 31% 30% transmission organizations in the Midwest. Positions advocated Ill Excludes merger and restructuring charges in2001 and 2000. by several parties in a Federal Energy Regulatory Commission (FERC) proceeding could require that Detroit Edison and its Factors impacting income: Earnings decreased $33 million customers be responsible for increased transmission costs. in 2002 and increased $11 million in 2001. The 2002 decrease Detroit Edison continues to actively participate inthis is due primarily to increased operating and maintenance proceeding and depending upon the outcome would expenses, partially offset by higher operating revenue. subsequently seek rate recovery of these costs. Operation and maintenance expenses were affected by 26 expenses associated with restoring power to customers who Non-Regulated ... lost service during two catastrophic storms during 2002, as Non-regulated energy distribution operations consist well as heat-related maintenance expenses due to prolonged primarily of DTE Energy Technologies that markets and periods of above normal summer temperatures and the distributes a broad portfolio of distributed generation products, related stress placed on the distribution system. Additionally, provides application engineering, and monitors and manages operation and maintenance expenses reflect increased costs system operations. associated with customer service process improvements, uncollectible accounts expense, and employee benefit Factorsimpacting income: Losses increased $6 million expenses. Operating revenues increased due primarily to during 2002 due primarily to expenses associated with higher residential sales attributable to greater cooling demand. the establishment of new sales offices in the distributed generation business. Outlook - DTE Energy Technologies expects to continue the expansion of its product portfolios and support capabilities in North America and the development of marketing relationships - in other parts of the world. We plan to develop and launch new products in 2003 that are critical to our plan to increase revenues and generate operating profits by 2004.
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K ( I believe ) IN4COMMUN¶ITY Fouad Ashkar Ethnic Marketing Manager ENERGY GAS April 2003, up to approximately 60% of customers could participate and beginning April 2004, all 1.2 million of Gas Distribution MichCon's gas customers could choose to participate. Gas Distribution operations include gas distribution services Since MichCon continues to transport and deliver the gas to primarily provided by MichCon, our gas utility that purchases, the participating customer premises at prices comparable to stores and distributes natural gas to 1.2 million residential, margins earned on gas sales, customers switching to other commercial and industrial customers located throughout suppliers have little impact on MichCon's earnings. As of Michigan. December 2002, approximately 190,000 customers were participating in the gas Customer Choice program. (inMillions) 2002 2001 2000 Operating Revenues $ 1,369 $ 615S - Under the MPSC order, MichCon returned to a gas cost Fuel and Purchased Power (774) (304) - recovery (GCR) mechanism upon termination of its three-year Gross Margins 595 311 - experimental Gas Sales Program in December 2001. Under the Operation and Maintenance (1) (297) (194) - GCR mechanism, the gas commodity component of MichCon's Depreciation, Depletion and Amortization (104) (61) - sales rates is designed to recover the actual costs of gas Taxes other than Income (51) (24) - purchases. In December 2001, the MPSC issued an order permitting MichCon to implement GCR factors up to $3.62 per Operating Income 143 32 - Mcf for January 2002 billings and up to $4.38 per Mcf for Other Income and (Deductions) (41) (38) - the remainder of 2002. The order also allowed MichCon to Income Tax Benefit (Provision) (36) 21 - recognize a regulatory asset of approximately $14 million Net Income $ 66 $ 15 $ - representing the difference between the $4.38 factor and the Operating Income as a Percent $3.62 factor for volumes that were unbilled at December 31, of Operating Revenues 10%O 5% -% 2001. The regulatory asset will be subject to the 2002 GCR (1)Excludes merger and restructuring charges in2001 and 2000. reconciliation process. In July 2002, in response to a petition for Factors impacting income: Gas Distribution had income of $66 rehearing filed by the Michigan Attorney General, the MPSC million in 2002 compared to $15 million in 2001. The significant directed the parties to address MichCon's implementation of improvement in 2002 reflects a full year of operations from the December 2001 order and the impact of that implementation MichCon, which was acquired in conjunction with the MCN on rates charged to MichCon's customers. Also, inJuly 2002, Energy acquisition in May 2001. In contrast to 2001, the 2002 an MPSC Administrative Law Judge (AL]) issued a Proposal results include the January through April period when for Decision on MichCon's 2002 GCR plan case. Inthat demand for natural gas is at Rts highest decision the AU recommended adoption of the MPSC Staff's proposed $26.5 million reduction in gas cost due to MichCon's Warmer than normal weather during 2002 and 2001 reduced decision to utilize storage gas during 2001 that resulted Gas Distribution's earnings by $11 million and $13 million, in a gas inventory decrement for the 2001 calendar respectively. Operations and maintenance expenses in year. Management cannot predict the outcome and 2002 were affected by higher uncollectible accounts has not accrued an amount related to this matter. expense, employee benefit expenses, and costs associated See Note 6- Regulatory Matters. with customer service process improvements. Gas Distribution's future operating results are expected to vary The pro-forma impact of the MCN Energy acquisition as a result of weather and changes in economic conditions. on DTE Energy is discussed in Note 4 - Acquisitions and Dispositions. Non-Regulated Outlook - Gas restructuring is expected to continue to Non-regulated operations include the gas and oil Exploration
& Production business, and the gas Pipelines & Processing result in increased customer choice inthe gas sales business.
In December 2001, the MPSC issued an order that continues business. E&P produces gas from proven reserves owned in the gas Customer Choice program on a permanent and northern Michigan and sells the gas to the Energy Marketing expanding basis beginning with the conclusion of the & Trading segment. Pipelines & Processing has partnership three-year temporary program on March 31, 2002. Under interests in two interstate transmission pipelines, seven carbon the expanded program, beginning April 1,2002, up to dioxide processing facilities and a natural gas storage field. approximately 40% of customers could elect to purchase The assets of these businesses primarily support the Energy gas from suppliers other than MichCon. Beginning in Marketing & Trading segment.
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V: -{- Factors impacting income: Earnings were $26 million in The decline in 2001 resulted primarily from lower earnings, 2002 compared with $11 million in 2001. The results reflect a after adjusting for noncash items including merger and full year of operations of the E&P and Pipeline & Processing restructuring charges, and higher working capital require- r businesses that were acquired in conjunction with the ments. Working capital was affected by the seasonal I MCN Energy acquisition in May 2001. requirements in the second half of 2001 of the gas business where cash is used to finance increases in gas inventories Outlook - We expect to further develop our gas production and customer accounts receivable. properties in northern Michigan and our pipelines, processing and storage assets to support other DTE Energy businesses. Outlook - We expect our cash flow from operations will 1 Additionally, we expect to continue exploring opportunities in increase in 2003 due to earnings growth, and by better the coal bed methane gas production business to leverage our managing our working capital requirements, including the E&P capabilities, skills and experience. continued focus of reducing past due accounts receivable. I These expected improvements will be partially offset by a CORPORATE & OTHER $222 million contribution to our pension plan in January 2003. Corporate & Other had a loss of $52 million in 2002 compared Investing Activities with a loss of $14 million in 2001. The increased loss was due to higher interest expense resulting from increased debt and a full Our net cash used for investing activities decreased $1.2 billion in 2002 and increased $1.6 billion in 2001. The cash consideration M year impact of corporate debt assumed in the MCN Energy acquisition. Additionally, results reflect a reserve of $11 million portion of the MCN Energy acquisition totaled $1.2 billion (pre-tax) for the possible loss associated with direct loans to and impacts the comparison of the periods. In2002, capital and the guarantee of debt of a technology investment expenditures in regulated and non-regulated businesses were lower, partially offset by reduced proceeds from the sale CAPITAL RESOURCES AND LIQUIDITY of non-strategic assets. In 2001, higher regulated capital expenditures at Detroit Edison were due to new air quality (in Millions) 2002 2001 2000 regulations that require reductions in nitrogen oxide levels as Cash and Cash Equivalents discussed inthe following "Environmental Matters" section. Cash Flow From (Used For) Operating activities: Outlook - Our strategic direction anticipates base level Net income, depreciation, capital investments and expenditures for existing businesses depletion and amortization $ 1,391 $ 1,127 $ 1,226 in 2003 totaling approximately $850 million, of which approxi-Merger and restructuring charg es - 215 - mately $700 million will be in regulated gas and electric Deferred income taxes 1208) (7) (133) operations and the remaining $150 million in non-regulated Working capital and other (209) (524) (78) businesses. Approximately $100 million of the regulated 974 811 1,015 capital expenditures will be incurred by our Power Generation Investing activities (1) (1,115) (2,286) (674) business to comply with new ozone and air quality regulations. Financing activities 12) 6 1,679 (310) Investments in new non-regulated growth businesses Net Increase (Decrease) in could push actual capital investments and expenditures Cash and Cash Equivalents S (135) $ 204 $ 31 over $1 billion. The actual level of non-regulated investments and expenditures will depend on new market opportunities.
- 11) Includes acquisition of MCN Energy if12001. We also expect to complete the sale of ITC in 2003 for 28 12) Includes $1.75 billion of securitization bonds issued in21 approximately $610 million.
Operating Activities The proposed level of investments and expenditures infuture Our consolidated net cash from operating activities increased years is expected to be financed primarily with internally generated
$163 million in 2002 and decreased $204 million in 2001. We funds, including proceeds from the sale of non-strategic assets.
use cash derived from operating activities to maintain and We will evaluate divesting of assets and investments that do expand our core electric and gas utility businesses and to not meet certain return criteria or are not consistentwith our grow our non-regulated businesses. In addition, we use cash strategic direction to maximize shareholder value. from operations to retire long-term debt and pay dividends. ! I I The increase in 2002 was attributable to higher net income, We believe that we will have sufficient capital resources, both after adjusting for noncash items (depreciation, amortization internal and external, to meet anticipated capital requirements. and deferred taxes), partially offset by higher working capital i Financing Activities requirements. Working capital requirements reflect an i increase in accounts receivable and gas inventories. Our consolidated net cash related to financing activities Accounts receivable collections were slowed in our utility decreased $1.7 billion in 2002 and increased $2billion in 2001. business due to billing issues associated with our new The 2001 issuance of $1.75 billion of securitization bonds and the ' combined billing system that have been resolved. 2001 issuance of $1.35 billion of long-term debt to finance the
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( I believe) IN MYCO-WORKgRS Kevin Shaffer Assistant Business Manager Local#17 acquisition of MCN Energy impacts the comparison of the DTE Energy, Detroit Edison and MichCon have effective shelf periods. In 2002, proceeds from the issuance of debt and registrations with the SEC that allow for the issuance of up to common stock were used forthe redemption of higher cost debt $1.9 billion of debt and equity securities. and to reduce short-term borrowings. In 2001, proceeds from the issuance of securitization bonds and other Detroit Edison In February 2003, MichCon issued $200 million of 5.7% senior and MichCon debt were used to repay debt and repurchase notes, due in 2033. The proceeds were used for debt redemption. our common stock. Details of 2002 financing activities follows: Outlook - Our capitalization objective is to maintain
- InJanuary 2002, DTE Energy Trust I, awholly owned trust our credit ratings through a strong balance sheet. Our of the company, issued $180 million of 7.8% Trust Preferred capitalization objective is a 50% to 55% leverage target Securities. The proceeds were used to redeem the 8-5/8% (excluding certain debt, principally securitization debt.)
Trust Originated Preferred Securities and the 9-3/8% We have issued guarantees for the benefit of various Redeemable Cumulative Preferred Securities. non-regulated subsidiary transactions. We do not anticipate any credit rating downgrades, however in the event that
- InApril 2002, DTE Energy issued $200 million of 6.65% our credit rating is downgraded below investment grade, senior notes, due 2009. The proceeds were used to retire certain of these guarantees would require us to post cash MCN Energy Enterprises Remarketable Securities that had or letters of credit valued at approximately $200 million an aggregate principal amount of $100 million, and to reduce at December 31, 2002.
short-term borrowings.
- InJune 2002, DTE Energy issued 6.9 million equity-linked CRITICAL ACCOUNTING ESTIMATES security units at $25 per unit An equity security unit consists There are estimates used in preparing the consolidated of a stock purchase contract and a senior note of DTE Energy. financial statements that require considerable judgment.
DTE Energy used the net proceeds of $167 million from this Such estimates relate to regulation, risk management and issuance for general corporate purposes, including the trading activities, Section 29 tax credits, goodwill, pension and repayment of short-term borrowings. post retirement costs, and the allowance for doubtful accounts.
- InJune 2002, DTE Energy also issued 6.325 million shares Regulation of common stock at $43.25 per share, grossing $273.6 million.
A significant portion of our business is subject to regulation. Net proceeds from the common stock offering were $265 Detroit Edison, MichCon and ITC currently meet the criteria million and were used for general corporate purposes. of Statement of Financial Accounting Standards (SFAS) No. 71,
- InOctober 2002, Detroit Edison issued $225 million of 5.20% "Accounting for the Effects of Certain Types of Regulation."
senior notes, due 2012, and $225 million of 6.35% senior Application of this standard results in differences inthe notes, due 2032. The proceeds were used for general application of generally accepted accounting principles corporate purposes, including debt redemptions and the between regulated and non-regulated businesses. repayment of short-term borrowings. SFAS No. 71 requires the recording of regulatory assets and
- InDecember 2002, Detroit Edison issued $64 million of liabilities for certain transactions that would have been 5.45% tax exempt bonds and $56 million of 5.25% tax exempt treated as revenue or expense in non-regulated businesses.
bonds, due 2032. The proceeds were used for the refunding Future regulatory changes or changes in the competitive of tax exempt bonds and to finance costs to be incurred for environment could result in discontinuing the application pollution control facilities at our power plants. of SFAS No. 71 for some or all of our businesses. If we were to discontinue the application of SFAS No. 71 on all In October 2002, DTE Energy, Detroit Edison and MichCon our operations, we estimate that an extraordinary noncash entered into separate revolving credit facilities with asyndicate effect to income would be as follows: of banks totaling $1.2 billion. Our revolving credit facilities contain customary covenants. One important aspect of these (inMillions) Noncash agreements requires us to maintain a debtto total capitalization Regulated Entity Gain (loss) ratio of not more than .65 to 1,and an "earnings before interest, etroit Edison (1) $ (27) D, taxes, depreciation and amortization' to interest ratio of no iilichCon (28) less than 2 to 1. See Note 13 - Short-Term Credit rC (6) Arrangements and Borrowings. Total $ (61) (1)Excludes securitized regulatory assets. l a J _ ,Ji- 7.,-i , ... ... ) - :f )". .
Il 1 vi:., __:t i (_]- i v Ii-o i y - Management believes that currently available facts support impairment tests annually or whenever events or circumstances the continued application of SFAS No. 71 and that all regulatory indicate that the value of goodwill may be impaired. Inorder assets and liabilities are recoverable or refundable inthe to perform these impairment tests, we must determine the current rate environment reporting unit's fair value using valuation techniques, which use Risk Management and Trading Activities estimates of discounted future cash flows to be generated by the reporting unit These cash flow estimates involve judgments All derivatives are recorded at fair value and shown as based on abroad range of information and historical results.
"Assets or liabilities from risk management and trading To the extent estimated cash flows are revised downward, the activities" inthe consolidated statement of financial position. reporting unit may be required to write down all or a portion Risk management activities are accounted for in accordance of its goodwill which would adversely impact our earnings.
with SFAS No. 133, "Accounting for Derivative Instruments As of December 31, 2002, our goodwill totaled $2.1 billion and and Hedging Activities. e Through December 2002, trading we determined that no impairment exists. activities were accounted for in accordance with Financial Pension and Postretirement Costs Accounting Standards Board Emerging Issue Task Force (EITF) Issue No. 98-10, "Accounting for Energy Trading and Risk Our cost of providing pension and postretirement benefits are ManagementActivities. " Effective January 2003, trading dependent upon a number of factors, including rates of return activities are accounted for in accordance with SFAS No. 133. on plan assets, the discount rate and the rate of increase in See Note 2- New Accounting Pronouncements. health care costs. The offsetting entry to "Assets or liabilities from risk We had pension income for qualified pension plans of $9million management and trading activities" is to other comprehensive in 2002, and pension expense of $159 million in 2001 and $9 income or earnings depending on the use of the derivative, million in 2000. Postretirement benefits expense for all plans how it is designated and if it qualifies for hedge accounting. was $70 million in 2002, $104 million in 2001 and $44 million The fair values of derivative contracts were adjusted each in2000. Pension and postretirement benefits expense is reporting period for changes using market sources such as: calculated based upon a number of actuarial assumptions, including an expected long-term rate of return on our plan
- published exchange traded market data assets of 9%at December 31, 2002. Indeveloping our expected
- prices from external sources long-term rate of return assumption, we evaluated input from
- price based on valuation models our consultants, including their review of asset class return expectations as well as long-term inflation assumptions.
Market quotes are more readily available for short duration Projected returns by such consultants are based on broad contracts. Effective in 2003, fair value measurements must be equity and bond markets. Our expected long-term rate of return; evidenced by similar transactions in the marketplace. on plan assets is based on an asset allocation assumption of Section 29 Tax Credits 65% in equity markets, 28% infixed income markets, and 7% invested in other assets. Because of market volatility, we We have generated Section 29 tax credits from our synfuel, periodically review our asset allocation and rebalance our coke battery and biomass operations. Seven of our synthetic portfolio when considered appropriate. Given market conditions fuel facilities have received favorable private letter rulings we believe that 9%is a reasonable long-term rate of return on from the Internal Revenue Service (IRS) with respect to their our plan assets, despite the recent financial market downturn. operations. The remaining two rulings have been requested We will continue to evaluate our actuarial assumptions, 30 and are expected in 2003. These tax credits are subject including our expected rate of return, at least annually. to review by the IRS and if we fail to prevail through the administrative and legal process, there could be a significant We base our determination of the expected return on plan tax liability owed for previously taken Section 29 tax credits. assets for pension benefits on a market-related valuation of Our portion of tax credits generated was $250 million in 2002, assets which reduces year-to-year volatility. This market-related up from $165 million in 2001 and $130 million in 2000. Outside valuation recognizes changes infair value in asystematic firms assist us in assuring we operate in accordance with our manner over a three-year period. Because of this method, the private letter rulings and within the parameters of the law, future value of assets will be impacted as previously deferred as well as calculating the value of tax credits. gains or losses are recorded. We have unrecognized net losses Goodwill due to the recent unfavorable performance of the financial markets. As of December 31, 2002, we had cumulative losses Certain of our business units have goodwill resulting from of approximately $375 million which remain to be recognized purchase business combinations. In accordance with inthe calculation of the market-related value of assets. SFAS No. 142, "Goodwill and Other Intangible Assets," each These unrecognized net losses may result in increases in of our reporting units with goodwill is required to perform our future pension expense. 1, 4 .I 11, 4 , 'Ji 12 , : i -$, -, , ii , , ;f- .
( I believe) IN!RESU[TS [ Lisa Howze Senior Business Fnancial Analyst The discount rate that we utilize for determining future pension Allowance for Doubtful Accounts and postretirement benefit obligations is based on a review We establish an allowance for doubtful accounts based of long-term bonds that receive one of the two highest ratings upon factors surrounding the credit risk of specific customers, given by a recognized rating agency. The discount rate historical trends, economic conditions, age of receivables determined on this basis has decreased from 7.25% at and other information. With the implementation of a new December 31, 2001 to 6.75% at December 31, 2002. Due to integrated billing system in late 2001, we encountered billing recent financial market performance, lower discount rates issues that resulted in an MPSC inquiry. We filed a plan and increased health care trend rates, we estimate that our with the MPSC in March 2002 addressing customer billing 2003 pension expense will approximate $70 million and our complaints. While we have resolved the primary billing issues, postretirement benefit expense will approximate $141 million. we may encounter difficulty in collecting past due receivables. We have also made modifications to the pension and As a result, our allowance for doubtful accounts increased in postretirement benefit plans to mitigate the earnings impact 2002. We believe the allowance for doubtful accounts is based of the higher costs. Future actual pension and postretirement on reasonable estimates, however; failure to collect our past benefit expense will depend on future investment performance, due receivables could unfavorably affect operating results changes in future discount rates and various other factors and cash flow. related to plan design. Lowering the expected long-term rate of return on our pension ENVIRONMENTAL MATTERS plan assets by 0.5% would have increased our 2002 pension Protecting the environment, as well as correcting past expense by approximately $12 million and our postretirement environmental damage, continues to be a focus of state benefit expense by $3million. Lowering the discount rate and and federal regulators. Legislation and (or) rulemaking the salary increase assumptions by 0.5% would have increased could further impact the electric utility industry including our pension expense for 2002 by approximately $3million. Detroit Edison. The Environmental Protection Agency (EPA) Lowering the discount rate and the health care cost trend and the Michigan Department of Environmental Quality assumptions by 0.5% would have decreased our postretirement have aggressive programs to clean-up contaminated property. benefit expense for 2002 by approximately $4million. The EPA initiated enforcement actions against several major The market value of our pension and postretirement benefit electric utilities citing violations of new source provisions of plan assets has been affected by sharp declines in the financial the Clean Air Act Detroit Edison received and responded to markets since 2000. The value of our plan assets has decreased information requests from the EPA on this subject. The EPA from $2.8 billion at December 31, 2001, to $2.4 billion at has not initiated proceedings against Detroit Edison. December 31, 2002. The investment performance returns and The National Energy Policy Development Group is reviewing declining discount rates have required us to recognize at the EPA's interpretation and application of regulations for December 31, 2002, an additional minimum pension liability of new source review requirements. We expectthis review $855 million, an intangible asset of $57 million and an entry to to focus on the ability of fossil-fueled plant owners to other comprehensive loss (shareholders' equity) of $518 million, perform plant maintenance without additional significant net of tax. The additional minimum pension liability and related environmentally related modifications. While we anticipate accounting entries would be reversed on the balance sheet continued ability to economically maintain our plants, the 31 infuture periods if the fair value of plan assets exceeds the outcome of this governmental review cannot be predicted. accumulated pension benefit obligations. The recording EPA ozone transport regulations and final new air quality of the minimum pension liability does not affect net income standards relating to ozone and particulate air pollution will or cash flow. impact us. Detroit Edison has spent approximately$460 million Pension and postretirement costs and pension cash funding through December 2002 and estimates that it will incur requirements will increase in future years without a substantial approximately $300 million to $400 million of future capital recovery in the financial markets. We made a $35 million cash expenditures over the next five to eight years to comply. contribution to the pension plan in 2002 and a $222 million cash contribution in January 2003. We also contributed $33 million to the postretirement plans in 2002, and expect to contribute at least $80 million by the end of 2003.
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I~- * +tt* I-NEW ACCOUNTING FAIR VALUE OF CONTRACTS PRONOUNCEMENTS Roll-Forward of Mark to Market Energy Contract Net Assets See Note 2- New Accounting Pronouncements foir The following table provides details on changes in our mark-to-discussion of new pronouncements. market (MTM) net asset or liability position during 2002. CONTRACTUAL OBLIGATIONS The following table reflects the payments due to o1 ,hers Propfietar Structured Owned (inMillions) (r Tradin (1l Contracts (2) Assets 13) Total for contractual obligations existing at December 31 1,2u02 Energy Marketing Less Than 1-3 4-5 After & Trading Segment (in Millions) Total 1 Year Years Years 5Years MTMatDecember31,2001 $ (4) $ (171) $ 42 $ (133) Contractual Obligations Reclassification to realized Long-Term Debt at settlement of contract 1 16 (45) (28) Mortgage bonds, Reclassification to Liabilities notes & other $ 6,576 $ 920 S 793 $ 644 S 4,219 from Transportation and Storage Contracts(4) - 155 - 155 Securitization bonds 1,673 88 185 215 1,185 Netchangeinoptionpremiums 11 - 1 12 Equity Linked Securities 191 6 185 - - Other changes infair value 7 19 (48) (22) Capital Lease Obligations 127 16 24 25 62 MTMatDecember31,2002 $ 15 $ 19 $ (50) (16) Operating Leases 328 40 80 71 137 Other DTE Energy Segments (100) Electric and Gas
$ 1116)
Purchase Obligations 2,078 709 576 277 516 Other Long-Term Obligations 683 110 182 70 321 (1)'Proprietary Trading' represents derivative activity transacted with the intent Total Obligations $ 11,656 $ 1,889 S 2,025 $ 1,302 $ 6,440 of capturing profits on forward price movements. (2)'Structured Contracts' represents derivative activitytransacted with the intentto capture profits by originating substantially hedged positions with We expect 2003 capital expenditures will approximate $850 wholesale energy marketers, utilities, retail aggregators and end-users. million. Certain commitments have been made in connection Although transactions are generally executed with a buyer and seller simultaneously, some positions remain open until a suitable offsetting trade with such capital expenditures and are excluded from the can be executed. above table. (3)"Owned Assets" represents derivative activity associated with assets I owned by DTE Energy, including forward sales of gas production and trades associated with owned transportation and storage capacity. Derivatives are generally executed with the intent of locking in and optimizing profits without creating additional risk. (4)Represents transportation contracts that no longer meet the definition of a derivative. The fair value of such contracts were frozen and are being amortized to income over the remaining contract terms. Proietuy Stuctured Owned (inMillions) TWading Contracts Assets Eliminations Total CurrentAssets S 62 $ 68 $ 65 $ (10) $ 185 Noncurrent assets 18 33 114 (16) 149 Total MTM assets 80 101 179 (26) 334 Current liabilities (49) (58) (96) 9 (194) Noncurrent liabilities (16) (24) (133) 17 (156) Total MTM liabilities (65) (82) (229) 26 (350) Total MTM net assets (liabilities) $ 15 $ 19 $ (50) $ - $ (16)
~-'~- -: L ___ "ft I
( I believe) /I/ TEAMWORK Jim Rottman Muskegon Field Operations Supervisor Maturity and source of fair value of MTM energy contract net assets The table below shows the maturity and source of how we derived the MTM positions of our energy contracts. (inMillions) Beyond Total e Source of Fair Value 2003 2004 2005 2006 2007 FiveYears Fair Value Proprietary Trading Actively quoted prices (1) $13 $ (6) S (3) $ - $ - S - $ 4 Prices by external sources (2) - 6 3 - 2 _ 11 13 - - - 2 - 15 Structured Contracts Actively quoted prices (1) 9 5 - - - - 14 Prices by external sources (2) - - 1 1 1 2 5 9 5 1 1 1 2 19 Owned Assets Actively quoted prices (1) (30) (14) (8) (4) - - (56) Prices by external sources (2) - 12 11 2 (6) (13) 6 (30) (2) 3 (2) (6) (13) (50) Total S (8) $ 3 S 4 $ (1) $ (3) $(11) $ (16) (11Actively quoted prices" represent our position where we developed forward price curves using published New York Merchantile Exchange (NYMEX) prices, over the counter (OTCJ gas and power quotes. The NYMEX publishes gas futures prices for the next six years. (2) Prices by extermal sources" represent our forward positions inpower at points where OTC broker quotes are not always available. We value these positions against internally developed forward market price curves that are constantly validated and recalibrated against OTC broker quotes for closely correlated points. This catagory also includes 'strip" transactions whose prices are obtained from external sources and then modeled to daily or monthly prices as appropriate. QUANTITATIVE AND QUALITATIVE Summary of Sensitivity Analysis DISCLOSURES ABOUT MARKET RISK We performed a sensitivity analysis calculating the impact of changes infair values utilizing applicable forward commodity rates Commodity Price Risk or changes ininterest rates if they occurred at December 31, 2002: Risk Management and Trading Activities Increase Decrease Change inthe DTE Energy has commodity price risk arising from market price (inMillions) of 10%0 of 10%0 fair value of fluctuations in conjunction with the anticipated purchase of Activity electricity to meet its obligations during periods of peak demand. Gas Contracts S (21) $ 7 Commodity contra cts We also are exposed to the risk of market price fluctuations Power Contracts S 3 $ (1) Commodity on gas sale and purchase contracts, gas production and gas contra cts inventories. To limit our exposure to commodity price fluctuations, Interest Rate Risk $ (229) $ 245 Long term debt we have entered into a series of electricity and gas futures, 33 forwards, option and swap contracts. See Note 15 - Financial Credit Risk .. . and Other Derivative Instruments for further discussion. We purchase and sell electricity, gas and coke to numerous Interest Rate Risk companies operating inthe steel, automotive, energy and retail industries. During 2001 and 2002, a number of customers have filed DTE Energy issubject to interest rate risk in connection with for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy the issuance of debt and preferred securities. Inorder to Code, including certain Enron Corporation affiliates, National Steel manage interest costs, we use treasury locks and interest rate Company and Bethlehem Steel Company. At December 31, 2002, swap agreements. Our exposure to interest rate risk arises we had approximately$65 million of accounts receivable and primarily from changes in U.S. Treasury rates, commercial approximately $40 million of accounts payable with these bankrupt paper rates and London Inter-Bank Offered Rates (LIBOR). companies. We regularly review contingent matters relating to purchase and sale contracts and record provisions for amounts considered probable of loss. We believe our previously accrued amounts are adequate for probable losses. The final resolution of these matters are not expected to have a material effect on our financial statements inthe period they are resolved. 46- -, I0i i 1 A -T4 ]= -' )...... 1, ;f:j -J-)- t 4W -_ V - V I - I &J. ) . It I - 96
*1I1i Report of Management's
.Respnsi bil ity for Financial Statements We have reviewed this annual report to shareholders, (b) evaluated the effectiveness of our disclosure and based on our knowledge, this annual report does not controls and procedures as of a date within 90 contain any untrue statement of a material fact or omit to days prior to the completion of this annual report state a material fact necessary to make the statements made, (the "Evaluation Date"); and in light of the circumstances under which such statements (c)have concluded that as of the Evaluation Date, such were made, not misleading with respect to the period covered controls and procedures were effective at ensuring that by this annual report. Also, based on our knowledge, the financial statements, and other financial information included required information isdisclosed on atimely basis.
inthis annual report, fairly present in all material respects the financial condition, results of operations and cash flows of DTE Energy as of, and for, the periods presented. Anthony F.Earley, Jr. We are responsible for establishing and maintaining Chairman, President Chief Executive and disclosure controls and procedures (as defined inSecurities Chief Operating Officer and Exchange Act Rules 13a-14 and 15d-14) and we have: (a)designed such disclosure controls and procedures to ensure that material information ismade known to us by David E.Meador others within our company, particularly during the period Senior Vice President and Chief Financial Officer in which this annual report is being prepared; Independent
........... Audyitors' Report used and significant estimates made by management, Deloitte Sull? Cente as well as evaluating the overall financial statement &Touche Detroit, Michigan 48243-1704 presentation. We believe that our audits provide a To the Board of Directors and Shareholders reasonable basis for our opinion.
of DTE Energy Company Inour opinion, such consolidated financial statements present We have audited the consolidated statement of financial fairly, in all material respects, the financial position of DTE Energy position of DTE Energy Company and subsidiaries (the "Company") Company and subsidiaries at December 31, 2002 and 2001, and 34 as of December 31, 2002 and 2001 and the related consolidated the results of their operations and their cash flows for each of the~ statements of operations, cash flows, and changes in share- three years in the period ended December 31, 2002 in conformity holders' equity and comprehensive income for the each of the with accounting principles generally accepted inthe United three years inthe period ended December 31, 2002. These States of America. financial statements are the responsibility of the Company's As discussed in Note 2to the consolidated financial statements, management Our responsibility isto express an opinion on the Company changed its method of accounting for goodwill and the consolidated financial statements based on our audits. energy trading contracts in 2002. Also, as discussed in Note 2to We conducted our audits in accordance with auditing the consolidated financial statements, the Company changed its standards generally accepted inthe United States of America. method of accounting for derivative instruments and hedging Those standards require that we plan and perform the audit activities in 2001. to obtain reasonable assurance about whether the financial statements are free of material misstatement An audit Dzt~s,7- ToucA4 .L includes examining, on a test basis, evidence supporting DELOITTE &TOUCHE LLP the amounts and disclosures inthe financial statements. February 11, 2003 An audit also includes assessing the accounting principles I l' N " ,
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- I-4 413.
Consolidated Statement of Operations Year Ended December 31 (inMillions, Except Per Share Amounts) 2002 2001 2000 Operating Revenues S 6,749 $ 5,791 $ 4,638 Operating Expenses Fuel, purchased power and gas 2,099 1,919 1,305 Operation and maintenance 2Z416 1,801 1,424 Depreciation, depletion and amortization 759 795 758 Taxes other than income 370 312 296 Merger and restructuring charges (Note 5) 268 25 Total Operating Expenses 5,644 5,095 3,808 Operating Income 1,105 696 830 Other Income and Deductions Interest expense 548 468 336 Preferred stock dividends of subsidiaries 25 15 - Interest income (29) (22) (9) Other income (62) (60) (4) Other expenses 50 76 30 Total other income and deductions 532 477 353 Income Before Income Taxes 573 219 477 Income Tax Provision (Benefit) (Note 9) (59) (110) 9 Income Before Accounting Change 632 329 468 Cumulative Effect of Accounting Change (Note 15) 3 - Net Income $ 632 $ 332 $ 468 Basic Earnings per Common Share (Note 10) Before accounting change $ 3.85 $ 2.15 S 3.27 Cumulative effect of accounting change .02 - Total1 $ 3.85 $ 2.17 $ 3.27 35 Diluted Earnings per Common Share (Note 10) Before accounting change $ 3.83 $ 2.14 $ 3.27 Cumulative effect of accounting change .02 - Total1 $ 3.83 $ 2.16 $ 3.27 Average Common Shares Basic 164 153 143 Diluted 165 154 143 Dividends Declared perCommon Share $ 2.06 $ 2.06 $ 2.06 See Notes to Consolidated Financial Statements 1 iT~ v ( ~j~CT _ _ _ _ _ _ _ _ I Consolidated Statement of Financial Position December 31 tin Millions) 2002 2001 ASSETS Current Assets Cash and cash equivalents $ 133 $268 Restricted cash 237 157 Accounts receivable Customer (less allowance for doubtful accounts of $82 and $57, respectively) 902 745 Accrued unbilled revenues 296 242 Other 237 261 Inventories Fuel and gas 413 345 Materials and supplies 163 160 Assets from risk management and trading activities 224 191 Other 159 110 2,764 2,479 Investments Nuclear decommissioning trust funds 417 417 Other 487 625 904 1,042 Property Property, plant and equipment 17.862 17,073 Less accumulated depreciation and depletion (8,049) (7,524) 9,813 9,549 36 Other Assets Goodwill (Note 4) 2,119 2,003 Regulatory assets (Note 6) 1,197 1,189 Securitized regulatory assets 1,613 1,692 Assets from risk management and trading activities 152 150 Prepaid pension assets 172 435 Other 504 342 5,757 5,811 Total Assets S 19,238 $ 18,881 See Notes to Consolidated Financial Statements _ __ _ _ _ _ _ _ _ ,,I : _ __; 91
( Ib elieve) IN/ INTE6Q/TY Roddy Parker Financial Consolidation Controller December 31 (inMillions, Except Shares) 2002 2001 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 647 $ 581 Accrued interest 115 117 Dividends payable 90 84 Accrued payroll 49 108 Short-term borrowings 414 681 Current portion long-term debt, including capital leases 1,018 517 Liabilities from risk management and trading activities 284 216 Other 596 523 3,213 2,827 Other Liabilities Deferred income taxes 916 1,486 Regulatory liabilities 179 187 Unamortized investment tax credit 168 180 Liabilities from risk management and trading activities 208 310 Liabilities from transportation and storage contracts 523 373 Accrued pension liability 582 32 Nuclear decommissioning 416 412 Other 683 557 3,675 3,537 Long-Term Debt (Note 12) Mortgage bonds, notes and other 5,656 5,892 Securitization bonds 1,585 1,673 Equity-linked securities 191 - Capital lease obligations 82 89 7,514 7,654 Commitments and Contingencies (Notes 6,7,16) Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries Holding Solely Debentures of DTE Energy or Enterprises 271 274 Shareholders' Equity Common stock, without par value, 400,000,000 shares authorized, 167,462,430 and 161,133,959 shares issued and outstanding, respectively 3,052 2,811 Retained earnings 2132 1,846 Accumulated other comprehensive loss (619) (68) 4,565 4,589 Total Liabilities and Shareholders' Equity $ 19,238 $ 18,881 See Notes to Consolidated Financial Statements
Consolidated Statement
..... ......... .... .. of Cash Flows Year Ended December 31 (inMillions) 2002 2001 2000 Operating Activities Net income $ 632 $ 332 $ 468 Adjustments to reconcile net income to net cash from operating activities:
Depreciation, depletion and amortization 759 795 758 Merger and restructuring charges 215 Deferred income taxes (208) (7) (1331 Changes in assets and liabilities, exclusive of changes shown separately (Note 1) (209) (524) (78) Net cash from operating activities 974 811 1,015 Investing Activities Plant and equipment expenditures - regulated (794) 1776) (586) Plant and equipment expenditures - non-regulated (190) (320) (163) Acquisition of MCN Energy, net of cash acquired (1,212) Proceeds from sales of assets 41 216 Restricted cash for debt redemptions (79) (70) 43 Other investments (93) (124) 32 Net cash used for investing activities (1.115) (2,286) (674) Financing Activities Issuance of long-term debt 958 4,254 273 Redemption of long-term debt (613) (1,423) (331) Issuance of preferred securities 190 Redemption of preferred securities (180) Short-term borrowvings, net (261) (282) 116 Capital lease obligations (12) (107) (2) Issuance of common stock 265 Repurchase of common stock ()(438) (70) Capital additions from synfuel partners 22 Dividends on common stock (338) (325) (296) Net cash from (used for) financing activities 6 1,679 (310) 38 Net Increase (Decrease) inCash and Cash Equivalents (135) 204 31 Cash and Cash Equivalents at Beginning of Period 258 64 33 Cash and Cash Equivalents at End of Period $ 133 $ 268 $ 64 See Notes to Consolidated Financial Statements
-; 40Is LI. -
4 Consolidated Statement of Changes inShareholders' Equity and Comprehensive Income Common Stock Retained Accumulated Other (Dollars in Millions, Shares in Thousands) Shares Amounts Earnings Comprehensive Loss Total Balance, December 31, 1999 145,041 S 1,943 $ 1,959 $ -S 3,902 Net income - - 468 -468 Dividends declared on common stock -- (294) -(294) Repurchase and retirement of common stock (2,390) (32) (39) -(71) Unearned stock compensation I - 1 Other - - 3 3 Balance, December 31,2000 142,651 1,912 2,097 - 4,009 Net income - - 332 - 332 Issuance of new shares 29,017 1,060 - - 1,060 Dividends declared on common stock - - (324) - (324) Repurchase and retirement of common stock (10,534) (155) (270) - (425) Unearned stock compensation - (6) - (6) Other - 11 - 11 Net change inunrealized losses on derivatives, net of tax - - - (69) (69) Net change inunrealized gain on investments, net of tax - - - 1 1 Balance, December 31,2001 161,134 2,811 1,846 (68) 4,589 Net income - - 632 - 632 Issuance of new shares 6,426 270 - - 270 Dividends declared on common stock - - (341) - (341) Repurchase and retirement of common stock (98) (1) (2) (3) Pension Obligations (518) (518) Other - (28) (3) (31) Net change inunrealized losses on derivatives, net of tax - - - (33) (33) Balance, December 31, 2002 157,462 $ 3,052 $ 2,132 $ 1619) S 4,565 We did not have other comprehensive income (loss) in 2000. The following table displays comprehensive income (loss) for 2002 and 2001: (inMillions) 2002 2001 39 Net income $ 632 S 332 Other comprehensive income (loss), net of tax: Net unrealized losses on derivatives: Cumulative effect of a change inaccounting principle, net of taxes of $24 - (42) Losses arising during the period, net of taxes of $32 and $29, respectively (60) (53) Amounts reclassified to earnings, net of taxes of $15 and $14, respectively 27 26 (33) (69) Net change inunrealized gain on investments, net of taxes of $1 - 1 Pension obligations, net of taxes of $280 (518) - Comprehensive income $ 81 $ 264 See Notes to Consolidated Financial Statements
I --in ii)LC t5W1-ia Notes to Consolidated Financial Statements NOTE 1 - SIGNIFICANT Basis of Presentation ACCOUNTING POLICIES The accompanying consolidated financial statements are Corporate Structure prepared using accounting principles generally accepted in the United States of America. These accounting principles DTE Energy is an exempt holding company under the require us to use estimates and assumptions that impact Public Utility Holding Company Act of 1935. DTE Energy reported amounts of assets, liabilities, revenues, expenses, was incorporated in Michigan in 1995 and is the parent and the disclosure of contingent assets and liabilities. company of the following subsidiaries: Actual results may differ from our estimates.
- Detroit Edison Company; We reclassified some prior year balances to match the
- International Transmission Company (ITC); 2002 financial statement presentation.
- DTE Enterprises Inc. IEnterprises); and Revenues Other subsidiaries engaged in energy marketing and trading, Revenues from the sale and delivery of electricity, and the sale, energy services and various other electricity, coal and gas delivery and storage of natural gas are recognized as services related businesses. are provided. Detroit Edison and MichCon record revenues for Detroit Edison is a regulated Michigan public utility engaged electric, gas and steam heating services provided but unbilled in the generation, purchase, distribution and sale of electric at the end of each month. Under agreement with the MPSC, energy to 2.1 million customers in southeast Michigan. Detroit Edison is not allowed to raise rates through 2003.
Through December 2001, MichCon's rates included a compo-ITC is regulated by the Federal Energy Regulatory Commission nent for cost of gas sold that was fixed at $2.95 per thousand (FERC) for the transmission of electric energy. In December cubic feet (Mcf). In 2002, MichCon implemented a gas cost 2002, we entered into a definitive agreement to sell ITC. recovery (GCR) mechanism that will recover the prudent and See Note 4 for more detail. reasonable cost of gas sold subject to annual proceedings before the MPSC. On May 31, 2001, DTE Energy completed the acquisition of MCN Energy, now referred to as Enterprises. See Note 4 for Through December 2002, our Energy Marketing & Trading further discussion. Enterprises is an exempt holding company segment recorded in revenues unrealized gains and losses under the Public Utility Holding Company Act of 1935. on energy trading contracts (commodity forwards and Enterprises is a Michigan corporation primarily engaged in financial derivatives) and corresponding physical positions. natural gas production, gathering, processing, transmission, The recognition of unrealized gains and losses associated storage, distribution and energy marketing. Enterprises largest with energy trading activities was required under the subsidiary is MichCon, a natural gas utility serving 1.2 million Financial Accounting Standards Board (FASB) Emerging customers throughout the state of Michigan. Issues Task Force (EITF) Issue No. 98-10, "Accounting for Energy Trading Activities and Risk ManagementActivities." 40 Both Detroit Edison and MichCon are regulated by With the rescission of EITF Issue No. 98-10 in the third the Michigan Public Service Commission IMPSC). quarter of 2002, the recognition of unrealized gains and Detroit Edison is also regulated by the FERC. losses is only permitted on energy trading contracts meeting References in this report to "we", "us" and "our" are to the definition of a derivative under Statement of Financial DTE Energy and its subsidiaries, collectively. Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." Accordingly, Principles of Consolidation the company no longer records unrealized gains and losses We consolidate all majority owned subsidiaries and investments on physical positions utilized in our energy trading operations in entities in which we have controlling influence. Non-majority as discussed inthe Inventories policy and Note 2- New owned investments are accounted for using the equity method Accounting Pronouncements. when the company is able to influence the operating policies EITF Issue No. 98-10, permitted either gross or net presentation of the investee. Non-majority owned investments include of mark to market gains and losses on energy trading contracts investments inlimited liability companies, partnerships or joint (including those to be physically settled) in the consolidated ventures. When we do not influence the operating policies of statement of operations. Based on discussions held at the an investee, the cost method is used. The company eliminates June 2002 meeting of the EITF and statements made by the all intercompany balances and transactions. I 61..,.
!1 c.r -, I -I II
IV. i a ( Ibelieve) /IN DING RMYBFIT I Ralph Bigelow Crew Leader DTE Energy Distribution SEC staff, we concluded that net presentation is preferable. Property, Retirement and Maintenance, In the past we presented such amounts on a gross basis. and Depreciation and Depletion As of December 31, 2002, we have presented such amounts on a net basis, and all presented prior periods have been Summary of property by classification as of December 31: reclassified on a consistent basis. (inMillions) 2002 2001 Comprehensive Income Property, Plant and Equipment Electric Utility We comply with SFAS No. 130, 'Reporting Comprehensive Generation $ 6,515 $ 6,165 Income,' that established standards for reporting comprehen-Distribution 5,606 5,407 sive income. SFAS No. 130 defines comprehensive income as Transmission 813 802 the change in common shareholders' equity during a period from transactions and events from non-owner sources, Total Electric Utility 12,934 12,374 including net income. Significant amounts recorded to Gas Utility comprehensive income include minimum pension liabilities Distribution 1,903 1,852 as prescribed by SFAS No.87, "Employers'Accounting for Storage 212 208 Pensions," and unrealized gains and losses associated with Other 906 903 cash flow hedging activities under SFAS No. 133. Total Gas Utility 3,021 2,963 Non-regulated and other 1,907 1,736 Inventories Total Property Plant and Equipment 17,862 17,073 Fuel inventory and materials and supplies at Detroit Edison, Less Accumulated Depreciation and Depletion MichCon and other subsidiaries are valued at average cost. Electric Utility Generation (3,117) (2,948) Gas inventory at MichCon is determined using the last-in, Distribution (2,207) (2,062) first-out (LIFO) method. At December 31, 2002, the replacement Transmission (425) (407) cost of gas remaining in storage exceeded the $55 million LIFO Total Electric Utility (5,749) (5,417) cost by $187 million. At December 31, 2001, the replacement Gas Utility cost exceeded the $6.2 million LIFO cost by $90.9 million. Distribution (1,127) (1,070) During 2001, MichCon liquidated 2.1 billion cubic feet (Bcf) Storage (98) (97) of prior years' LIFO layers at an average cost of $0.39 per Mcf. Other (491) (459) MichCon's average gas purchase rate in 2001 was $2.83 per Mcf higher than the average LIFO liquidation rate. Applying Total Gas Utility (1,716) (1,626) LIFO cost in valuing the liquidation, as opposed to using Non-regulated and other (584) (481) the average purchase rate, decreased 2001 cost of gas by Total Accumulated Depreciation and Depletion (8,049) (7,524) $5.8 million and increased earnings by $3.8 million, net of taxes. Net Property, Plant and Equipment $ 9,813 $ 9,549 Through December 2002, the Energy Marketing & Trading Property is stated at cost and includes construction-related segment used the fair value method to price gas inventories. labor and materials. The cost of properties retired plus removal To comply with new accounting requirements resulting from 41 costs, less salvage, at Detroit Edison and MichCon are charged the rescission of EITF Issue No. 98-10, the Energy Marketing to accumulated depreciation. & Trading segment changed to the average cost method for Rts gas inventories, effective January 2003. Expenditures for maintenance and repairs are charged to expense when incurred, except for Fermi 2. Approximately $25 million of expenses related to the anticipated Fermi 2 refueling outage scheduled for 2003 are being accrued on a pro-rata basis over an 18-month period that began in November 2001. We base depreciation provisions for utility property at Detroit Edison and MichCon on straight-line and units of production rates approved by the MPSC. The composite depreciation rate for Detroit Edison was 3.4% in 2002, 2001 and 2000. The composite depreciation rate for MichCon was 3.6% in 2002 and 3.9% in 2001. 1 1 ']A -P o"01, .)I.3-1j p e:p
- i. . A_# -1 4 it It
11i4-Ci Ca ; (tmi___-__ The average estimated useful life for each class of property, Stock-Based Compensation plant and equipment as of December 31, 2002 follows: We have a stock-based employee compensation plan, which Estimated Useful Lives inYears is described in Note 18. The plan permits the awarding of Utility Generation Distribution Transmission various stock awards, including options, restricted stock and performance shares. We accountfor stock awards underthe Electric 39 37 36 plan under the recognition and measurement principles of Gas N/A 26 29 Accounting Principles Board (APB) Opinion No. 25, "Accounting Non-regulated property is depreciated over its estimated for Stock Issued to Employees." No compensation cost related useful life using straight-line, declining-balance or to stock options is reflected in net income, as all options units-of-production methods. granted had an exercise price equal to the market value of the underlying common stock on the date of grant The recognition Natural Gas and Oil Exploration and Production provisions under SFAS No. 123, "Accounting for Stock-Based We follow the successful efforts method of accounting for Compensation," require the recording of compensation expense, investments in oil and gas properties. Under the successful for stock options equal to their fair value at date of grant as efforts method, we capitalize the costs of property acquisitions, determined using an option pricing model. The following table successful exploratory wells, development costs, support equip- illustrates the effect on net income and earnings per share if we ment and facilities. When a well is classified as non-productive, had recorded compensation expense for options granted under costs associated with that well are expensed. We also expense the fair value recognition provisions of SFAS No. 123. production costs, overheads, and exploration costs other than for (inMillions, except per share amounts) 2002 2001 2000 exploratory drilling. Depreciation and depletion of proven oil and Net Income As Reported $ 632 $ 332 $ 468 gas properties are determined using the units-of-production Less: Total Stock-based Expense (1) (7) (9) (2) method over the life of the proven reserves. Pro Forma Net Income $ 625 $ 323 $ 466 Long-Lived Assets Earnings Per Share Basic - as reported S 3.85 $ 2.17 $ 3.27 Long-lived assets that we own are reviewed for impairment Basic - pro forma S 3.81 $ 2.11 $ 3.26 whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If the Diluted - as reported $ 3.83 S 2.16 $ 3.27 carrying amount of the asset exceeds the expected future cash Diluted - pro forma $ 3.79 S 2.10 $ 3.25 flows generated by the asset, an impairment loss is recognized resulting in the asset being written down to its estimated fair (1)Expense determined using a Black-Scholes based option pricing model. value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. Issuance of Stock by Equity Investees DTE Energy and Mechanical Technology Incorporated formed Software Costs Plug Power Inc. to design and develop on-site electric fuel cell We capitalize the cost of software developed for internal use. power generation systems. In 1999, Plug Power completed an These costs are amortized on a straight-line basis over five years. initial public offering (IPO) of common stock at$15 per share. Amortization begins when the software project is complete. After the IPO,we owned approximately 32% of Plug Power's outstanding common stock. Since Plug Power is considered a Excise and Sales Taxes development stage company, generally accepted accounting We record the billing of excise and sales taxes as receivables principles require us to record gains and losses from Plug Power with an offsetting payable to the applicable taxing authority, stock issuances as an adjustmentto equity. As a result of Plug with no impact on the statement of operations. Power's IPO, we recorded an increase of $44 million inour investment and an after-tax increase of $28 million to equity Deferred Debt Costs in 1999. InJuly 2001, Plug Power completed a second public The costs related to the issuance of long-term debt are offering of common stock at$12 per share. After this public deferred and amortized over the life of each debt issue. offering, we owned approximately 28% of Plug Power's outstanding In accordance with MPSC regulations applicable to Detroit common stock and recorded an increase of $17 million in our Edison and MichCon, the unamortized discount, premium investment and an after-tax increase of $11 million to equity. and expense related to debt redeemed with a refinancing are amortized over the life of the replacement issue. Discount, Consolidated Statement of Cash Flows premium and expense on early redemptions of debt associated We consider investments purchased with a maturity of three with non-regulated operations are charged to earnings. months or less to be cash equivalents. Cash contractually designated for debt service is classified as restricted cash.
I (inMillions) 2002 2001 2000 Business Combinations Changes inAssets and Liabilities, Exclusive of Changes Shown Separately Effective July 1,2001 we adopted SFAS No. 141, "Business Combinations."SFAS No. 141 requires that the purchase Accounts receivable, net $ (157) $ 17 $ (118) method of accounting be used for all business combinations Accrued unbilled receivables (54) (19) (22) initiated after June 30, 2001. The adoption of SFAS No. 141 did Accrued gas cost recovery revenue (5) (14) - not have an impact on the consolidated financial statements. Inventories (71) (76) 8 Accounts payables 66 (178) 134 Goodwill and Other Intangible Assets Income taxes payable (8) (105) 34 Effective January 1,2002, we adopted SFAS No. 142, 'Goodwill General taxes (36) 22 5 and Other IntangibleAssets,"which addresses the financial Risk management and trading activities 69 (80) 8 accounting and reporting standards for the acquisition of Other (13) (91) (127) intangible assets outside of a business combination and for
$ (209) $ (524) $ (78) goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill Other cash and non-cash investing and financing activities be separately disclosed from other intangible assets in the for the years ended December 31 were as follows: balance sheet. Additionally under this statement, goodwill is no longer amortized, but must be reviewed at least annually (inMillions) 2002 2001 2000 for impairment The provisions of this accounting standard Supplementary Cash also require the completion of a transitional impairment test Flow Information within six months of adoption, with any impairment treated Interest paid (excluding as a cumulative effect of a change in accounting principle.
interest capitalized) $ 551 S 409 $ 334 We completed the transitional goodwill impairment test as of Income taxes paid 167 45 104 January 1,2002 and the annual goodwill impairment test as of Noncash Investing and October 1,2002 and determined that no impairment existed. Financing Activities Notes received from sale of property 217 - - In accordance with SFAS No. 142, we discontinued Issuance of equity-linked securities 21 - - the amortization of goodwill effective January 1,2002. A reconciliation of previously reported net income and Issuance of common stock for acquisition of MCN Energy - 1,060 earnings per share to the amounts adjusted for the exclusion of goodwill amortization follows: See the following notes for other accounting policies (inMillions, except per share amounts) 2001 2000 impacting our financial statements. Net Income Note Tiee As reported $ 332 $ 468 2 New Accounting Pronouncements Add: Goodwill amortization 31 2 6 Regulatory Matters As adjusted $ 363 $ 470 9 Income Taxes 15 Financial & Other Derivative Instruments 17 Retirement Benefits and Trusteed Assets Basic Earnings Per Share As reported $ 2.17 $ 3.27 NOTE 2 - NEW ACCOUNTING Add: Goodwill amortization .20 .01 PRONOUNCEMENTS As adjusted $ 2.37 S 3.28 Derivatives Diluted Earnings Per Share Effective January 1,2001, we adopted SFAS No. 133, As reported $ 2.16 $ 3.27
'Accounting for Derivative Instruments and Hedging Activities,' Add: Goodwill amortization .20 .01 as amended. SFAS No. 133 establishes accounting and As adjusted $ 2.36 $ 3.28 reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that companies recognize all In connection with the adoption of SFAS No. 142, we also derivatives as either assets or liabilities measured at fair value reassessed the useful lives and the classification of identifiable on the statement of financial position. SFAS No. 133 provides intangible assets and determined that they continue to be an exception for certain contracts that qualify as 'normal appropriate. Our intangible assets consist primarily of software purchases and sales." To qualify for this exception, certain and are subject to amortization. Intangible assets amortization criteria must be met, including a high probability the contract expense was $46 million in 2002 and $48 million in 2001. There will result in physical delivery. See Note 15 - Financial and were no material acquisitions of intangible assets during 2002.
Other Derivative Instruments for additional information. The gross carrying amount and accumulated amortization of
I _ _ _ X 1,_ _ _ _ _ __ _ _ __'M I' intangible assets at December 31, 2002 were $519 million and Reporting Gains and Losses from Extinguishment
$313 million, respectively. Amortization expense of intangible of Debt and Accounting for Leases assets is estimated to be $46 million annually for 2003 through 2007. SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Asset Retirement Obligations Corrections,"eliminates SFAS No. 4 "Reporting Gains and On January 1,2003, we adopted SFAS No. 143, "Accounting for Losses from Extinguishment of Debt" and allows for only Asset Retirement Obligations, "which requires the fair value those gains or loses on the extinguishment of debt that meet of an asset retirement obligation be recognized inthe period in the criteria of extraordinary items to be treated as such in the which itis incurred. Itwill applyto legal obligations associated financial statements. SFAS No. 145 also amends SFAS No. 13 with the retirement of long-lived assets resulting from the acqui- "Accounting for Leases"to require sale-leaseback accounting sition, construction, development and (or) the normal operation for certain lease transactions. We adopted the provisions of of a long-lived asset When a new liability is recorded, an entity this statement in 2002 with no impact on the consolidated will capitalize the costs of the liability by increasing the carrying financial statements.
amount of the related long-lived asset The liability is accreted Exit and Disposal Activities to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset SFAS No. 146, "Accounting for CostsAssociatedwith Exit or Upon settlement of the liability, an entity settles the obligation DisposalActivities, requires that the liability for costs associated for its recorded amount or incurs a gain or loss upon settlement with exit or disposal activities be recognized when incurred, rather than at the date of a commitment to an exit or disposal We have completed a preliminary review and have identified plan. Application of SFAS No. 146 is required prospectively for a legal retirement obligation for the decommissioning costs exit or disposal activities entered into on or after January 1,2003. for our Fermi 2 nuclear plant To a lesser extent, we have retirement obligations for our synthetic fuel operations, gas Stock-Based Compensation production facilities, asphalt plant gas gathering facilities and SFAS No. 148, "Accounting for Stock-Based Compensation - various other operations. As to regulated operations, we Transition and Disclosure - an amendment to FASB No. 123," believe that adoption of SFAS No. 143 results primarily intiming provides alternative methods of transition for a voluntary differences in the recognition of legal asset retirement costs change to the fair value based method of accounting for that we are currently recovering in rates and will be deferring stock-based employee compensation. In addition, this such differences under SFAS No. 71. statement requires prominent disclosures in both annual and interim financial statements about the method of accounting As a result of adopting SFAS No. 143, we expect to record a for stock-based employee compensation and the effect of the capitalized asset of approximately $300 million, a corresponding method used on reported results. retirement obligation liability of approximately $500 million, a cumulative effect amount related to regulated operations as a Energy Trading Contracts regulatory asset of approximately $200 million and a cumulative EITF Issue No. 98-10, "Accounting for Contracts Involved in effect charge against earnings of $10 million to $15 million. We will finalize these preliminary estimates inthe first quarter of 2003. Energy Trading and Risk Management Activities," permitted either gross or net presentation of mark to market gains and SFAS No. 143 also requires the quantification of the estimated losses on energy trading contracts (including those to be 44 cost of removal obligations, arising from other than legal obliga- physically settled) in the consolidated statement of operations. tions, which have been accrued through depreciation charges. Based on discussions held at the June 2002 meeting of the At January 1,2003 we estimate that we had approximately $700 EITF and statements made by the SEC staff, we concluded that million of previously accrued asset removal costs related to our net presentation is preferable. In the past we presented such regulated operations, for other than legal obligations, included amounts on a gross basis. As of December 31, 2002, we have in accumulated depreciation. presented such amounts on a net basis, and all presented prior periods have been reclassified on a consistent basis. Long-Lived Assets The table below details the impact of the change in SFAS No. 144, "Accounting for the Impairment or Disposal of reporting gains and losses on energy trading contracts on Long-LivedAssets"supersedes SFAS No. 121, "Accounting our consolidated operating revenues and fuel, purchased for the Impairment of Long-Lived Assets and for Long-Lived power and gas expenses. This reclassification had no Assets to Be Disposed Of." This statement establishes a single impact on margins and net income. accounting model for long-lived assets to be disposed of by sale, whether previously held and used, or newly acquired. We adopted this statement on January 1,2002, with no impact on the consolidated financial statements.
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(inMillions) 2002 2001 2000 In the normal course of business we enter into a variety Revenues: of contractual guarantees. We may guarantee another Operating Revenues -Gross $ 9,902 $ 7,849 $ 5,597 entity's obligation in the event they fail to perform. We may provide guarantees in certain indemnification Less: Reclassification (3,153) (2,058) (959) agreements. Finally, we may provide indirect guarantees Operating Revenues - Net S 6,749 $ 5,791 $ 4,638 of the indebtedness of others. Below are the details Expenses: of specific material guarantees we currently provide. Fuel, Purchased Power Our other guarantees are not individually material and and Gas - Gross $ 5,252 $ 3,977 $ 2,264 total approximately $100 million at December 31, 2002. Less: Reclassification (3,153) (2,058) (959) Parent Company Guarantee of Subsidiary Obligations Fuel, Purchased Power and Gas- Net $ 2,099 $ 1,919 S 1,305 We have issued guarantees for the benefit of various non-regulated subsidiarytransactions. In the eventthat Under EITF Issue No. 98-10, "Accounting for Contracts Involved DTE Energy's credit rating is downgraded below investment in Energy Trading and Risk ManagementActivities, "companies grade, certain of these guarantees would require us to post were required to use mark to market accounting for contracts cash or letters of credit valued at approximately $200 million utilized in energy trading activities. EITF Issue No. 98-10 was at December 31,2002. This estimated amountfluctuates based rescinded in October 2002, and energy trading contracts must upon the provisions and maturities of the underlying agreements. now be reviewed to determine if they meet the definition of a Sale of Tax Credit Properties derivative under SFAS No. 133. As discussed above in the note, SFAS No. 133 requires all derivatives to be recognized inthe We have provided certain guarantees and indemnities statement of financial position as either assets or liabilities (guarantees) in conjunction with the sales of interests intwo of measured at their fair value and sets forth conditions inwhich our synfuel facilities. The guarantees cover general commercial, a derivative instrument may be designated as a hedge. environmental and tax-related exposure and will survive until SFAS No. 133 also requires that changes inthe fair value of 90 days after expiration of all applicable statue of limitations, derivatives be recognized in earnings unless specific hedge or indefinitely, depending on the nature of the guaranty. accounting criteria are met Energy trading contracts not We are unable to estimate our maximum liability under the meeting the definition of a derivative would be accounted for guarantees as our exposure is contingent upon the occurrence of under settlement accounting, effective October 25,2002 for new certain events, including the amount of tax credits generated. contracts and effective January 1,2003 for existing contracts. Consolidation of Variable Interest Entities Additionally, inventory utilized in energy trading activities FASB Interpretation No. 46 requires variable interest entities, accounted for underthe fair value method of accounting as pre- previously referred to as special-purpose entities or off-balance scribed by Accounting Research Bulletin (ARB) 43 is no longer sheet structures, to be consolidated by a company if that permitted. DTE Energy's Energy Marketing & Trading segment company is subject to a majority of the risk of loss from the used gas inventory in its trading operations and switched to the entity's activities or is entitled to receive a majority of the entity's average cost inventory accounting method in January 2003. returns or both. The consolidation provisions of Interpretation Effective January 1, 2003, DTE Energy no longer applies EITF No. 46 apply immediately to variable interest entities created Issue No. 98-10 to energy contracts and ARB 43 to gas inventory. after January 31, 2003 and to existing entities inthe first fiscal As a result of discontinuing the application of these accounting year or interim period beginning afterJune 15, 2003. Certain 45 principles, we expect to record a cumulative effect of account- disclosure provisions apply in financial statements issued ing change that will reduce net income for the first quarter of after January 31, 2003. 2003 by approximately $40 million. We believe that it is reasonably possible that we will Guarantor's Accounting and Disclosure consolidate the following entities upon the adoption of FASB Interpretation No. 46 in the third quarter of 2003. FASB Interpretation No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the In 1997, Enterprises' 50%-owned partnership, Washington 10 obligation undertaken in issuing the guarantee. It also requires Storage Partnership (Washington 10), entered into a leveraged disclosure ininterim and annual financial statements of is lease transaction to finance the conversion of a depleted obligations under certain guarantees it has issued. The initial natural gas reservoir into a 42 Bcf storage facility. The storage recognition and measurement provisions of Interpretation facility began operations in mid-1999 and cost $160 million to No. 45 are to be applied prospectively to guarantees issued develop. Enterprises has entered into a contract with or modified after December 31, 2002. The disclosure Washington 10 to market 100% of the capacity of the storage requirements are effective for financial statements for field through 2029. Under the terms of the marketing contract, periods ending after December 15, 2002.
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- I Enterprises is obligated to generate sufficient revenues to recoverable regulatory assets not recognized prior to the cover Washington 10 lease payments and certain operating 2002 fourth quarter application of SFAS No. 71. Prior period costs, which average approximately $15 million annually. financial statements have not been restated due to the immaterial effect of retroactively applying SFAS No. 71 to In 1999, a trust was established to acquire certain railcars and Detroit Edison's generation business.
other coal transportation-related equipment for lease to Detroit Edison. The trust issued $101 million of secured notes and trust NOTE 4 - ACQUISITIONS certificates, due in 2009, to finance the railcars and other AND DISPOSTIONS equipment. Detroit Edison is unconditionally obligated to make rental payments in amounts that are sufficient to pay all Acquisition of MCN Energy payments of principal and interest on the notes and the yield On May 31, 2001, DTE Energy completed the acquisition of on the certificates. Tale to the railcars and other equipment MCN Energy by acquiring all of its outstanding shares of common will nottransferto Detroit Edison atthe end of the lease term stock for a combination of cash and shares of our common stock and there are no options to renew the lease at its expiration. See Note 10 - Common Stock and Earnings per Share herein The lease agreement includes an option on the part of Detroit for additional information. We purchased the outstanding Edison to purchase the equipment at the end of the lease term. common stock of MCN Energy for $2.3 billion and assumed If the purchase option is not exercised, Detroit Edison must existing MCN Energy debt and preferred securities of $1.5 billion. make a termination payment equal to the unamortized note balance and will be responsible for arranging an orderly We accounted forthe acquisition using the purchase method disposition of the railcars and equipment. and accordingly allocated the purchase price to the fair value of the assets acquired and liabilities assumed. The exc6ss of the ' NOTE 3- CHANGE IN purchase price over the fair value of net assets acquired totaled ACCOUNTING FOR REGULATION $2.1 billion and was classified as goodwill. We began amortizing In 1998, based on MPSC orders, the Power Generation business goodwill on June 1,2001, on astraight-line basis using a40-year of Detroit Edison started transitioning to market-based rates with life. Inaccordance with the adoption of SFAS No. 142 on the start of a customer choice program. In compliance with EITF January 1,2002, the amortization of goodwill ceased, and Issue No. 97-4, "Deregulation of the Pricing of Electricity, "we goodwill istested for impairment on an annual basis. ceased application of SFAS No. 71, "Accounting for the Effects The following unaudited pro forma summary presents informa-of Certain Types of Regulation,"for the generation business in tion about the company as if the acquisition became effective 1998. Since that time, there have been significant legislative and at the beginning of the respective periods. The pro forma regulatory changes in Michigan that have resulted inour gener- amounts include the impact of certain adjustments, such as ation business being fully regulated with cost-based ratemaking. acquiring the operations of MCN Energy and issuing $1.35 On June 5,2000, the Customer Choice and Electric Reliability billion of debt and 29 million shares of common stock to finance Act (PA 141) was enacted into law providing the regulatory the acquisition. The pro forma amounts do not reflect the framework to maintain cost-based rates for retail customers benefits from synergies we are receiving as a result of and ensuring the recovery of all amounts of generation-related combining operations, do not reflect the actual results that stranded costs from choice customers. Subsequent MPSC would have occurred had the companies been combined for orders required a cost-based methodology to set atransition the periods presented, and are not necessarily indicative of charge applicable to choice customers for recovery of our future results of operations of the combined companies.
.4.6 stranded costs. Since rates for retail customers and transition Pro Forma charges for choice customers are set by the regulator, recover Year Ended December 31 Detroit Edison's generation costs and are billed and recovered (inMillions, except per share amounts) 2001 2000 from retail and choice customers, the criteria of SFAS No. 71 Operating revenues $ 9,393 $ 8,388 are satisfied. Inaddition, we have both the legislative and Income before accounting change $ 534 $ 426 regulatory authority to defer regulatory costs and to begin Netincome $ 537 $ 426 recovery of such costs starting in 2004 after the PA 141 Basic earnings per share:
mandated rate freeze expires. As a result of discussions with the SEC staff, the SEC has no objection to Detroit Edison Before accounting change $ 3.23 $ 2.48 resuming application of SFAS No. 71 for its generation Total $ 3.25 $ 2.48 business. Detroit Edison applied SFAS No. 71 starting inthe Diluted earnings per share: fourth quarter of 2002 and recorded $15 million of additional Before accounting change $ 3.21 $ 2.48 regulatory assets for the equity component of Allowance Total $ 3.23 S 2.48 for Funds Used During Construction and costs related to reacquired debt that was refinanced with lower cost debt Included in the $15 million regulatory asset is$11 million of IA4.
- 0 +t4it The following table summarizes the estimated fair values of the The steam heating business had assets of $6million at assets acquired and liabilities assumed atthe date of acquisition: December 31, 2002, and had net losses of $12 million in 2002, net income of $3million in2001 and a net loss of $18 million in 2000.
(inMillions) At May 31, 2001 See Note 16 - Commitments and Contingencies. Current assets, net of cash acquired $ 853 Investments 52 NOTE 5 - MERGER AND Property, plant and equipment, net 1,628 RESTRUCTURING CHARGES Assets held for sale 245 On May 31,2001, we completed the acquisition of MCN Energy. Goodwill 2,077 The following costs were incurred: Other assets 1,216 Total assets acquired 6,071 (in Millions) 2001 2000 Current liabilities (1,472) Merger related S 27 S 25 Intangible liabilities (390) Restructuring 241 Other liabilities (721) Total pre-tax $268 $ 25 Preferred securities (273) Total net of tax $175 $ 16 Long-term debt (940) Total liabilities assumed (3,796) Merger related charges represent systems integration, Net assets acquired $ 2,275 relocation, legal, accounting and consulting costs. Restructuring charges were primarily associated with a Disposition of International Transmission Company work force reduction plan. The plan included early retirement incentives and voluntary separation agreements for 1,186 In December 2002, we entered into a definitive agreement employees, primarily in overlapping corporate support areas. with affiliates of Kohlberg Kravis Roberts & Co. and Trimaran Approximately $53 million of the merger and restructuring Capital Partners, LLC providing for the sale of ITC for charges were paid as of December 31, 2001 and remaining approximately $610 million in cash. Following receipt of benefit payments have been or will be paid from retirement plans. regulatory approvals and resolution of other contingencies, it is anticipated that the transaction will close in the NOTE 6 - REGULATORY MATTERS first quarter of 2003 and generate a net of tax gain of approximately $75 million. Regulation Detroit Edison and MichCon are subject to the regulatory As provided in FERC regulations, Detroit Edison will continue to jurisdiction of the MPSC, which issues orders pertaining have fair and open access to Michigan's electric transmission to rates, recovery of certain costs, including the costs of network following the sale. The ITC electric transmission system generating facilities and regulatory assets, conditions of will continue to be operated by the Midwest Independent System service, accounting and operating-related matters. Operator, a regional transmission operator. Under the terms of the Detroit Edison isalso regulated by the FERC with respect sale agreement, ITC will seek FERC approval to cap transmission to financing authorization and wholesale electric activities. rates charged to Detroit Edison's customers at current levels until December 31, 2004. Thereafter, rates would be subject to The operations of Detroit Edison, MichCon, and ITC meet the adjustment by the FERC. criteria of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." This accounting standard recognizes the ITC had net property of $387 million at December 31, 2002 and 47. cost-based ratemaking process, which results in differences in .. had net income of $42 million in 2002 and $15 million in 2001 the application of generally accepted accounting principles from May 31, 2001 when Detroit Edison distributed 100% of between regulated and non-regulated businesses. SFAS No. 71 the shares of ITC to DTE Energy. requires the recording of regulatory assets and liabilities for Disposition of Detroit Edison's certain transactions that would have been treated as revenue Steam Heating Business and expense in non-regulated businesses. Continued applicability of SFAS No. 71 requires that rates be designed to In January 2003, we sold the steam heating business of Detroit recover specific costs of providing regulated services and be Edison to Thermal Ventures II, LLP. This disposition is consistent charged to and collected from customers. Management believes with DTE Energy's strategy of divestiture of non-strategic assets. that currently available facts support the continued application of Due to the continuing involvement of Detroit Edison in the steam SFAS No. 71 to these businesses. Future regulatory changes or heating business, including the commitment to purchase $176 changes inthe competitive environment could result in the million insteam for resale through 2008, fund certain capital company discontinuing the application of SFAS No. 71 for some improvements and guarantee the buyers credit facility, we will or all of its businesses and require the write-off of the portion of record a net of tax loss of approximately $13 million inthe first any regulatory asset or liabilitythat was no longer probable of quarter of 2003. As a result of our continuing involvement, this recovery through regulated rates. transaction is not considered a sale for accounting purposes.
6 * -46 a rII
;1 I_-I cI1Ef+/- ~* a Regulatory Assets and Liabilities As required by PA 141, the MPSC conducted a proceeding to develop a methodology for calculating the net stranded costs The following are the balances of the regulatory assets associated with electric Customer Choice. In a December 2001 and liabilities at December 31: order, the MPSC determined that Detroit Edison could recover' (inMillions) 2002 2001 net stranded costs associated with the fixed cost component Assets of its electric generation operations. Specifically, there would Securitized regulatory assets $ 1,613 $ 1,692 be an annual filing with the MPSC comparing the receipt of Recoverable income taxes related revenues associated with the fixed cost component of its to securitized regulatory assets 884 942 generation services to the revenue requirement for the fixed Other recoverable income taxes 118 123 cost component of those services, inclusive of an allowance Stranded costs and other costs for the cost of capital. Any resulting shortfall in recovery, recoverable under PA 141 21 - net of mitigation, would be considered a net stranded cost Unamortized loss on reacquired debt 36 37 The MPSC, in its December 2001 order, also determined that Electric Choice implementation costs 76 53 Detroit Edison had no net stranded costs in2000 and consequently Deferred environmental costs 29 29 established a zero net stranded cost transition charge for billing Other 33 5 purposes in 2002. The MPSC authorized Detroit Edison to Total Assets $ 2,810 $ 2,881 establish a regulatory asset to defer recovery of its incurred stranded costs, subject to review in a subsequent annual net Liabilities stranded cost proceeding. The MPSC also determined that Refundable income taxes $ 142 $ 144 Detroit Edison should provide a full and offsetting credit for Excess securitized savings 37 43 the securitization and tax charges applied to electric Customer Total Liabilities S 179 $ 187 Choice bills in2002. In addition, the MPSC ordered an additional' credit on bills equal to the 5%rate reduction realized by full Electric Industry Restructuring service customers. Both credits were to be funded from Electric Rates, Customer Choice and Stranded Costs - savings derived from securitization. The December 2001 In June 2000, PA 141 became effective. PA 141 provided Detroit order, coupled with lower wholesale power prices in 2002, Edison with the rightto recover stranded costs, codified and has encouraged additional customer participation in the established January 1,2002 as the date for full implementation of electric Customer Choice program and has resulted in the loss, the MPSC's existing Electric Choice program, and required the of margins attributable to generation services. In May 2002, MPSCto reduce residential electric rates by 5%. Atthattime, the MPSC denied Detroit Edison's request for rehearing and Public Act 142 (PA 142) also became effective. PA 142 provided clarification. In June 2002, Detroit Edison filed an appeal of the for the recovery through securitization of 'qualified costs" which MPSC order at the Michigan Court of Appeals, challenging the consist of an electric utility's regulatory assets, plus various costs, legality of specific aspects of the MPSC order. The Court of associated with, or resulting from, the establishment of a compet- Appeals has not yet issued a decision on this appeal.
itive electric market and the issuance of securitization bonds. In May 2002, Detroit Edison submitted its 2002 net stranded Acting pursuantto PA 141, in an order issued in June 2000, the cost filing with the MPSC. The filing provides refinements to the MPSC reduced Detroit Edison's residential electric rates by 5% MPSC Staff's calculation of net stranded costs that was adopted and imposed a rate freeze for all classes of customers through in the December 2001 order, seeks more timely recovery of net 2003. In April 2001, commercial and industrial rates were lowered stranded costs, and addresses issues raised by the continuation: 5.48 by 5% as a result of savings derived from the issuance of of securitization offsets and rate reduction equalization credits. securitization bonds in March 2001, as subsequently discussed. Detroit Edison's filing supports the following conclusions: (i) Detroit Edison had no net stranded costs in 2000 and $13 The legislation also contains provisions freezing rates through million of recoverable net stranded costs attributable to electric 2003 and preventing rate increases for residential customers Customer Choice in 2001; (ii) Detroit Edison requested recovery through 2005 and for small business customers through 2004. of 2001 net stranded costs through the use of excess securitiza-Certain costs may be deferred and recovered once rates can be tion savings; (iii) Detroit Edison expects to incur additional net increased. This rate cap may be lifted when certain market test stranded costs in 2002 and 2003 as a result of increased electric provisions are met, specifically, when an electric utility has no Customer Choice participation; and (iv) Detroit Edison recom-more than 30% of generation capacity in its relevant market with mended that a pro-forma or forward looking transition charge consideration for capacity needed to meet a utility's responsibility be approved for billing during the remainder of 2002 and for 2003 to serve its retail customers. Statewide, multi-utility transmission to eliminate the time lag between the occurrence and recovery system improvements also are required. Detroit Edison expects of net stranded costs inherent in the methodology approved in that these market and transmission improvement conditions will the December 2001 order. In November 2002, the MPSC Staff be met and the rate cap will not continue after the dates and other interveners submitted their 2002 net stranded cost specified inthe legislation. filings. In the fourth quarter of 2002, Detroit Edison recorded a regulatory asset of $21 million representing 2002 net stranded _ s I :_ .
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- W costs and the deferral of other costs recoverable under Securitization LLC and the $1.75 billion of securitization bonds PA 141. The effect of recording the regulatory asset increased appear on the company's consolidated statement of financial 2002 earnings by $13 million, net of taxes. The MPSC has not position. The company makes no claim to these assets.
yet acted upon this Detroit Edison filing. Ownership of such assets has vested in the Securitization LLC and been assigned to the trustee for the Securitization Bonds. In several orders issued in June 2000, the MPSC determined Funds collected by Detroit Edison, acting in the capacity of a that adjusting rates for changes in fuel and purchased power servicer for the Securitization LLC, are remitted to the trustee expenses through continuance of the Power Supply Cost forthe Securitization Bonds. Neitherthe qualified costs which Recovery (PSCR) clause would be inconsistent with the rate were sold nor funds collected from Detroit Edison's customers freeze required by PA 141. Detroit Edison was not permitted to for the payment of costs related to the Securitization LLC and collect the 1998 PSCR under-recovery of $9million, plus accrued Securitization Bonds are available to Detroit Edison's creditors. interest of $3million. Also, Detroit Edison was not required to refund approximately $55 million of liabilities for over-recoveries Gas Industry Restructuring of PSCR expenses for 1999 and 2000, and disallowances under Through December 2001, MichCon was operating under the performance standard mechanism for our Fermi 2 nuclear an MPSC-approved Regulatory Reform Plan, which included power plant In January and March 2002, the Michigan Court of a comprehensive experimental three-year gas Customer Appeals rejected appeals and motions for rehearing filed by Choice program, a Gas Sales Program and an income sharing parties opposing the MPSC's actions in this proceeding. In mechanism. MichCon returned to a GCR mechanism in January March 2002, the Michigan Attorney General applied for leave to 2002 when the Gas Sales Program expired. Under the GCR appeal at the Michigan Supreme Court. The court has issued mechanism, the gas commodity component of MichCon's an order indicating that it will not hear the case. gas sales rates is designed to recover the actual costs of It is unclear at this time whether the PSCR clause will be gas purchases. In December 2001, the MPSC issued an order suspended beyond 2003. 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 Securitization - In an order issued in November 2000 and the remainder of 2002. The order also allowed MichCon to clarified inJanuary 2001, the MPSC approved the issuance recognize a regulatory asset of approximately $14 million of securitization bonds to recover qualified costs that include representing the difference between the $4.38 factor and the the unamortized investment in Fermi 2,costs of certain other $3.62 factor for volumes that were unbilled at December 31, regulatory assets, Electric Choice implementation costs, costs 2001. The regulatory asset will be subject to the 2002 GCR of issuing securitization bonds, and the costs of retiring securities reconciliation process. As of December 31, 2002, MichCon with the proceeds of securitization. The order permits the collec- has accrued a $22 million regulatory asset representing the tion of these qualifying costs from Detroit Edison's customers. under-recovery of actual gas costs incurred. In July 2002, in response to a petition for rehearing filed by the Michigan Detroit Edison formed The Detroit Edison Securitization Attorney General, the MPSC directed the parties to address Funding LLC (Securitization LLC), a wholly owned subsidiary, MichCon's implementation of the December 2001 order and for the purpose of securitizing its qualified costs. In March 2001, the impact of that implementation on rates charged to the Securitization LLC issued $1.75 billion of Securitization MichCon's customers. Also, inJuly 2002, an MPSC Bonds, and Detroit Edison sold $1.75 billion of qualified costs Administrative Law Judge (AW) issued a Proposal for to the Securitization LLC. The Securitization Bonds mature Decision on MichCon's 2002 GCR plan case. In that decision over a 14-year period and have an annual average interest rate of 6.3% over the life of the bonds. Detroit Edison used the AU recommended adoption of the MPSC Staff's proposed 49
$26.5 million reduction in gas cost due to MichCon's decision the proceeds to retire debt and equity in approximately equal to utilize storage gas during 2001 that resulted in a gas amounts. The company likewise retired approximately 50% inventory decrement for the 2001 calendar year.
debt and 50% equity with the proceeds received as the sole shareholder of Detroit Edison. Detroit Edison implemented a In December 2001, the MPSC also approved MichCon's non-bypassable surcharge on its customer bills, effective application for a voluntary, expanded permanent gas Customer March 26, 2001, for the purpose of collecting amounts sufficient Choice program, which replaced the experimental program to provide for the payment of interest and principal and the that expired in March 2002. Effective April 2002, up to 40% payment of income tax on the additional revenue from the sur- of MichCon's customers could elect to purchase gas from charge. As a result of securitization, Detroit Edison established a suppliers other than MichCon. Effective April 2003, up to 60% regulatory asset for securitized costs including costs that had of customers would be eligible and by April 2004, all of MichCon's previously been recorded in other regulatory asset accounts. 1.2 million customers can participate in the program. The MPSC also approved the use of deferred accounting for the recovery The Securitization LLC is independent of Detroit Edison, as of implementation costs of the gas Customer Choice program. is its ownership of the qualified costs. Due to principles of As of December 2002, approximately 190,000 customers are consolidation, qualified costs sold by Detroit Edison to the participating in the gas Customer Choice program. I " It4 i ,A A DTj, ]=Tt tI...... A
4 t ! S --1-b_ _ _ _ _ _ _ As previously mentioned, MichCon was operating under a Property Insurance Regulatory Reform Plan through December 2001, which included an income sharing mechanism. The income sharing mechanism Detroit Edison maintains several different types of property allowed customers to share in profits when actual returns on insurance policies specifically for the Fermi 2 plant. These equity from utility operations exceed predetermined thresholds. policies cover such items as replacement power and property Based on the MPSC approved formula, MichCon believes that damage. The Nuclear Electric Insurance Limited (NEIL) is the no income sharing is required in 2001. In July 2002, the MPSC primary supplier of these insurance polices. Under the NEIL ordered a hearing be held to determine the appropriate treatment policies, Detroit Edison could be liable for maximum assess-of $766,000 of pipeline refunds received by MichCon during 2001. ments of up to approximately $27 million per event if the loss MichCon does not agree with the MPSC's position that this associated with any one event at any nuclear plant inthe United amount should be refunded to customers. States should exceed the accumulated funds available to NEIL Other Detroit Edison maintains a policy for extra expenses, including replacement power costs necessitated by Fermi 2's unavailability In accordance with a November 1997 MPSC order, Detroit due to an insured event These policies have a 12-week waiting Edison reduced rates by $53 million annually to reflectthe period and provide three years of coverage. scheduled reduction in the revenue requirement for Fermi 2. The $53 million reduction was effective in January 1999. Detroit Edison has $500 million in primary coverage and $2.25 In addition, the November 1997 MPSC order authorized the billion of excess coverage for stabilization, decontamination, deferral of $30 million of storm damage costs and amortization debris removal, repair and/or replacement of property and and recovery of the costs over a 24-month period commencing decommissioning. The combined coverage limit for total January 1998. After various legal appeals, the Michigan Court property damage is $2.75 billion. of Appeals remanded back to the MPSC for hearing the For multiple terrorism losses occurring within one year after November 1997 order. In December 2000, the MPSC issued the first loss from terrorism, the NEIL policies would make an order reopening the case for hearing. The parties inthe available to all insured entities up to $3.2 billion plus any case have agreed to a stipulation of fact and waiver of hearing. amounts recovered from reinsurance, government indemnity, In June 2002, the MPSC issued an order modifying its 1997 or other sources to cover losses. order that will require Detroit Edison to refund approximately
$1.5 million after January 1, 2004. In July 2002, the Michigan Public Liability Insurance Attorney General filed an appeal with the Michigan Court of Appeals regarding the June 2002 MPSC Order. As required by federal law, Detroit Edison increased the amount of public liability insurance for a nuclear incident In November 2002, the MPSC requested Michigan gas and from $200 million to $300 million, effective January 1, 2003.
electric utilities to justify why their retail rates should not be For liabilities arising out of terrorist acts, the policy is now lowered due to potential personal property tax reductions. subject to one industry aggregate limit of $300 million. We have responded and await further MPSC action. Further, under the Price-Anderson Amendments Act of 1988 (Act), deferred premium charges up to $84 million could Management is unable to predictthe outcome of the regulatory matters discussed herein. Resolution of these matters isdependent be levied against each licensed nuclear facility, but not more upon future MPSC orders, which may materially impactthe finan- than $10 million peryear per facility. Thus, deferred premium cial position, results of operations and cash flows of the company. charges could be levied against all owners of licensed nuclear facilities in the event of a nuclear incident at any of these NOTE 7 - NUCLEAR OPERATIONS facilities. The Act expired on August 1,2002, however the provisions of the Act remain in effect for existing reactors. General Legislation to extend the Act is currently under debate in Fermi 2, our nuclear generating plant, began commercial Congress. President Bush has expressed his support to operation in 1988. The Nuclear Regulatory Commission (NRC) extend the Act. We cannot predict whether the legislation has jurisdiction over the licensing and operation of Fermi 2. will pass Congress. Fermi 2 has a design electrical rating (net) of 1,150 Megawatts. Decommissioning This plant represents approximately 10% of Detroit Edison's summer net rated capability. The net book balance of the The NRC has jurisdiction overthe decommissioning of nuclear Fermi 2 plant was written off at December 31, 1998, and power plants and requires decommissioning funding based upon an equivalent regulatory asset was established. In 2001, a formula. The MPSC and FERC regulate the recovery of costs of the Fermi 2 regulatory asset was securitized. See Note decommissioning nuclear power plants and both require the use 6- Regulatory Matters. Detroit Edison also owns Fermi 1, of external trust funds to finance the decommissioning of Fermi 2. a nuclear plant that was shut down in 1972 and is currently Rates approved by the MPSC provide forthe recovery of being decommissioned. decommissioning costs of Fermi 2. Detroit Edison is continuing ak
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to fund FERC jurisdictional amounts for decommissioning even NOTE 8 - JOINTLY OWNED though explicit provisions are not included in FERC rates. We UTILITY PLANT believe the MPSC and FERC collections will be adequate to fund Detroit Edison's share of jointly owned utility plants at the estimated cost of decommissioning using the NRC formula. December 31, 2002 was as follows: Ludington Detroit Edison has established a restricted external trust to Hydroelectric hold funds collected from customers for decommissioning Belle River Pumped Storage and the disposal of low-level radioactive waste. During 2002, In-service date 1984-1985 1973 Detroit Edison collected $42 million and in 2001 and 2000, Ownership interest
- 49%
Detroit Edison collected $38 million each year from customers Investment (inMillions) $ 1,021 $ 196 for decommissioning and low-level radioactive waste disposal. Accumulated depreciation Such amounts were recorded as components of depreciation, (inMillions) $ 478 $ 108 depletion and amortization expense, and in other liabilities.
- Detroit Edison's ownership interest is63% inUnit No. 1,81% of the facilities Net unrealized investment losses of $39 million and $23 million applicable to Belle River used jointly by the Belle River and St. Clair Power in 2002 and 2001, respectively, were recorded as adjustments to Plants, 49% incertain transmission lines, and 75% incommon facilities used at Unit No. 2.
the nuclear decommissioning trust funds and other liabilities. At December 31, 2002, investments in the external trust Belle River consisted of approximately 42.7% in publicly traded equity The Michigan Public Power Agency (MPPA) has an ownership securities, 43.7% infixed debt instruments and 13.6% in cash interest inBelle River Unit No. 1 and other related facilities. The equivalents. Investments in debt and equity securities held MPPA isentitled to 19% of the total capacity and energy of the plant within the external trust are classified as "available for sale." (1,026 MW) and isresponsible for the same percentage of the At December 31, 2002 and 2001, Detroit Edison had reserves plant's operation, maintenance and capital improvements costs. of $377 million and $372 million, respectively, for the future Ludington Hydroelectric Pumped Storage decommissioning of Fermi 2,and $22 million and $26 million, respectively, for the decommissioning of Fermi 1. Detroit Edison Operation, maintenance and other expenses of the Ludington also had a reserve of $17 million for low-level radioactive Hydroelectric Pumped Storage Plant (1,872 MW) are shared by waste disposal costs at December 31,2002 and $14 million as Detroit Edison and Consumers Energy Company in proportion to of December 31, 2001. These reserves are included in other their respective plant ownership interests. liabilities, with an equivalent amount invested in an external NOTE 9- INCOME TAXES trust It is estimated that the cost of decommissioning Fermi 2, when its license expires in 2025, will be $947 million in 2002 We file a consolidated federal income tax return. dollars and $3.4 billion in2025 dollars, using a6%inflation rate. In2001, the company began the decommissioning of Total income tax expense as a percent of income before Fermi 1,with the goal of removing the radioactive material tax varied from the statutory federal income tax rate for the following reasons: and terminating the Fermi 1license. The decommissioning is expected to be complete by 2008. (Dollars inMillions) 2002 2001 2000 Effective federal income tax rate (10.5)% (50.3)% 1.9% Nuclear Fuel Disposal Costs Income tax expense at 35% Inaccordance with the Federal Nuclear Waste Policy Act of statutory rate $ 200 $ 77 $ 167 1982, Detroit Edison has a contract with the U.S. Department Section 29 tax credits (250) (165) (130) 51 of Energy (DOE) for the future storage and disposal of spent Removal costs - 1 (24) nuclear fuel from Fermi 2. Detroit Edison is obligated to pay the Investment tax credits (9) (8) (10) DOE afee of one mill per net kilowatthour of Fermi 2electricity Depreciation 2 (12) 11 generated and sold. The fee is a component of nuclear fuel Goodwill amortization - 10 - expense. Delays have occurred in the DOE's program for Research expenditures tax credits - (7) the acceptance and disposal of spent nuclear fuel at a Employee Stock Ownership permanent repository. Until the DOE is able to fulfill its Plan dividends (4) (4) - obligation under the contract, Detroit Edison is responsible Other-net 2 (2) (5) for the spent nuclear fuel storage. Detroit Edison estimates Total $ (59) $ (110) $ 9 that existing storage capacity will be sufficient until 2007. Components of income tax expense (benefit) were as follows: Detroit Edison has entered into litigation againstthe DOE for damages caused by the DOE not accepting spent (inMillions) 2002 2001 2000 nuclear fuel on atimely basis. Current federal and other income tax expense $ 160 $ 10 $ 138 Deferred federal income tax benefit (219) (120) (129) Total S (59) $ (110) $ 9
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I _ _ _ _ _ _ _ _ _ _ _ Internal Revenue Code Section 29 provides a tax credit for consideration to purchase all of the outstanding common qualified fuels produced and sold by a taxpayer to an unrelated stock of MCN Energy. See Note 4 -Acquisitions and party during the taxable year. Section 29 tax credits earned but Dispositions. The newly issued shares were valued at the not utilized of $381 million are carried forward indefinitely as average market price of our common stock for a five-day alternative minimum tax credits. We have received private letter period, including February 28, 2001, the announcement date rulings from the Internal Revenue Service (IRS) for all of our tax of the revised merger agreement credit properties, except for two synthetic fuel facilities, that In2001, DTE Energy repurchased approximately 10.5 million shares provide assurance as to the appropriateness of using these of common stock with a total cost of approximately $438 million. credits to offset taxable income, however, these tax credits are subjectto IRS audit and adjustment Under the DTE Energy Company Long-Term Incentive Plan, we grant non-vested stock awards to management Atthe time At December 31, 2002, we had a net operating loss carryforward of grant, DTE Energy records the fair value of the non-vested of $326 million as a result of the MCN Energy acquisition expiring awards as unearned compensation, which is reflected as a in 2018through 2020. We do not believethata valuation allowance reduction in common stock. The number of non-vested stock is required, as we expect to utilize the loss carryforward prior awards is included inthe number of common shares outstand-to its expiration. ing; however, for purposes of computing basic earnings per Deferred tax assets and liabilities are recognized for the estimated share, non-vested stock awards are excluded. future tax effect of temporary differences between the tax basis of Shareholders' Rights Plan assets or liabilities and the reported amounts inthe financial state-ments. Deferred tax assets and liabilities are classified as current We have a Shareholders' Rights Plan designed to maximize or noncurrent according to the classification of the related assets or shareholders' value should DTE Energy be acquired. The rights liabilities. Deferred tax assets and liabilities not related to assets or are attached to and trade with shares of DTE Energy's common liabilities are classified according to the expected reversal date of stock until they are exercisable upon certain triggering events. the temporary differences. The rights expire in 2007. i Deferred income tax assets (liabilities) were comprised Earnings per Share. i of the following at December 31: We report both basic and diluted earnings per share. Basic I (inMillions) 2002 2001 earnings per share is computed by dividing net income by Property $ (1.179) S (1,149) the weighted average number of common shares outstanding Securitized regulatory assets (871) (909) during the period. Diluted earnings per share assumes the Alternative minimum tax credit carryforward 381 274 issuance of potentially dilutive common shares outstanding Merger basis differences 186 213 during the period and the repurchase of common shares that Pension and benefits 216 (71) would have occurred with proceeds from the assumed Net operating loss 114 148 issuance. Diluted earnings per share assume the exercise Other 282 63 of stock options, vesting of non-vested stock awards, and i issuance of performance share awards. A reconciliation S 1871) $ (1,431) I of both calculations is presented inthe following table: Deferred income tax liabilities $ (Z564) $ (2,479) Deferred income tax assets 1,693 1,048 (inThousands, exceptpershare amounts) 2002 2001 2000 5 (871) $ (1,431) Basic Earnings per Share 52
.. . Income before accounting change $ 631,702 S 328,745 $ 468,550 During 2002, the IRS completed and closed its audits of our 'I Average number of common federal income tax returns through 1995. The IRS is currently shares outstanding 164,017 153,120 143,116 conducting audits of our federal income tax returns for the years Earnings per share of common 1996 and 1997. Audits of the MCN Energyfederal income tax stock based on average number returns for 1995 through 1998 are being finalized. We believe that of shares outstanding $ 3.85 S 2.15 $ 3.27 our accrued tax liabilities are adequate for all years. Diluted Earnings per Share Income before accounting change $ 631,702 $ 328,745 $ 468,550 NOTE 1 0 - COMMON STOCK Average number of common AND EARNINGS PER SHARE shares outstanding 164,017 153,120 143,116 Incremental shares from Common Stock stock-based awards 750 639 149 In June 2002, we issued 6.325 million shares of common stock Average number of dilutive at $43.25 per share, grossing $274 million. Net proceeds from shares outstanding 164,767 153,759 143,265 I the offering were approximately $265 million. Earnings per share of common stock assuming On May 31, 2001, we issued approximately 29 million shares issuance of incremental shares S 3.83 S Z14 $ 3.27 of common stock, valued at $1.06 billion, as part of the
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4 IR lobAW? - Options to purchase approximately one million shares of Each trust uses payments received on the debenture it holds to common stock were not included in the computation of diluted make cash distribution on the preferred securities it has issued. earnings per share because the options' exercise price was greater than the average market price of the common shares, The preferred securities allow us the right to extend interest thus making these securities anti-dilutive. payment periods on the debentures and, as a consequence, the subsidiaries can defer dividend payments on the preferred NOTE 11 - PREFERRED SECURITIES securities during any such interest payment period. Should we exercise this right, we cannot declare or pay dividends on, or DTE Energy and Enterprises-Obligated Mandatorily redeem, purchase or acquire, any of our capital stock during Redeemable Preferred Securities of Subsidiaries the deferral period. Various trusts and a partnership (subsidiaries) were formed In the event of default, holders of the preferred securities will for the sole purpose of issuing preferred securities and lending be entitled to exercise and enforce the subsidiaries' creditor the gross proceeds to their respective parent. The sole assets rights against the parent, which may include acceleration of of the subsidiaries are debentures of the parent with terms the principal amount due on the debentures. DTE Energy has similarto those of the related preferred securities. Summarized issued certain guaranties with respect to payments on the information for DTE Energy and Enterprises-obligated mandatorily preferred securities. These guaranties, when taken together redeemable preferred securities of wholly-owned subsidiaries of with each parent's obligations under the debentures, related DTE Energy and Enterprises, holding solely debentures of the indenture and subsidiary documents, provide full and parent is as follows: unconditional guarantees of the subsidiaries' obligations Liquidation Maturity oi Earliest under the preferred securities. (inMillions, except Deceber 31 Value Underlying Redempton share amounts) 2I02 2001 Per Share Debentures Date Financing costs forthese issuances were deferred and are MCN Financing I reflected as a reduction inthe carrying value of the preferred securities. These costs are being amortized using the straight-8-5/8%Trust0riginated $ - S 77 $ 25 2036 line method over the estimated lives of the related securities. Preferred Securities 1(3,200,000 preferred Preferred and Preference Securities - securities) Dividends Authorized and Unissued payable quarterly At December 31, 2002, DTE Energy had 5 million shares of MCN Financing II preferred stock without par value authorized, with no shares 8-5/8% Trust 97 98 $ 25 2038 2003 issued. Of such amount, 1.6 million shares are reserved for Preferred Securities issuance in accordance with the Shareholders' Rights Plan. (4,000,000 preferred securities) Dividends At December 31, 2002, Detroit Edison had 6.75 million shares payable quarterly of preferred stock with a par value of $100 per share and 30 MCN Financing III million shares of preference stock with a par value of $1per share authorized, with no shares issued. 7.25% Preferred - 2 S 50 2002 2002 Securities At December 31, 2002, Enterprises had 25 million shares (30,600 preferred of preferred stock without par value authorized, with no securities) Dividends 53 shares issued. payable quarterly MCN Michigan Ltd. At December 31, 2002, MichCon had 7 million shares of Partnership preferred stock with a par value of $1per share and 4 million 9-3/8% Redeemable - 97 S 25 2024 1999 shares of preference stock with a par value of $1 per share Cumulative Preferred authorized, with no shares issued. Securities (4,000,000 preferred securities) Dividends payable monthly DTE Energy Trust I 7.8% Trust 174 - S 25 2032 2007 Preferred Securities (7,200,000 preferred securities) Dividends payable quarterly
$271 $274 0, A - . "j,. $,8) _ND6-412=-i5- 1"_1;j
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L. taa-,j ," , NOTE 12 - LONG-TERM DEBT
- Issued $1.75 billion of Securitization Bonds by the Securitization LLC Our long-term debt outstanding and weighted average
- Issued $200 million of MichCon senior secured notes interest rates of debt outstanding at December 31 were: bearing interest at 6.125% and maturing in 2008 (inMillions) 2002 2001
- Rledeemed $1.3 billion of Detroit Edison debt of which DTE Energy Debt. Unsecured $1.1 billion represented unscheduled redemptions 6.7% due 2004 to 2038 $ 1,948 S 1,748
- Repurchased $40 million of MichCon mortgage Detroit Edison Taxable Debt, bonds, due 2021 Principally Secured
- Entered into a Detroit Edison financing arrangement for 6.3% due 2003 to 2034 1,812 1,548 certain equipment with a value of approximately $90 million.
Detroit Edison Tax Exempt The arrangement has an implicit interest rate of 7.6% with Revenue Bonds aterm of approximately nine years. 5.8% due 2004 to 2032 I XmO "c"" 1 IAA
'~~"In the years 2003 - 2007, our long-term debt maturities MichCon Taxable Debt, principally secured are $1billion, $464 million, $512 million, $685 million and 6.8% due 2003 to 2039 775 ~ $178 million, respectively.
Quarterly Income Remarketable Securities Debt Securities r 7.5% due 2026 to 2028 385 385 At December 31, 2002, $914 million of notes were subject to Non-Recourse Debt periodic remarketings, $575 million of which will take place in 8.1% due 2003 to 2017 119 196 2003. Amounts that will be remarketed in 2003 are included in Other Lone-Term Debt 329 503 the current portion of long-term debt. We direct the remarket-6,576 6,321 ing agents to remarket these securities at lowest interest rate Less amount due within one year (920) (429) necessary to produce a par bid. Inthe event that a remarket-5,656 $ 5,892 ing fails, we would be required to purchase these securities. Quarterly Income Debt Securities ((IUIDS) I Securitization Bonds $ 1,613 $ 1,746 Less amount due within one year (88) (73) Each series of QUIDS provides that interest Will be paid quarterly. i S 1.585 $ 1,673 However, Detroit Edison has the right to extend the interest payment period on the QUIDS for up to 20 consecutive interest Equity-Linked Securities $ 191 $ - payment periods. lnterestwould continue to accrue during the deferral period. Ifthis right isexercised, Detroit Edison may not During 2002 and 2001, we issued and repurchased declare or pay dividends on, or redeem, purchase or acquire, long-term debt consisting of the following: any of its capital stock during the deferral period. 2002 Equity-Linked Securities
- Issued $200 million of DTE Energy senior notes bearing InJune 2002, we issued 6.9 million equity security units with interest at 6.65 %and maturing in 2009 gross proceeds from the issuance of $172.5 million. An equity
- Issued $172.5 million of DTE Energy equity-linked debt security unit consists of a stock purchase contract and a senior 54 securities as subsequently discussed note of DTE Energy. Under the stock purchase contracts, we
- Issued $225 million of Detroit Edison senior notes bearing will sell, and equity security unit holders must buy, shares of interest at 5.20 %and maturing in2012 DTE Energy common stock inAugust 2005 for $172.5 million.
The issue price per share and the exact number of common
- Issued $225 million of Detroit Edison senior notes bearing shares to be sold is dependent on the market value of ashare interest at 6.35 %and maturing in 2032 inAugust 2005. The issue price will be not less than $43.25 or
- Issued $64 million of Detroit Edison tax exempt bonds bearing more than $51.90 per common share, with the corresponding interest at 5.45% and $56 million of tax exempt bonds bearing number of shares issued of not more than 4.0 million or less than interest at 5.25%, both maturing in2032. 3.3 million shares. We are also obligated to pay the security unit 2001 holders aquarterly contract adjustment payment at an annual
- Issued $1.35 billion of DTE Energy debt inthree series to rate of 4.15% of the stated amount until the purchase contract finance the cash consideration of the MCN Energy acquisition settlement date. We have recorded the present value of the contract adjustment payments of $26 million in long-term debt
- $250 million of 6.00% senior notes due 2004
- $500 million of 6.45% senior notes due 2006 with an offsetting reduction in shareholders' equity. The liability
- $600 million of 7.05% senior notes due 2011 isreduced as the contract adjustment payments are made.
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t - I . A 4: ia LSI.- 4 V -19M go Each senior note has a stated value of $25, pays an annual NOTE 14 - CAPITAL AND interest rate of 4.60% and matures in August 2007. The senior OPERATING LEASES notes are pledged as collateral to secure the security unit holders' obligation to purchase DTE Energy common stock Lessee - We lease various assets under capital and operating under the stock purchase contracts. The security unit holders leases, including lake vessels, locomotives, coal cars, office may satisfy their obligations under the stock purchase buildings, a parking facility, a warehouse, computers, vehicles contracts by allowing the senior notes to be remarketed and other equipment. The lease arrangements expire at vari-with proceeds being paid to DTE Energy as consideration ous dates through 2022 with renewal options extending beyond for the purchase of stock under the stock purchase contracts. that date. Portions of the office buildings and parking facility Alternatively, holders may choose to continue holding the are subleased to tenants. senior notes and use cash as consideration for the purchase of stock underthe stock purchase contracts. Future minimum lease payments under non-cancelable leases at December 31, 2002 were: Net proceeds from the equity security unit issuance totaled Capital Operating
$167 million. Expenses incurred in connection with this issuance (in Millions) Leases Leases totaled $5.6 million and were allocated between the senior notes 2003 $ 16 $ 40 and the stock purchase contracts. The amount allocated to the 2004 12 40 senior notes was deferred and will be recognized as interest 2005 12 40 expense over the term of the notes. The amount allocated to 2006 14 37 the purchase contracts was charged to equity.
2007 11 34 Cross Default Provisions 2008 and thereafter 62 137 Substantially all of the net utility properties of Detroit Edison Total minimum lease payments 127 $ 328 and MichCon are subject to the lien of mortgages. Should Less imputed interest (36) Detroit Edison or MichCon fail to timely pay their indebtedness Present value of net minimum lease payments 91 under these mortgages, such failure will create cross defaults in substantially all of their respective indebtedness. Less current portion (91 Non-current portion $ 82 NOTE 13 - SHORT-TERM CREDIT ARRANGEMENTS Total minimum lease payments for operating leases have AND BORROWINGS not been reduced by future minimum sublease rentals totaling In October 2002, we entered into a $470 million, 364-day revolving $17 million under non-cancelable subleases expiring at various facility and a $230 million, three-year revolving facility. These dates to 2019. credit facilities can be used for general corporate purposes, Rental expenses for operating leases were $40 million but are primarily intended to provide liquidity for our commercial in 2002, $19 million in 2001 and $13 million in 2000. paper program. Important aspects of these agreements require us to maintain a debt to total capitalization ratio of not more Lessor - MichCon leases a portion of its pipeline system to the than .65 to 1,and a "earnings before interest, taxes, depreciation Vector Pipeline Partnership through a capital lease contract and amortization" to interest ratio of no less than 2 to 1. that expires in 2020, with renewal options extending for five Detroit Edison and MichCon entered into similar revolving years. The components of the net investment in the capital creditfacilities. Detroit Edison has a $135 million, 364-day lease at December 31, 2002 were as follows: 55 facility and a $65 million, three-year facility. MichCon has a (in Millions)
$200 million, 364-day facility and a $100 million, three-year 2003 $ 9 facility. A delinquency greater than $25 million by either 2004 9 Detroit Edison or MichCon to any creditor will be considered 2005 9 a default under DTE Energy's credit agreements. Commercial paper and borrowings outstanding were $414 million at 2006 9 December 31, 2002. 2007 9 Thereafter 116 The weighted average interest rates for short-term borrowings Total minimum future lease receipts 161 were 1.7% and 2.8% at December 31, 2002 and 2001, respectively. Residual value of leased pipeline 40 Less - unearned income (117)
Detroit Edison has a $200 million short-term financing agree-Net investment incapital lease 84 ment secured by customer accounts receivable and unbilled revenues. There were no outstanding amounts under this Less - current portion (1)
$ 83 financing agreement at December 31, 2002 and 2001.
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NOTE 15 - FINANCIAL AND OTHER Our primary market risk exposure is associated with commodity DERIVATIVE INSTRUMENTS prices and interest rates. -We have risk management policies to monitor and decrease market risks. We use derivative In 1998, FASB issued SFAS No. 133, "Accounting for Derivative instruments to manage some of the exposure. Except for Instruments and HedgingActivities." SFAS No. 133, establishes the activities of the Energy Marketing & Trading segment accounting and reporting standards for derivative instruments we do not hold or issue derivative instruments for trading and hedging activities. Listed below are important SFAS No. purposes. The fair value of all derivatives is shown as"assets 133 requirements: or liabilities from risk management and trading activities" inthe
- All derivative instruments must be recognized as assets or consolidated statement of financial position.
liabilities and measured at fair value, unless they meet the RISK MANAGEMENT ACTIVITIES "normal purchases and sales" exemption. Credit Risk
- The accounting for changes infair value depends upon the purpose of the derivative instrument and whether it is We are exposed to credit risk if customers or counterparties designated as a hedge and qualifies for hedge accounting. do not comply with their contractual obligations. We maintain credit policies that significantly minimize overall credit risk.
- Special accounting isallowed for a derivative instrument These policies include an evaluation of potential customers' qualifying as ahedge and designated as a hedge for the vari- and counterparties' financial condition, credit rating, collateral ability of cash flow associated with a forecasted transaction. requirements or other credit enhancements such as letters Gain or loss associated with the effective portion of the hedge of credit or guarantees. We use standardized agreements isrecorded in other comprehensive income. The ineffective that allow the netting of positive and negative transactions portion is recorded to earnings. Amounts recorded in other associated with a single counterparty.
comprehensive income will be reclassified to net income Interest Rate Risk when the forecasted transaction affects earnings. During 2000, we entered into a series of interest rate swaps
- If a cash flow hedge is discontinued because it isunlikely the and treasury locks to limit our sensitivity to market interest forecasted transaction will not occur, net gains or losses are rate risk associated with the issuance of long-term debt used immediately recorded into earnings. to acquire MCN Energy. Such instruments were designated
- Special accounting isallowed for a derivative instrument as cash flow hedges. In the first quarter of 2001, a loss of approximately $5 million was reclassified from accumulated qualifying as a hedge and designated as a hedge of the changes infair value of an existing asset liability or firm other comprehensive loss into earnings. We made this decision since itwas probable that certain transactions associated commitment Gain or loss on the hedging instrument isrecorded into earnings. The gain or loss on the underlying asset liability with the issuance of long-term debt would not occur within the originally anticipated time frame. This loss was reported as or firm commitment isalso recorded into earnings.
a component of interest expense inthe consolidated statement SFAS No. 133 requires that as of the date of initial adoption, of operations. In 2001, we issued long-term debt and terminat-the difference between the fair value of derivative instruments ed these hedges at a cost of $83 million. The corresponding and the previous carrying amount of those derivatives be loss on these instruments is included in other comprehensive reported in net income or other comprehensive income as loss. During the next 30 years, amounts recorded in other the cumulative effect of a change in accounting principle. comprehensive loss will be reclassified to interest expense 56 .. . as the related interest affects earnings. In 2003 we estimate In2001 we adopted SFAS No. 133. The financial statement reclassifying $10 million of losses into interest expense. impact of recording the various SFAS No. 133 transactions at January 1,2001 was as follows: Commodity Price Risk Increase Regulated Operations (inMillions) (Decrease) Detroit Edison uses forward energy, capacity, and futures Financial Statement Line Item contracts to manage changes in the price of electricity and Assets from risk management and trading activities S 26 natural gas. Certain contracts have been designated as cash Liabilities from risk management and trading activities $ 85 flow hedges of forecasted purchases of power and natural gas. Deferred income taxes payable $ (20) For the year ended December 31, 2002, Detroit Edison recorded Cumulative effect of a change inaccounting principle: a loss of $0.7 million, net of tax, in other comprehensive loss for Other comprehensive loss S 42 these hedges. Amounts recorded in other comprehensive Net income S 3 income will be reclassified to fuel, purchased power and gas expense as the forecasted purchases of electricity and natural gas affect earnings. During 2003 we estimate $2.1 million of
3P~Uh. i 4' existing losses will be reclassified to fuel, purchased power Although Energy Marketing & Trading attempts to maintain and gas expense. Two years isthe maximum length of time a balanced or flat book from an economic standpoint, it will Detroit Edison is hedging exposure to the variability of future experience earnings volatility as a result of its gas inventory and cash flows. Ineffectiveness recognized in hedging relation- related hedges. Gas inventory does not qualify for mark to market ships was immaterial for the year ended December 31, 2002. accounting under generally accepted accounting principles. In 2001, the FASB provided additional guidance on SFAS FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS No. 133 for certain contracts in the power generation industry. The fair value of financial instruments is determined by using In particular, issue No. C15, "Scope Exceptions:Normal various market data and other valuation techniques. The table Purchases and Normal Sales Exception for Option-Type below shows the fair value relative to the carrying value for Contracts and Forward Contracts in Electricity" Since long-term debt and preferred securities: electricity cannot be readily stored in significant quantities, and the entity engaged in selling electricity is obligated to maintain 2002 2001 sufficient capacity to meet the needs of customers, the FASB Fair Carrying Fair. Carrying concluded an option contract for the purchase of electricity Value Value Value Value meeting certain criteria is eligible for the normal purchases Long-Term Debt $8.9 billion $82 billion $8.2 billion $8.1 billion and sales exception. Detroit Edison adopted this new guidance Preferred Securities $291 million $271 million $283 million $274 million on July 1,2001, classified certain contracts as normal, and began amortizing the previously recorded liability on option-like NOTE 16 - COMMITMENTS contracts over their remaining lives. Later in 2001. the FASB AND CONTINGENCIES issued additional revisions to issue No. C15 which were Personal Property Taxes effective in April 2002. The revised guidance differentiates traditional capacity contracts used by electric utilities to meet Detroit Edison, MichCon and other Michigan utilities have electric load and financial options on electricity. Traditional asserted that Michigan's valuation tables result inthe substantial capacity contracts are eligible for settlement accounting under overvaluation of utility personal property. Valuation tables the normal purchases and sales exception. Financial options established by the Michigan State Tax Commission (STC) are on electricity are not eligible for settlement accounting. used to determine the taxable value of personal property based Financial options on electricity are recorded at fair value on the property's age. In November 1999, the STC approved new on the statement of financial position using mark-to-market valuation tables that more accurately recognize the value of a accounting. Certain of Detroit Edison's forward electric utility's personal property. The newtables became effective in contracts are considered "normal purchases and sales" 2000 and are currently used to calculate property tax expense. and therefore are excluded from the scope of SFAS No. 133. However, several local taxing jurisdictions have taken legal action attempting to prevent the STC from implementing the new MichCon has firm-priced contracts for a substantial portion of valuation tables and have continued to prepare assessments its expected gas supply requirements through 2003. These based on the superseded tables. The legal actions regarding contracts are designated and qualify for the "normal purchases" the appropriateness of the new tables were before the Michigan exception under SFAS No.133. Accordingly, MichCon does not Tax Tribunal (MTT) which, inApril 2002, issued its decision account for such contracts as derivatives. essentially affirming the validity of the STC's new tables. InJune Non-Regulated Operations 2002, petitioners in the case filed an appeal of the MTTs decision with the Michigan Court of Appeals. The Michigan Court of Energy Marketing & Trading markets and trades wholesale Appeals has not yet issued a decision on this appeal. 57 electricity and natural gas physical products, trades financial instruments, and provides risk management services utilizing Detroit Edison and MichCon record property tax expense energy commodity derivative instruments. Forwards, futures, based on the newtables. Detroit Edison and MichCon will options and swap agreements are used to manage exposure seek to apply the new tables retroactively and to ultimately to the risk of market price and volume fluctuations on its settle the pending tax appeals related to 1997 through 1999. operations. This risk minimization strategy is being accounted This isa solution supported by the STC inthe past. The legal for by marking to market its commodity forwards and financial action, along with possible additional appeals by local taxing derivatives so they substantially offset. This fair value accounting jurisdictions, is expected to delay any recoveries by better aligns financial reporting with the way the business is Detroit Edison and MichCon. managed and its performance measured. Unrealized gains and Energy Gas Environmental Matters losses resulting from marking to market commodity-related physical and financial derivatives utilized intrading operations Prior to the construction of major natural gas pipelines, gas are recorded as adjustments to revenues. for heating and other uses was manufactured from processes involving coal, coke or oil. Enterprises (MichCon and Citizens) owns, or previously owned, 17 such former manufactured gas plant (MGP) sites.
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___ Ado__ c ~~ AjIQi l-ii_ _ _ _ _ _ _ _ _ _ __ During the mid-1980's, Enterprises conducted preliminary commitments in excess of replacement costs from 1997 environmental investigations at former MGP sites, and some through 2008. The reserve for steam purchase commitments contamination related to the by-products of gas manufacturing is being amortized to fuel, purchased power and gas expense was discovered at each site. The existence of these sites with non-cash accretion expense being recorded through and the results of the environmental investigations have 2008. In 2001, due to changes in estimated future replacement been reported to the Michigan Department of Environmental costs we reduced the reserve for future steam purchase Quality (MDEQ). None of these former MGP sites is on the commitments by $22 million. We purchased $37 million of National Priorities List prepared by the Environmental steam and electricity in 2002, $41 million in 2001 and $35 million Protection Agency (EPA). in 2000. We estimate annual steam and electric purchase commitments from 2003 until 2007 will not exceed $46 million Enterprises completed the administrative proceeding before the per year. As discussed in Note 4 - Acquisitions and Dispositions, EPA regarding one of the former MGP sites. The site received inJanuary 2003, we sold the steam heating business of closure from the EPA in2002. Enterprises is remediating seven of Detroit Edison to Thermal Ventures II,LLP. Due to terms of the former MGP sites and conducting more extensive investiga- the sale, Detroit Edison will remain contractually obligated to tions at five other former MGP sites. In 1998, Enterprises received GDRRA until 2008 and will also record an additional liability of state closure of one of the former MGP sites. Additionally, the $20 million for future commitments. MDEQ has determined with respectto two other former MGP sites that Enterprises is not a responsible party forthe purpose The EPA has issued ozone transport regulations and final of assessing remediation expenditures. In September 2001, new air quality standards relating to ozone and particulate Enterprises was advised of one additional MGP site for which air pollution. In September 1998, the EPA issued a State it has some responsibility. After review of the extent of the Implementation Plan (SIP) call giving states a year to develop necessary environmental clean-up required, remediation new regulations to limit nitrogen oxide emissions because costs for this site are not expected to exceed $500,000. of their contribution to ozone formation. Detroit Edison has spent approximately $460 million through December 2002 and In 1984, Enterprises established a $12 million reserve for estimates that it will incur approximately $300 million to $400 environmental investigation and remediation. During 1993, million of future capital expenditures over the next five to eight MichCon received MPSC approval of a cost deferral and rate years. In March 2000, the U.S. Court of Appeals ruled in favor recovery mechanism for investigation and remediation costs of the EPA's SIP call regulations. The new air quality standards incurred at former MGP sites in excess of this reserve. have been upheld in legal challenges in the U.S. Court of Enterprises employed outside consultants to evaluate Appeals, but the U.S. Supreme Court has agreed to hearthe remediation altematives for these sites, to assist in estimating its appeal. Until the legal issues are resolved, management is potential liabilities and to review its archived insurance policies. unable to predict the full impact of the new air quality standards. The findings of these investigations indicate that the estimated Under the June 2000 Michigan restructuring legislation, total expenditures for investigation and remediation activities for beginning January 1,2004, annual return of and on this capital these sites could range from $30 million to $170 million based on expenditure, in excess of current depreciation levels, would undiscounted 1995 costs. As a result of these studies, Enterprises be deferred in ratemaking, until after the expiration of the rate accrued an additional liability and a corresponding regulatory cap period, presently expected to end December 31, 2005. asset of $35 million during 1995. In 1997, Enterprises, 50%-owned partnership, Washington 10, During 2002, Enterprises spent $3million investigating and entered into a leveraged lease transaction to finance the remediating these former MGP sites. At December 31, 2002, conversion of a depleted natural gas reservoir into a 42.5 Bcf 58 the reserve balance was $22 million of which $5million was clas- storage facility. The storage facility began operations in sified as current Any significant change in assumptions, such as mid-1999 and cost$160 million to develop. Enterprises has remediation techniques, nature and extent of contamination and entered into a contractwith Washington lOto market 100% regulatory requirements, could impact the estimate of remedial of the capacity of the storage field through 2029. Under the action costs for the sites and, therefore, have an effect on the terms of the marketing contract, Enterprises is obligated to company's financial position and cash flows. However, we generate sufficient revenues to cover Washington 10's lease believe the cost deferral and rate recovery mechanism payments and certain operating costs, which average approved by the MPSC will prevent environmental costs from approximately $15 million annually. having a material adverse impact on our results of operations. To ensure a reliable supply of natural gas at competitive Commitments prices, Enterprises has entered into long-term purchase and transportation contracts with various suppliers and producers. Detroit Edison has an Energy Purchase Agreement to In general, purchases are under fixed price and volume purchase steam and electricity from the Greater Detroit contracts or formulas based on market prices. Enterprises Resource Recovery Authority (GDRRA). Under the Agreement, has firm purchase commitments through 2010 for approximately Detroit Edison will purchase steam through 2008 and electricity 392 Bcf of gas. Enterprises expects that sales, based on through June 2024. In 1996, a special charge to income was warmer-than-normal weather, will exceed its minimum purchase recorded that included a reserve for steam purchase commitments. Enterprises has long-term transportation and fts5 i_ , 1 j o Nt __-T_1 _-' Vil,:1
storage contracts with various companies expiring on various Net pension cost (credit) for the years ended December 31 dates through the year 2016. Enterprises is also committed to includes the following components: pay demand charges of approximately $69 million during 2003 related to firm purchase and transportation agreements. (inMillions) 2002 2001 2000 Service Cost S 43 $ 40 $ 35 We have also entered into long-term fuel supply commitments Interest Cost 162 140 107 of approximately $450 million at December 31, 2002. We estimate Expected Return on Plan Assets (223) (193) (139) that 2003 base level capital expenditures will be $850 million. Amortization of We have made commitments in connection with expected Net loss 2 - - capital expenditures. Prior service cost 9 10 10 Other Contingencies Net transition asset (2) (5) (4) Special Termination Benefits (Note 5) - 167 - We purchase and sell electricity, gas and coke to numerous Net Pension Cost (Credit) $ (9) $ 159 $ 9 companies operating inthe steel, automotive, energy and retail industries. During 2001 and 2002, a number of customers The following table reconciles the obligations, assets and have filed for bankruptcy protection under Chapter 11 of the funded status of the plans as well as the amounts recognized U.S. Bankruptcy Code, including certain Enron Corporation as prepaid pension cost or pension liability in the consolidated affiliates, National Steel Company and Bethlehem Steel statement of financial position at December 31: Company. At December 31, 2002 we had approximately (inMillions! 2002 2001 $65 million of accounts receivable and approximately $40 million of accounts payable with these bankrupt companies. Accumulated Benefit Obligation at the End of the Period S 2,299 $ 2,023 We regularly review contingent matters relating to purchase and sale contracts and record provisions for amounts Projected Benefit Obligation at the Beginning of the Period S 2,219 $ 1,540 considered probable of loss. We believe our previously accrued amounts are adequate for probable losses. Service Cost 43 40 The final resolution of these matters is not expected to Interest Cost 162 140 have a material effect on our financial statements inthe Actuarial Loss 235 103 period they are resolved. Special Termination Benefits (Note 5) - 167 Benefits Paid (160) (206) We are involved in certain legal (including commercial MCN Energy Acquisition - 481 matters), administrative and environmental proceedings before Plan Amendments - (46) various courts, arbitration panels and governmental agencies Projected Benefit Obligation at the concerning claims arising inthe ordinary course of business. End of the Period $ 2,499 $ 2,219 These proceedings include certain contract disputes, environ-mental reviews and investigations, and pending judicial matters. Plan Assets at Fair Value at the We cannot predict the final disposition of such proceedings. Beginning of the Period $ 2,183 $ 1,416 We regularly review legal matters and record provisions for Actual Return on Plan Assets (213) (36) claims that are considered probable of loss. The resolution of Company Contributions 35 35 pending proceedings is not expected to have a material effect Benefits Paid (160) (206) on our financial statements inthe period they are resolved. MCN Energy Acquisition - 974 See Note 6 and Note 7 for a discussion of contingencies Plan Assets at Fair Value atthe related to Regulatory Matters and Nuclear Operations. End of the Period $ 1,845 $ 2,183 59 NOTE 17 - RETIREMENT BENEFITS Funded Status of the Plans $ (654) $ (36) AND TRUSTEED ASSETS Unrecognized Qualified Pension Plan Benefits Net loss 1,080 442 Prior service cost 54 31 We have defined benefit retirement plans for eligible union and Net transition asset - (2) nonunion employees. Prior to December 31, 2001, we had three Net Amount Recognized $ 480 $ 435 separate defined benefit retirement plans. Effective December 31, 2001, two of the defined benefit retirement plans merged into Amount Recorded as: one plan. All of the plans are noncontributory, cover substantially all employees and provide retirement benefits based on the Prepaid Pension Asset $ 172 $ 435 employees' years of benefit service, average final compensation Accrued Pension Liability (531) - and age at retirement. In addition, one plan also offers cash Accumulated Other Comprehensive Loss 785 balance benefits based on annual employer contributions and Intangible Asset 54 - interest credits. Our policy is to fund pension costs by contribut- $ 480 $. 435 ing the minimum amount required by ERISA, and additional amounts as deemed appropriate by management.
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r r _. a. Assumptions used in determining the projected benefit The table below reconciles the obligations, assets and funded obligation at December 31 are listed below: status of the plans as well as the amounts recognized as an accrued pension liability in the consolidated statement of 2002 2001 2000 financial position at December31: Discount rate 6.75% 7.25% 7.5%/6 Annual increase infuture (in Millions) 2002 2001 compensation levels 4.0%/a 4.0% 4.0% Accumulated Benefit Obligation at the Expected long-term rate of End of the Period S 49 $ 39 return on Plan assets 9.00%0 9.5% 9.5% Projected Benefit Obligation at the Beginning of the Period S 42 S 22 InDecember 2002, we recognized an additional minimum Service Cost 1 1 pension liability as required under SFAS No. 87, "Employers' Interest Cost 3 2 Accounting for Pensions." An additional pension liability may Actuarial Loss 7 2 be required when the accumulated benefit obligation of the Special Termination Benefits (Note 5) - 6 plan exceeds the fair value of plan assets. Under SFAS No. 87, Benefits Paid (3) (4) we recorded an additional minimum pension liability of $839 MCN Energy Acquisition - 13 million, ($531 million after netting the previously recognized Projected Benefit Obligation at the prepaid pension asset associated with the non union plan), End of the Period S 50 $ 42 an intangible asset of $54 million and an other comprehensive loss of $785 million ($510 million after tax). Plan Assets at Fair Value at the InJanuary 2003, we made a $222 million cash contribution Beginning of the Period $ - $ to our defined benefit retirement plans. Company Contributions 3 4 Benefits Paid (3) (4) We also sponsor defined contribution retirement savings plans. Plan Assets at Fair Value at the Participation in one of these plans isavailable to substantially End of the Period $ - S - all union and nonunion employees. We match employee contributions up to certain predefined limits based upon eligible Funded Status of the Plans $ (50) S (42) compensation and in certain plans, years of credited service. Unrecognized The cost of these plans was $25 million in 2002, $26 million in Net loss 12 6 2001 and $22 million in2000. Prior service cost 3 4 Nonqualified Pension Benefit Plans Net Amount Recognized $ (35) $ (32); We maintain three supplemental nonqualified, noncontributory, Amount Recorded as: retirement benefit plans for selected management employees. Accrued Pension Liability $ (51) $ (32) These plans provide for benefits that supplementethose provided Accumulated Other Comprehensive Loss 13 - by DTE Energy's other retirement plans. Intangible Asset 3 Net pension costfor the years ended December31 includes $ (35) S (32) the following components: Assumptions used in determining the projected benefit 60 (inMillions) 2002 2001 2000 obligation at December 31 are listed below: Service Cost $ 1 S 1$ 1 Interest Cost 3 2 1 2002 2001 2000 Amortization of Discount rate 6.75% 7.25% 7.5% Net loss I - - Annual increase infuture compensation levels 4.0% 4.0% 4.0% Prior service cost 1 1 1 Special Termination Benefits (Note 5) - 6 - Under SFAS No. 87, we recorded an additional minimum pension Net Pension Cost $ 6 $ 10 S 3 liability of $16 million, an intangible asset of $3million and an other comprehensive loss of $13 million ($8 million after tax) in December2002. Other Postretirement Benefits We provide certain postretirement health care and life insurance benefits for some employees who may become eligible for these benefits while working for us. 41 4*A&1
- 1
-1 A Ir Net postretirement cost for the years ended December 31 Assumptions used in determining the projected benefit obliga-includes the following components: tion at December 31 are listed below: (inMillions) 2002 2001 2000 2002 2001 2000 Service Cost S 30 S 27 $ 22 Discount rate 6.75% 7.25% 7.5% Interest Cost 78 67 48 Expected long-term rate of Expected Return on Plan Assets (59) (57) (46) return on Plan assets 9.0% 9.5% 9.5% Amortization of Net loss 3 1 - Benefit costs were calculated assuming health care costtrend Prior service cost (1) - - rates beginning at 10% for 2003 and decreasing to 5%in 2009 Net transition obligation 19 20 20 and thereafter for persons under age 65 and decreasing from Special Termination Benefits (Note 5) - 46 - 9%to 5%for persons age 65 and over. A one-percentage-point Net Postretirement Cost $ 70 S 104 $ 44 increase in health care cost trend rates would have increased the total service cost and interest cost components of benefit costs by$15 million. The accumulated benefit obligation would The table below reconciles the obligations, assets and funded have increased by $11 8 million at December 31, 2002. A one-per-status of the plans including amounts recorded as accrued centage-point decrease inthe health care cost trend rates would postretirement cost in the consolidated statement of financial have decreased the total service and interest cost components of position at December31: benefit costs by $13 million and would have decreased the accu-(inMillions) 2002 2001 mulated benefit obligation by $106 million at December 31,2002. Accumulated Postretirement Benefit In 2003, DTE Energy amended its postretirement health Obligation at the Beginning of the Period $ 1,127 S 751 care and life insurance plans to reduce benefits, modify Service Cost 30 27 eligibility criteria and increase retiree co-pays. The changes Interest Cost 78 67 reduced the postretirement benefit obligation by $85 million Actuarial Loss 326 62 and the expected 2003 postretirement costs by $21 million. Special Termination Benefits (Note 5) - 46 The reduction in postretirement benefit obligation and costs MCN Energy Acquisition - 236 is not reflected in the previous tables. Plan Amendments - (12) Benefits Paid (67) (50) Grantor Trust Accumulated Postretirement Benefit MichCon maintains a Grantor Trust that invests in life insurance Obligation at the End of the Period $ 1,494 5 1,127 contracts and income securities. Employees and retirees have no right, title or interest in the assets of the Grantor Trust, and Plan Assets at Fair Value at the MichCon can revoke the trust subject to providing the MPSC Beginning of the Period $ 624 $ 517 with prior notification. Actual Return on Plan Assets (60) (25) Company Contributions 33 11 NOTE 18 - STOCK-BASED Benefits Paid (60) (54) COMPENSATION MCN Energy Acquisition - 175 The DTE Energy Company 2001 Stock Incentive Plan permits Plan Assets at Fair Value atthe the grant of incentive stock options, non-qualifying stock End of the Period $ 537 S 624 options, stock awards, performance shares and performance 61 units. A maximum of 18 million shares of common stock may Funded Status of the Plans $ (957) S (503) be issued under the plan. Participants in the plan include our Unrecognized employees and Board members. As of December 31, 2002, no Net loss 641 187 performance units have been granted under the plan. Prior service cost (7) (12) Prior to 2001, stock options, stock awards and performance shares Nettransition obligation 191 226 were issued underthe Long-Term Incentive Plan adopted in 1995. Accrued Postretirement Liability $ (132) $ (102)
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t.jw4Xll@ WH' 9 Options We apply APB Opinion 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense has been Options are exercisable at a rate according to the terms of the recorded for options granted. As required by SFAS No. 123, individual stock option award agreements. The options will "Accounting for Stock-Based Compensation, "we have expire 10 years after the date of the grant The option exercise determined fair value for these options at the date of grant price equals the fair value of the stock on the date thatthe using a Black-Scholes based option pricing model and the option was granted. Stock option activity was as follows: following assumptions: Weighted Number of Average 2002 2001 2000 Options Exercise Price Risk-free interest rate 5.33% 5.40 % 6.57 % Dividend yield 4.90 % 4.73 % 6.48 % Outstanding at January 1,2000 Expected volatility 19.79% 19.78 % 18.51 % (194,371 exercisable) 999,075 $ 37.03 Granted 2,023,400 $ 32.12 Expected life 6 years 10 years 10 years Exercised (10,750) $ 28.50 Fairvalue per option S 6.25 $ 8.81 S 5.19 Canceled (29,500) $ 41.14 Outstanding at December 31, 2000 Stock Awards (442,431 exercisable) 2,982,225 $ 33.69 Under the plan, stock awards are granted and restricted for Granted 2,775,341 S 42.74 varying periods which currently do not exceed four years. Exercised (402,442) S 32.31 Participants have all rights of a shareholder with respect to a Canceled (73,500) S 36.26 stock award, including the right to receive dividends and vote Outstanding at December 31, 2001 the shares; provided, that during such period (i)a participant (1,678,870 exercisable) 5,281,624 $ 38.51 may not sell, transfer, pledge, exchange or otherwise dispose Granted 1,334,370 $ 42.08 of shares granted pursuantto a stock award; (ii)we shall retain Exercised (678,715) $ 34.64 custody of the certificates evidencing shares granted pursuant Canceled (456,684) $ 38.74 to a stock award; and (iii) the participantwill deliver to us a Outstanding at December 31, 2002 stock powerwith respectto each stock award. (2,285,323 exercisable at aweighted average exercise price of $38.79) 5,480,595 S 39.87 The stock awards are recorded at cost which approximates the market value on the date of grant We account for stock The range of exercise prices for options outstanding at awards as unearned compensation, which is recorded as a December 31, 2002, was $27.62 to $46.74. The number, weighted reduction to common stock. The cost is amortized to compen-average exercise price and weighted average remaining sation expense over the vesting period. Stock award activity contractual life of options outstanding were as follows: for the years ended December 31 was: Weighted 2002 2001 2000 Weighted Average Range of Number of Average Remaining Restricted common shares awarded 113,410 247,640 29,565 Exercise Prices Options Exercise Price Contractual Life Weighted average market price
$27.62 - $38.04 1,333,880 $31.83 6.86 years of shares awarded S 42.92 $ 44.35 $ 32.00
$38.60-$42.44 2,267,814 $41.06 8.21 years Compensation cost charged against income (inthousands) S 4,101 S 2,484 $ 1,130 6.2 $42.60 - $44.54 875,540 $42.68 8.36 years
$45.28 - $46.74 1,003.361 $45.43 8.45 years Performance Share Awards 5,480,595 $39.87 7.95 years Under the plan, performance shares are awards stated with reference to a specified number of shares of common stock that entitles the holder to receive a cash payment or shares of common stock or a combination thereof. The final value of the award is determined by the achievement of certain performance objectives, as defined in the plan. The awards vest as of the end of a specified period. Beginning with the grant date, we account for performance share awards by accruing an amount based on the following: (i)the number of shares expected to be awarded based on the probable re 9in Val
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achievement of certain performance objectives, (ii)the market Energy Distribution value of the shares, and (iii) the vesting period. For 2002 and 2001, we accrued compensation expense related
- Regulatedoperations include the electric distribution to performance share awards totaling $3.6 million and services of Detroit Edison, and the electric transmission
$1.2 million, respectively. services of the ITC. Energy Distribution distributes electricity generated by Energy Resources to Detroit Edison's 2.1 million During the applicable restriction period, the recipient of residential, commercial and industrial customers.
a performance share award has no shareholder rights. However, recipients will be paid an amount equal to the
- Non-regulated operations include businesses that market dividend equivalent on such shares. Performance share and distribute a broad portfolio of distributed generation awards are nontransferable and are subject to risk of products, provide application engineering, and monitor and forfeiture. As of December 31, 2002, there were 422,249 manage system operations.
performance share awards outstanding. Energy Gas NOTE 19 - SEGMENT AND
- Regulatedoperations include gas distribution services RELATED INFORMATION provided by MichCon, the company's gas utility that Beginning in 2002, we realigned our internal and external purchases, stores and distributes natural gas throughout financial reporting structure into three strategic business Michigan to 1.2 million residential, commercial and units (Energy Resources, Energy Distribution and Energy Gas) industrial customers.
that have both regulated and non-regulated operations.
- Non-regulated operations include the exploration and The balance of our business consists of Corporate & Other. production of gas and the gathering, processing and Based on this structure we set strategic goals, allocate storing of gas. Certain pipeline and storage assets resources and evaluate performance. This results in the are primarily supported by the Energy Marketing &
following nine reportable segments: Trading segment. Energy Resources Corporate & Other includes administrative and general
- Regulatedoperations include the power generation services expenses, and interest costs of DTE Energy corporate that of Detroit Edison, the company's electric utility. Electricity is have not been allocated to the regulated and non-regulated generated from Detroit Edison's numerous fossil plants or its businesses. Corporate & Other also includes various other nuclear plant and sold throughout Southeastern Michigan to non-regulated operations, including investments in new residential, commercial, industrial and wholesale customers. emerging energy technologies.
- Non-regulated Goodwill allocated to each segment was as follows at Energy Services is comprised of various businesses December 31, 2002:
that develop, acquire and manage energy-related assets (inMillions) and services. Such projects include coke production, Energy Resources synfuels production, on-site energy projects and merchant Regulated - Power Generation $ 406 generation facilities. Non-regulated Energy Services 43 Energy Marketing & Trading consists of the electric and Energy Marketing & Trading 17 gas marketing and trading operations of DTE Energy Trading Other 7 63 Company and the natural gas marketing and trading opera- Total Non-regulated 67 tions of DTE Enterprises, which was acquired as part of the 473 MCN Energy merger. Energy Marketing & Trading enters Energy Distribution into forwards, futures, swaps and option contracts as part Regulated - Power Distribution of its trading strategy. & Transmission 841 Other non-regulated operations consist of businesses Non-regulated 12 involved in coal services and landfill gas recovery. 853 Energy Gas Regulated - Gas Distribution 776 Non-regulated 17 793
$ 2,119
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The income tax provisions or benefits of DTE Energy's payable to or receivable from DTE Energy resulting from subsidiaries are determined on an individual company basis the inclusion of its taxable income or loss in DTE Energy's and recognize the tax benefit of Section 29 tax credits and consolidated tax return. Inter-segment revenues are not net operating losses. The subsidiaries record income tax material. Financial data of the business segments follows: (inMillions) Depreciation, Operating Depletion & Interest Income Net Total Capital 2002 Revenue Amortization Expense Taxes Income Assets Expenditures Energy Resources Regulated - Power Generation S 2,711 S 331 $ 184 $ 120 S 241 $ 7,356 $ 395 Non-Regulated Energy Services 682 23 16 1264) 182 1,536 130 Energy Marketing &Trading 681 3 15 13 25 822 - Other 102 9 4 (19) 7 256 8 Total Non-Regulated 1,465 35 35 (270) 214 2,614 138 Total Energy Resources 4,176 366 219 (150) 455 9,970 533 Energy Distribution Regulated - Power Distribution
& Transmission 1,365 268 126 80 153 4,568 306 Non-Regulated 39 2 1 (9) (16) 60 2 1,404 270 127 71 137 4,628 308 Energy Gas Regulated - Gas Distribution 1,369 104 57 36 66 2,467 93 Non-Regulated 87 19 6 14 26 427 32 1,456 123 63 50 92 2,894 125 Corporate & Other 16 - 211 (29) (52) 2,437 18 Reconciliation & Eliminations (303) - (72) 11) - (691) -
Total S 6,749 S 759 $ 548 S (59) S 632 $ 19,238 S 984 (in Millions) Depreciation, Operating Depletion & Interest Income Net Total Capital 2001 Revenue Amortization Expense Taxes Income Assets Expenditures Energy Resources Regulated - Power Generation S 2,788 $ 385 S 181 $ 83 $ 183 S 7,260 $ 348 Non-Regulated EnergyServices 434 36 22 (173) 115 1,185 257 Energy Marketing & Trading 554 2 13 24 44 835 - Other 143 10 5 (15) 6 206 - Total Non-Regulated 1,131 48 40 (164) 165 2,226 257 Total Energy Resources 3,919 433 221 (81) 348 9,486 605 64 Energy Distribution Regulated - Power Distribution
& Transmission 1,263 259 125 74 186 4,472 362 Non-Regulated 21 1 (6) (101 66 5 1,284 260 126 68 176 4,538 367 Energy Gas Regulated - Gas Distribution 615 61 34 (21) 15 2,496 66 Non-Regulated 51 12 7 5 11 409 23 666 73 41 (16) 26 2,905 89 Corporate & Other 11 29 113 (16) (14) 2,401 35 Merger and Restructuring Charge - - - - (175) - -
MCN Energy Merger Goodwill Amortization - - - - (29) - Reconciliation & Eliminations (89) - (33) (65) - 1449) Total S 5,791 $ 795 S 468 $ (110) $ 332 S 18,881 $ 1,096
(inMillions) Depreciation, Operating Depletion & Interest Income Net Total Capital 2000 Revenue Amortization Expense Taxes Income Assets Expenditures Energy Resources Regulated- Power Generation $ 2,911 S 468 $ 159 $ 120 $ 252 $ 7,085 $ 195 Non-Regulated Energy Services 338 29 28 (128) 100 808 100 Energy Marketing & Trading 26 - - 5 10 468 Other 137 8 5 (21) (7) 216 63 Total Non-Regulated 501 37 33 (144) 103 1,492 163 Total Energy Resources 3,412 505 192 (24) 355 8,577 358 Energy Distribution Regulated - Power Distribution
&Transmission 1,218 251 118 61 175 3,900 389 Non-Regulated 11 2 1 (6) (10) 19 -
1,229 253 119 55 165 3,919 389 Energy Gas Regulated - Gas Distribution - - - - - - - Non-Regulated - - - - - _ - Corporate & Other 6 - 91 (13) (36) 909 2 Merger and Restructuring Charge - - - - (16) - - Reconciliation & Eliminations (9) - (66) (9) - (749) Total S 4,638 $ 758 $ 336 $ 9 $ 468 $ 12,656 $ 749 NOTE 20 - SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly earnings per share may nottotal forthe years, since quarterly computations are based on weighted average common shares outstanding during each quarter. First Second Third Fourth (inMillions, except per share amounts) Quarter Quarter Quarter Quarter Year 2002 Operating Revenues $ 1,896 $ 1,478 $ 1,636 $ 1,739 $ 6,749 Operating Income S 348 $ 199 $ 286 $ 272 S 1,105 Net Income $ 200 S 68 S 161 $ 203 $ 632 Basic Earnings per Share $ 1.25 $ .42 $ .96 S 1.22 $ 3.85 65 Diluted Earnings per Share S 1.24 $ .42 $ .96 $ 1.21 5 3.83 2001 Operating Revenues $ 1,161 $ 1,306 $ 1,585 S 1,739 $ 5,791 Operating Income (Loss) $ 244 $ (88) $ 212 $ 328 S 696 Net Income (Loss) S 138 (1) $ (87) S 63 $ 218 $ 332(1) Basic Earnings (Loss) per Share $ .98 (1) $ (.601 $ .38 S 1.41 $ 2.17 (11 Diluted Earnings (Loss) per Share $ .97 (1) S (.60) $ .38 $ 1.41 S 2.16 (1) (1 2001 earnings werefavorably impacted by$3 million or S.02 pershare dueto an accounting change. I 11~:~ s -~A D~14-,I...
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Statistical Review (Dollars inMillions, Except Common Share Data) 2002 2001 2000 1999 Operating Revenues Regulated $ 5,445 $ 4,666 $ 4,129 S 4,047 Non-regulated 1,304 1,125 509 452 Total S 6,749 S 5,791 $ 4,638 S 4,499 Net Income Regulated $ 460 S 384 S 427 S 434 Non-regulated 172 152 57 49 Merger, restructuring and goodwill amortization - (204) (16) S 632 S 332 S 468 S 483 Diluted Earnings per Share Regulated $ 2.79 $ 2.50 $ 2.99 $ 3.00 Non-regulated 1.04 0.98 0.40 0.33 3.83 3.48 3.39 3.33 Merger, restructuring and goodwill amortization - (1.32) 10.12) S 3.83 S 2.16 $ 3.27 S 3.33 Electric Utility Deliveries (Millions of kWh) 53,702 51,137 52,234 55,524 Electric Utility Customers at Year End (Thousands) 2,136 2,125 2,110 2,089 Gas Utilty Deliveries (Bcf)(1) 835 917 945 866 Gas Utility Customers at Year End (Thousands)(1) 1,267 1,235 1,235 1,220 Financial Position at Year End Net property S 9,813 S 9,549 $ 7,387 S 7,148 Total assets S 19238 $ 18,881 $ 12,656 $ 12,316 Redeemable Preferred Securities $ 271 S 274 $ - S - Long-term debt, including capital leases $ 7,514 S 7,667 $ 4,039 $ 4,091 Total shareholders' equity S 4,565 $ 4,589 S 4,009 $ 3,909 Common Share Data Dividends declared per share $ 2.06 $ 2.06 $ 2.06 $ 2.06 Average shares outstanding-diluted (millions) 165 154 143 145 Book value per share $ 27.26 S 28.48 S 28.14 S 26.75 Market price: High $ 47.70 $ 47.13 $ 41.25 $ 44.69 Low $ 33.05 $ 33.13 S 28.44 S 31.06 Year end S 46.40 S 41.94 $ 38.94 S 31.63 Miscellaneous Financial Data Cashflowfromoperations $ 974 $ 811 S 1,015 S 1,084 Capital expenditures $ 984 S 1,096 $ 749 S 739 Employees atyear end 11,095 11,030 9,144 8,886 (1)Gas Utility data shown prior to May 2001 is presented for informational purposes only. The acquisition of MCN Energy became effective on May 31, 2001. p . i I t r tri CFi1_jC-ti
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( I b e l i eve ) INIRESPECTING OTHERS Mary Webb Maintenance General Foreman Monroe Power Plant 1998 1997 1996 1995 1994 1993 1992 $ 3,902 $ 3,657 S 3,642 $ 3,634 $ 3,519 $ 3,555 $ 3,558 272 107 3 2 - - - $ 4,174 $ 3,764 $ 3,645 $ 3,636 $ 3,519 $ 3,555 $ 3,558 $ 412 $ 405 $ 312 $ 406 $ 390 $ 491 $ 558 31 12 (3) - - - $ 443 $ 417 $ 309 S 406 $ 390 $ 491 $ 558 $ 2.83 S 2.79 $ 2.15 s 2.80 S 2.67 $ 3.34 $ 3.79 0.22 .09 (.02) - - - _ 3.05 2.88 2.13 2.80 2.67 3.34 3.79 $ 3.05 S 2.88 $ 2.13 S 2.80 $ 2.67 $ 3.34 $ 3.79 54,913 50,642 48,453 48,942 46,132 46,576 43,901 2,068 2,051 2,025 2,002 1,980 1,964 1,950 850 941 895 730 667 637 542 1,206 1,193 1,183 1,173 1,155 1,142 1,130 $ 6,943 $ 8,934 $ 8,833 $ 8,823 s 8,925 $ 8,900 $ 9,024 $ 12,088 S 11,223 $ 11,015 $ 11,131 S 10,993 $ 11,135 $ 10,309 $ - $ - $ - $ - S - $ - $ - $ 4,323 $ 3,914 $ 3,894 s 3,884 S 3,951 $ 3,972 $ 4,129 $ 3,698 $ 3,706 $ 3,588 S 3,763 S 3,706 $ 3,677 $ 3,448 $ 2.06 $ 2.06 $ 2.06 s 2.06 S 2.06 $ 2.06 $ 1.98 145 145 145 145 146 147 147 $ 25.49 $ 24.51 $ 23.69 S 23.62 $ 22.89 $ 22.34 $ 21.13 $ 49.25 $ 34.75 $ 37.25 $ 34.88 $ 30.25 $ 37.13 $ 35.25 67 $ 33.50 $ 26.13 $ 27.63 S 25.75 $ 24.25 $ 29.88 $ 30.25 $ 43.06 $ 34.69 $ 32.38 $ 34.50 $ 26.13 $ 30.00 $ 32.75 $ 834 $ 905 $ 1,079 $ 913 $ 923 $ 1,110 $ 1,063 $ 589 $ 484 $ 531 $ 454 $ 366 $ 396 $ 416 8,781 8,732 8,526 8,340 8,494 8,919 9,183 V ,4 4i1*!f)
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( I believe) I/N CONTIT/AUOU, LEARNItN Jim Bess Gas Operations Technician Words Our Industry Uses Coke and Coke Battery Securitization Raw coal is heated to high temperatures in ovens to drive Detroit Edison financed specific stranded costs at lower off impurities, leaving a carbon residue called coke. Coke is interest rates through the sale of rate reduction bonds by a combined with iron ore to create a high metallic iron that is wholly owned special purpose entity, the Detroit Edison used to produce steel. A series of coke ovens configured in Securitization Funding LLC. a module is referred to as a battery. Stranded Costs Distributed Generation (DG) Costs incurred by utilities in order to serve customers Electric energy produced at or close to the point of use, in a regulated environment are not expected to be in contrast to central station generation which generally recoverable if customers switch to alternative produces electricity at large power plants and transmits suppliers of electricity and gas. and distributes power over long distances. DG includes fuel cells, small gas turbine engines called micro-turbines, Synfuels and other devices capable of producing 2 kilowatts to The synthetic fuel process involves chemically modifying 1 megawatt of power. and binding particles of coal to produce a fuel that is used Customer Choice for power generation and coke production. The customer choice programs are statewide initiatives giving customers in Michigan the option to choose alternative suppliers for electricity and gas. Gas Cost Recovery Mechanism A gas cost recovery mechanism authorized by the MPSC that was reinstated by MichCon in January 2002, permitting MichCon to pass the cost of natural gas to its customers. Power Supply Cost Recovery Mechanism A power supply cost recovery mechanism authorized by the MPSC that allowed Detroit Edison to recover through rates its fuel, fuel-related and purchased power electric expenses. The clause was suspended under Michigan's new restructuring legislation signed into law June 5, 2000,
.6.8 which lowered and froze electric customer rates.
Section 29 Tax Credits Tax credits as authorized under Section 29 of the Internal Revenue Code that are designed to stimulate investment in and development of alternate fuel sources. p IR r4 I It F:
DTE Energy
~ DetroitEdison Celebrating the past...
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Celebrating the past... 1 I -. I 7" I '?Q C' ;I I I f ! IX
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_______ sboiderroom part, 1914 Delverng bl daorti incarporaW documem (I believe)
'* # USwA AIQAONk ad INTEGRIT Forty-six guests filed through the ash pit into the boiler's Just eleven years earlier, on January 17, 1903, company founders combustion chamber. Dressed formally and seated at a banquet purchased securities of two corporations providing electric power table built over stokers, the partygoers chattered excitedly. It was and light in Detroit This was Detroit Edison's foundation. Built on (
November 28, 1914, and Detroit Edison's Conners Creek Power a solid base of core values of respect, integrity, learning, customer Plant was celebrating construction of its first large boiler that service and business success, the embryonic electric company would supply electricity to the eastside of the city. Detroit's first was on the cusp of a revolution. That same year, Henry Ford, who power plant, built in 1904 in the Delray neighborhood, was already providing electricity to westside neighborhoods. had been chief engineer/mechanic at the Edison Muminating Company, predecessor to Detroit Edison, founded Ford Motor Company. Detroit Edison would now produce the electricity that ( empowered both individuals and industry.
', J 1903
- Several local utility companies combine a and inco.po-ate as Detroit Edison on W January 17.1903. Theaverage yearly 1940 wAI,l, ;,ri1- 11- n- - -n-'c' fifth -resienr;>eeie Ys 1948 Reddy Kilowatt introduced as a Detroit Edison household electric bill was 53.00. fih president receives emblem. Reddy was used by many United States meows for reelectrifying utilities to promote the use of electricity Europe after W /Il.
- f1900J-6-------- [19101 T-----------[1920]-------- ---19301- -[1941 19601-1888 Ediso Itiminatrng la7wny of Detroit, kA 1912 Elecrodfsstove isdsnd by Warren rAoe for eftroitEtison and so/d to Bectromnaster ATc.
1957 An MaM 705 mprter gu-Mes bofi dy ftai W ihd predecessor of DetWt tdison, organized. Alex Dow becomes seow;d The Electrmhefl superior design st the standed for or tw -d*& president ater Charles quality electric Sloves. doo-teq b or Wetmore `19&3)I
DTE Energyz 4; DebdtEdroiFon
.;0 ANNNNN IL i U Ii Sarah Sheridan Alex Dow and Henry Fod (I believe)
M Ace be, IMNOVATVE ad CREATIVE And produce it did. Between 1924 and 1929, Detroit Edison With a diverse work force that numbers more than 11,000 and a increased its electrical production capacity by building the customer base of nearly 2.1 million, the beliefs of the early Marysville, Trenton Channel and Delray 3 Power Plants. founders were firmly ensconced at Detroit Edison when it merged The post-war boom brought the St. Clair Power Plaint onboard in with MichCon to operate under the DTE Energy umbrella Sarah 1954 and the River Rouge Power Plant in 1956. That same year, Sheridan, one of the first employees of the company, and the frst ground was broken for Fermi I, the world's first experimental woman vice president (1921), commenting on business in a 1941 liquid-metal-cooled, fast-breeder reactor, producing electricity for address said, 'Public utilities have responsibilities and obligations the first time in 1966. The Monroe Power Plant went online in to customers beyond the responsibilities and obligations of 1971 and by 1978, construction began on the Belle River Power competitive businesses. This carries the implication of the highest Plant. The Fermi 2 nuclear plant went online a decade later. ethical standards in the conduct of the business. There should be no failure to deliver service of the highest quality consistent with collectible costs. It's a new world.. .the old order changes - every day - and we must change with it." 2003 DIE &Ogooelesbrates 19 se6 w athe of Decroit Edison iphilanthropy dates back to 918when itgave its firstcharitable CitsDetroit 1h0idRy eAC subsidiary Edison. 1966 ntribution toaid the American Red Cross While our core business Detroit Edison enters the atomic age umanitarian efforts inWorld War I In 1986. . 2 an e will always be energy ihit as the Enrico FermiAtomic Power Plant beDetroit Edison Foundation was formed to utEergad Eler. will Ic
- begins generating electricity asctas the channel through which its Group merger completed nothing lAe thepast tfiedition of caring continued 19901--w --- -[20001--20011 ----------. {2 2 01. .....------
.1- [20031-----------------.---------
1978 Detroit Edison exchanged light estioit Edison earns a national environmental award for its power bulbs at no charge for nearly 75 years. A clsesaction si It msMeNs reductioanPrW&Rn Theoorrpanyccortiowsto actively support pinrms to improve the environrment brot aentrs tAr~iswn oriared tihecownpeny to sup 1989 ftspfwa monWa2F, 1978. Dert Eson lateanhes the popuila -OhIsiah radio and TV advertisng campaign. Pistoni star Isiah Thomas remivad kids and adults to usaelectricity safety
Energy 1G96 De holding i9l8 Fermi 2begins commercial operations (O believe) e4&b&4ig d pUa CLAIR, Wt t-ELELVINED go As the utility industry changes, DTE Energy looks to energize the future with new developments. We're working hard to create new energy infrastructures that will fuel society's growth today without compromising the needs of future generations. We envision a system where traditional power plants will be supplemented by energy sources such as distributed generation, which produces electricity safely, cleanly and reliably near or at the point of use, rather than at large central power stations. In 2003 we celebrate our foundation, our values and our past, as we look to energize the future.
Other information about DTE Energy Market for the Company's Common Annual Meeting of Shareholders Equity and Related Shareholder Matters The 2003 Annual Meeting of DTE Energy Shareholders will DTE Energy's common stock is listed on the New York Stock be held at 10 a.m., Detroit time, Thursday, April 17, 2003, Exchange and the Chicago Stock Exchange (symbol DTE). at the DTE Energy Building, 660 Plaza Drive, Detroit. The following table indicates the reported high and low Corporate Address sales prices of DTE Energy common stock on the composite tape of the New York Stock Exchange and dividends paid per DTE Energy, 2000 2nd Ave., Detroit, Ml 48226-1279 share for each quarterly period during the past two years: Telephone: 313.235.4000 www.dteenergy.com Dividends Independent Auditors Declared Calendar fuarter High Low Per Share Deloitte &Touche LLP 2002 First $ 45.75 $ 39.65 $ 0.515 600 Renaissance Center, Suite 900, Detroit, Ml 48243-1704 Second 47.70 42.65 0.515 Third 44.56 33.05 0.515 Form 10-K Fourth 46.90 38.20 0.515 We will provide without charge to our shareholders copies 2001 First $ 40.20 $ 33.13 $ 0.515 of Form 10-K, Securities and Exchange Commission Second 47.13 39.79 0.515 Annual Report. Written requests should be directed to: Third 47.04 41.30 0.515 Susan M. Beale, Vice President and Corporate Secretary, Fourth 45.00 39.90 0.515 DTE Energy, 2000 2nd Ave., Detroit, Ml 48226-1279, or www.dteenergy.com/investors As of Dec. 31, 2002, 167,462,430 shares of the company's common stock were outstanding. These shares were held Transfer Agent by a total of 109,596 shareholders. Send certificates for transfer and address changes to: Distribution of Ownership of DTE Energy Bank of New York, Receive and Deliver Department, P.O. Box 11002, Church Street Station, New York, NY 10286, Common Stock as of Dec. 31, 2002: or refer to the Bank of New York's stock transfer Type of Owner Owners Shares Web site: www.stockbny.com Individuals 66,589 22,859,193 Joint Accounts 41,464 16,882,544 Registrar of Stock Trust Accounts 513 256,719 Nominees 21 126,890,446 Address shareholder inquiries to: Institutions/Foundations 151 69,579 Bank of New York, Shareholder Relations Department, Brokers/Security Dealers 30 15,134 P.O. Box 11258, Church Street Station, New York, NY 10286, Others 828 488,815 or e-mail inquiries to: shareowner-svcs~bankofny.com Total 109,596 167,462,430 Other Shareholder Information State and Country Owners Shares As a service to shareholders of record, DTE Energy offers Michigan 56,142 22,341,603 direct deposit of dividend payments through the Bank of Florida 6,566 2,844,676 New York. Payments can be electronically transferred California 5,480 1,869,833 directly to the bank or savings and loan account of choice New York 4,414 128,347,546 on the payment date. Please write to the address below, or Illinois 4,172 1,452,884 call 866.388.8558 to receive an authorization form to request Ohio 3,426 1,121,518 direct deposit of dividend payments. 44 Other States 28,943 9,356,173 Foreign Countries 453 128,197 Bank of New York, Shareholder Relations Department, Total 109,596 167,462,430 P.O. Box 11258, Church Street Station, New York, NY 10286, or e-mail inquiries to: shareowner-svcsCbankofny.com The company also produces an environmental stewardship report. For a copy write to: Roberta Urbani, Environmental Initiatives, DTE Energy, 2000 2nd Ave., 1051 WCB, Detroit, Ml 48226-1279. 02003 DTE Energy Company, DTE Energy is the owner of the Printed by Case-Hoyt, all rights reserved. 'Head/Corona" logo. DTE Energy or its A St. Ives Group Company DTE affiliates are the owners of various other Rochester, New York. i Printed on recycled paper registered and unregistered trademarks. NYSE S. I *. .
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