June 21, 2005

Research Assoc: Jewel Saha, ACS

Editor: James Weber, CFA

www.zackspro.com 155 North Wacker Drive l Chicago, IL 60606

DTE Energy / (DTE-NYSE) / $46.82

Note: All new material since last update is highlighted.

Reason for Report: Quarterly Results 1Q’05

Overview

Based on Detroit, Michigan DTE Energy Company (DTE) is a diversified energy company that conducts its regulated operations through its subsidiaries, Detroit Edison Company and Michigan Consolidated Gas Company (MichCon). Detroit Edison is an electric utility engaged in the generation, purchase, distribution and sale of electric energy to 2.1 million customers in southeast Michigan. MichCon is a natural gas utility engaged in the purchase, storage, transmission and distribution and sale of natural gas to 1.2 million customers throughout areas of Michigan. Additionally, the Company has numerous non-regulated subsidiaries engaged in energy marketing and trading, energy services and various other electricity, coal and gas related businesses predominantly in the midwest and eastern United States. DTE Energy operates its businesses through three strategic business units: Energy Resources, Energy Distribution and Energy Gas. DTE employs over 11,200 people. For more information about the Company, visit its website at www.dteenergy.com. The company operates on a calendar year basis.

Analysts have identified the following factors for evaluating investment merits of DTE.

Key Positive Arguments / Key Negative Arguments
·  Management’s non-regulated investment track record considered one of the best in the industry
·  Expected to generate over $1B of cash from the monetization of synfuel projects between 2005 2008; probable uses include share buybacks, debt reduction, and capital infusion into the utility
·  Residential rate caps set to expire after 2006, should boost earnings prospects thereafter.
·  Increase in stock repurchases authorization to $700MM.
·  Revenue growth expected to improve in 2005 and 2006 versus 2004.
·  Solid EPS rebound and growth in 2005 and 2006. / ·  Synfuel tax credits set to expire in 2008, analysts foresee an ‘earnings cliff’.
·  Company recently filed the ‘rate deskewing’ case; an unfavorable ruling would deter Choice Consumer customers from returning to DTE; ruling expected in late ’05.
·  Rising interest rates and unfavorable regulatory decisions.

Of the nine analysts following the stock, eight issued a neutral rating for the stock and one analyst issued a positive ratting. The average target price is $46.80, with the target price ranging from a low of $42 to a high of $53.

DTE recently increased its stock-repurchase authorization amount to $700MM, and DTE indicated it would consider a dividend increase later in 2005 if appropriate investments are not found.

Revenues

Fiscal Year Ends: December $ in millions / 2Q’04A / 3Q’04A / 4Q’04A / FY’04A / 1Q’05A / FY’05E / FY’06E
Zacks Consensus / $1,501 / $1,594 / $1,926 / $7,114 / $2,315 / $7,711 / $7,941
Digest High / 1,501 / 1,594 / 1,926 / 7,114 / 2,315 / 7,824 / 8,080
Digest Low / 1,501 / 1,594 / 1,926 / 7,114 / 2,315 / 7,469 / 7,818
Digest Average / 1,501 / 1,594 / 1,926 / 7,114 / 2,315 / 7,579 / 7,923
Digest Average Y-o-Y Growth / 1.0% / 10.6% / 6.5% / 4.5%

1Q’05 revenue was $2.3B compared to $2.1B earned the comparable previous year, which reflects y-o-y growth of 10.6%. DTE’s partners contributed to the synfuel revenue, but a portion was deferred due to the oil price volatility as part of an overall gain recognition accounting principle.

DTE’s consensus model forecasts revenue of $7.58B in FY’05 and $7.92B in FY’06, representing a y-o-y growth of 6.5% and 4.5% in FY’05 and FY’06 respectively. The estimated Compound Annual Growth Rate (CAGR) on the realized FY’04 operating income comes to 5.5%.

Operating revenues are forecast to grow in the low-to-mid single-digit levels over the next few years. The analysts believe FY’04 represented a trough in results, due to the loss of retail customers to the Customer Choice program, which should be offset by a favorable ruling in the ‘rate deskewing’ case late in ’05, leading to most retail customers returning to DTE. Revenues for the utility will likely increase in FY’05 and FY’06 following a favorable rate relief case that occurred in Nov ’04. On the non-utility side, revenue growth in FY’05 is contingent upon continued strong coke/gas prices and a favorable ruling in the natural gas rate case.

The company produced 15.6 million tons of synfuel in 2004 and expects it to increase to 18–19 tons in 2005. Cash flow from synfuel was $168 million in 2004 and is expected to increase to $420 million in 2005.

Please refer to Zacks Research Digest spreadsheet for specific revenue estimates.

Margins

FY2004A / FY2005E / FY2006E / CAGR
Operating Margin / 11.9% / 15.4% / 16.5% / 24.2%
Net Profit Margin / 6.2% / 7.9% / 8.6% / 23.8%

1Q’05 operating income was $219MM compared to $367MM earned in the comparable previous year quarter, which reflects a decrease of 40.3% on a y-o-y basis.

DTE’s consensus model forecasts operating income of $1.17B in FY’05 and $1.31B in FY’06, representing a y-o-y growth of 37.7% and 12.1% in FY’05 and FY’06 respectively. The CAGR on the realized FY’04 operating income comes to 24.2%.

1Q’05 net income was $153MM compared to $190MM earned in the comparable previous year quarter, which reflects a decrease of 19.5% on a y-o-y basis. Detroit Edison’s earnings were higher due to benefit of the rate relief granted by Michigan Public Service Commission (MPSC). Michcon earnings were lower due to uncollectible expenses, increased pension and healthcare expenses and tax adjustments. Non-utility businesses performed better due to higher synfuel contribution.

DTE’s consensus model forecasts net income of $602MM in FY’05 and $679MM in FY’06, representing a y-o-y growth of 35.9% and 12.7% in FY’05 and FY’06 respectively. The CAGR on the realized FY’04 net income comes to 23.8%.

Operating margins are expected to drastically improve in FY2005 following a difficult 2004. Lower pension and healthcare costs, along with general cost-cutting implementations, should lead to expanding margins this year. The analysts point to a likely favorable ruling in the ‘rate deskewing’ case as the key catalyst for long-term margin growth. A favorable ruling will allow rates to level in 2007, which should lead to customers returning to DTE from the Choice program.

One analyst (B. of America) expects the electric utility business to contribute operating earnings of $270MM to $290MM, mainly driven by incremental rate relief from the recent Detroit Edison rate order. The gas utility is expected to contribute $75MM to $85MM in operating earnings in 2005, driven by incremental rate relief. The Non-utility businesses are expected to contribute operating earnings of $300 million to $320 million in 2005, out of which the synfuel business is expected to contribute approximately $215MM to $225MM of the total 2005 guidance.

One analyst (AG Edwards) pointed out that the non-regulated net income, excluding synfuel and coke batteries, will grow to $105MM in FY’08 from $63MM in FY’05.

Please refer to Zacks Research Digest spreadsheet for more details on margin estimates.

Earnings Per Share

Fiscal Year Ends: December / 2Q04A / 3Q04A / 4Q04A / FY’04A / 1Q’05A / 2Q’05E / FY’05E / FY’06E
Zacks consensus / $0.23 / $0.40 / $0.94 / $2.46 / $0.88 / $0.41 / $3.43 / $3.87
Digest High EPS / 0.23 / 0.40 / 0.94 / 2.46 / 0.88 / 0.40 / 3.55 / 4.00
Digest Low EPS / 0.23 / 0.40 / 0.94 / 2.46 / 0.88 / 0.40 / 3.38 / 3.75
Digest Average / 0.23 / 0.40 / 0.94 / 2.46 / 0.88 / 0.40 / 3.48 / 3.87
Digest Average Y-o-Y Growth / -45.2% / -40.3% / 14.6% / -17.2% / -1.1% / 73.9% / 41.5% / 11.1%

1Q’05 EPS was $0.88 compared to a year ago earnings of $0.89, which reflects y-o-y decline in earnings of 1.1%. Contributions from the various segments were $0.33 from Energy Resources, $0.23 from Energy Distribution, $0.35 from Energy Gas, and Corporate and Other realized a loss of $0.03. The weaker results reflects lower earnings associated with the company’s decision to defer gas withdrawal from storage, which have led to increased gas purchase costs for fulfillment of gas supply contracts. One analyst (B. of America) does not view the short fall in earnings as a concern as weak results reflect more of a timing issue as opposed to fundamental problems.

Management reconfirmed its FY’05 EPS guidance, which is in the range of $3.30-$3.60 per share. The company is likely to improve earnings driven by higher utility margins, lower choice switching levels at Detroit Edison, higher synfuel earnings, and final rate relief at Michcon.

The digest yearly EPS estimate is $3.48 for FY’05 and $3.87 for FY’06, which represents y-o-y growth of 41.5% and 11.1% in FY’05 and FY’06, respectively. The CAGR on realized FY’04 EPS comes to 25.4%.

One analyst (UnionBankSwitz.) lowered earnings estimates given the lower 1Q’05 earnings and the delay in receiving the final rate relief at Michcon. Another analyst (B. of America) feels higher forward gas prices will enable the company to reverse the loss and earn some additional margin going forward.

DTE recently increased its stock-repurchase authorization amount to $700MM, and DTE indicated it would consider a dividend increase later in 2005 if appropriate investments are not found.

Please refer to Zacks Research Digest spreadsheet for more extensive EPS figures.

Target Price/Valuation

Of the nine analysts following the stock, eight issued a neutral rating and one analyst (Maxcor) issued a positive ratting. The average target price is $46.80, with the target price ranging from a low of $42 (B. of America) to a high of $53 (Maxcor).

Rating Distribution
Positive / 11.0%
Neutral / 89.0%
Negative / 0%
Average Target Price / $46.80

Please refer to Zacks Research Digest Spreadsheet for further details on valuation.

Upcoming Events

Earnings Announcement (2Q’05) / July 28, 2005

Long-Term Growth

Of the nine analysts, five forecast a long-term EPS growth rate. Estimated LTG rates range from 4% (B. of America, Lehman) to 6% (KeyBanc, Maxcor) with a digest average of 5%.

Capital investments are expected to total $1.02B to $1.07B, and dividends are expected to total $360 MM, up slightly from the $354MM reported in 2004. Asset sales are expected to contribute another $30 MM.

The company’s growth is contingent upon favorable rate cases, proper uses of excess cash and re-investment/expansion of its utility. The company recently filed a ‘rate deskewing’ case, which, if ruled in its favor, will help level rates starting in 2007. This should help aid the return of retail customers to DTE from the Consumer Choice program. The result would be a boost to earnings and operating margins. DTE also expects to generate over $1.65B of cash over the next 3 years from the monetization of synfuel projects. The analysts have mixed opinions with regard to potential uses for this cash; however, management has already stated that debt re-payment, share buybacks, and growth re-investment into the utility are top priorities. If this plan is executed, investors should expect above-average earnings growth for the next 3 years. A significant risk to long-term earnings growth is the expiration of synfuel tax credits in 2007, which will lead to a decline in earnings beginning in 2008.

Additional Conversation/ Cash Flow

One analyst (B. of America) pointed out that DTE expects to be slightly free cash flow positive in 2005 and the cash flow from operations in 2005 of approximately $1.4B to $1.5 billion ($1.1B to $1.150B of cash flow from operations plus synfuel production payments totaling $300MM to $350MM).

DTE indicated that around 3.8MM shares will be converted as part of the 2002 equity issuance.

Detroit Edison signed an agreement with the MPSC and other parties regarding the accounting treatment for its business computer system modernization project. The agreement allows Detroit Edison to defer up to $60MM of costs that would normally be expensed as regulatory assets, beginning January 1, 2006. These regulatory assets will be recovered as part of a subsequent Detroit Edison general rate case order.

One analyst (Lehman) pointed out that MPSC issued a recommendation in DTE's electric rate de-skewing the purpose of which is to smooth higher commercial rates with lower residential rates. The analyst added that the points of difference were modestly negative.

Individual Analyst Opinions

POSITIVE RATINGS (11%)

Maxcor – May 31, 2005 – Buy ($53 price target): The analyst believes earnings will continue to be strong given the benefits from rate increases and manageable exodus of customers.

NEUTRAL RATINGS (89%)

AG Edwards – April 29, 2005 – Hold: The analyst believes the fair value of the shares justifies the rating.

Harris Nesbitt – May 16, 2005 – Neutral ($45): The analyst believes Detroit Edison continues to try to work both regulatory and legislative angles to improve its position.

KeyBanc – May 20, 2005 – Hold: The analyst feels the discount at which the shares are traded is justified because of a high proportion of synfuel earnings. The analyst believes a 4.5% dividend yield is justified and attractive.

B. of America – May 18, 2005 – Neutral ($42): The analyst feels the rating on the shares is justified given the likely ‘earnings cliff ‘in 2008 following the expiration of synfuel credits.