About halfway through the closing on my house in Michigan last summer, I became very familiar with DTE Energy (NYSE:DTE) through the massive power outage that affected much of the Ohio Valley and Northeast. We all immediately thought the worst when a man walked into the office and told us that many Eastern states also lost power. As transplanted New Yorkers, the thoughts of September 11 still weighed heavy on my family's hearts and minds. It took a few days for the power to come back on, but the effort of power companies such as DTE was greatly appreciated by so many people.
A major issue that revolves around DTE and its future is Michigan's Electric Choice Program. It seems simple to understand: Lawmakers wanted to be able to control energy rates, support low-income customers, reduce emissions from power plants, aid school district spending, and generally create a level playing field for electricity suppliers. However, the law (Public Act 141) has mostly inhibited DTE and has opened the power companies' high-margin customers to DTE's competition. In response to this, six state Senate bills (1331-1336) were introduced earlier this month and aim to adjust the titled playing field.
As DTE waits for help from the government, its results are taking a beating. The company reported second-quarter earnings of $0.23 per share, which was an eye-popping $0.18 below the consensus estimate of $0.41 per share. Management pointed to its two utilities, Detroit Edison and MichCon, as reasons for the shortfall. DTE said, "The negative impact of Michigan's Electric Choice Program was the largest factor driving the earnings decline at Detroit Edison."
The company also cited higher pension and health-care expenses, increased uncollectible expenses, and mild weather as MichCon's sources of trouble. Conversely, the company has been performing quite well in its non-regulated businesses and has upped its 2004 guidance for this portfolio to between $215 million and $255 million from a previous estimate of between $194 million and $249 million.
The bottom line is that companies such as DTE, which previously had the run of the land, will now have to fight for just about every energy dollar spent. This transition from monopoly to competition was one that I witnessed in the telecom services industry following the passage of the Telecommunications Act of 1996.
While DTE does have a legitimate beef that the Electric Choice Program must be tweaked a bit, it must also develop a tougher skin and prepare itself for the onrush of competition. I would still hold the shares, given the company's strong 5.19% dividend yield, but would wait to buy additional shares until this whole Electric Choice mess is cleaned up.
Fool contributor Phil Wohl spent more than 12 years on Wall Street and now concentrates his writing on more fictional characters. He has no stake in any firm mentioned above.
