1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1994 1-2198
THE DETROIT EDISON COMPANY
(Exact name of registrant as specified in its charter)
MICHIGAN 38-0478650
(State of incorporation) (I.R.S. employer identification no.)
2000 SECOND AVENUE, DETROIT, MICHIGAN 48226
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (313) 237-8000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $10 par value New York and Chicago Stock Exchanges
Preferred Stock (5 1/2%, 7.36%,
7.45%, 7.68%, 7.74% and
7.75% series), cumulative,
$100 par value New York Stock Exchange
General and Refunding Mortgage Bonds
(only Series R and S) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
______________________________
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
At February 28, 1995, 144,863,966 shares of the Company's Common Stock,
substantially all held by non-affiliates, were outstanding, with an aggregate
market value of approximately $4,146,731,027 based upon the closing price on
the New York Stock Exchange.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the Company's definitive proxy statement dated March 9,
1995 (which is included with the prospectus of DTE Holdings, Inc.), in
connection with its Annual Meeting of Shareholders to be held on April 24,
1995, is incorporated herein by reference in Part III, Items 10, 11, 12 and 13
hereof.
2
CROSS REFERENCE TO INFORMATION CONTAINED IN THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT DATED MARCH 9, 1995
(INCORPORATED HEREIN BY REFERENCE)
ANNUAL REPORT LOCATION OF INFORMATION
ON FORM 10-K IN PROXY STATEMENT
------------- -----------------------
Part III, Item 10 - Directors and "The Election of Directors" - Pages 5-9
Executive Officers of the Registrant "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" - Page
35
Part III, Item 11 - Executive "Board Compensation Committee Report on
Compensation Executive Compensation" - Pages 10-15
Part III, Item 12 - Security "Security Ownership of Management" - Page 9
Ownership of Certain Beneficial Owners and
Management
Part III, Item 13 - Certain "Compensation Committee Interlocks and Insider
Relationships and Related Transactions Participation" - Page 15
2
3
TABLE OF CONTENTS
Page
----
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Part I - Items 1 and 2 - Business and Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Certain Factors Affecting Public Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Capital Expenditure Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7
Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Fuel Costs and Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Nuclear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Regulation and Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Michigan Public Service Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Federal Energy Regulatory Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Nuclear Regulatory Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Air . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Wastes and Toxic Substances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Employes and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Employes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 3 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 4 - Submission of Matters to a Vote of Security-Holders . . . . . . . . . . . . . . . . . . 22
Part II -Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 6 - Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 24
Item 8 - Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . 30
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . 49
Part III -Item 10 - Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . 49
Item 11 - Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Item 12 - Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Item 13 - Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 50
Part IV -Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3
4
DEFINITIONS
AFUDC . . . . . . . . . . . . . Allowance for Funds Used During Construction (both borrowed and other funds)
BTU . . . . . . . . . . . . . . British Thermal Unit
CERCLA . . . . . . . . . . . . Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980
Company . . . . . . . . . . . . The Detroit Edison Company and Subsidiary Companies
Consumers . . . . . . . . . . . Consumers Power Company (a wholly-owned subsidiary of CMS Energy Corporation)
DOE . . . . . . . . . . . . . . United States Department of Energy
DSM . . . . . . . . . . . . . . Demand-Side Management
EPA . . . . . . . . . . . . . . Environmental Protection Agency
ERA . . . . . . . . . . . . . . Department of Energy's Economic Regulatory Administration
FERC . . . . . . . . . . . . . Federal Energy Regulatory Commission
kWh . . . . . . . . . . . . . . Kilowatthour
Ludington . . . . . . . . . . . Ludington Hydroelectric Pumped Storage Plant (owned jointly with Consumers)
MDNR . . . . . . . . . . . . . Michigan Department of Natural Resources
Mortgage Bonds . . . . . . . . The Company's General and Refunding Mortgage Bonds
MPSC . . . . . . . . . . . . . Michigan Public Service Commission
MW . . . . . . . . . . . . . . Megawatt
MWh . . . . . . . . . . . . . . Megawatthour
MWRC . . . . . . . . . . . . . Michigan Water Resources Commission
Note . . . . . . . . . . . . . Notes to Consolidated Financial Statements
NPDES . . . . . . . . . . . . . National Pollutant Discharge Elimination System
NRC . . . . . . . . . . . . . . Nuclear Regulatory Commission
PCB's . . . . . . . . . . . . . Polychlorinated Biphenyls
PRP . . . . . . . . . . . . . . Potentially Responsible Party
PSCR . . . . . . . . . . . . . Power Supply Cost Recovery
RCRA . . . . . . . . . . . . . Resource Conservation and Recovery Act
Registrant . . . . . . . . . . The Detroit Edison Company
Renaissance . . . . . . . . . . Renaissance Energy Company (an unaffiliated company)
4
5
PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES.
GENERAL
The Company, incorporated in Michigan since 1967, is a regulated
public utility engaged in the generation, purchase, transmission, distribution
and sale of electric energy in a 7,600 square mile area in southeastern
Michigan. The Company's service area includes about 13% of Michigan's total
land area, and about half of its population (approximately five million
people), electric energy consumption and industrial capacity. The Company's
residential customers reside in urban and rural areas, including an extensive
shoreline along the Great Lakes and connecting waters. See operating revenues,
sales and customer data by rate class below.
1994(1) 1993(1) 1992
----------------------- ----------------------- -----------------------
Percent Percent Percent
Operating Revenues Amount of Total Amount of Total Amount of Total
------------------ ----------- ---------- ----------- ---------- ----------- ----------
(Thousands, except percentages)
Electric
Residential . . . . . . . . $1,136,169 32.3% $1,125,624 31.7% $1,098,027 30.8%
Commercial . . . . . . . . . 1,473,309 41.9 1,428,321 40.2 1,438,258 40.4
Industrial . . . . . . . . . 736,339 20.9 720,002 20.2 749,240 21.1
Sales for resale and other (2) 102,534 2.9 193,410 5.4 187,058 5.3
---------- ----- ---------- ----- ---------- -----
Total System . . . . . . . 3,448,351 98.0 3,467,357 97.5 3,472,583 97.6
Interconnection . . . . . . 43,141 1.2 60,363 1.7 58,447 1.6
---------- ----- ---------- ----- ---------- -----
Total Electric . . . . . . 3,491,492 99.2 3,527,720 99.2 3,531,030 99.2
Steam Heating . . . . . . . . . 27,849 0.8 27,491 0.8 27,113 0.8
---------- ----- ---------- ----- ---------- -----
Total Operating Revenues . $3,519,341 100.0% $3,555,211 100.0% $3,558,143 100.0%
========== ===== ========== ===== ========== =====
(1) 1994 and 1993 include unbilled sales and operating revenues by rate class
while 1992 includes unbilled sales and operating revenues in the other
category.
(2) Primary pumping operating revenues, sales and customers are included in
commercial in 1994 and in the other category in 1993 and 1992.
1994(1) 1993(1) 1992
----------------------- ----------------------- -----------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
From Prior From Prior From Prior
Sales Amount Year Amount Year Amount Year
----- ----------- ---------- ----------- ---------- ----------- ----------
Electric (thousands of kWh)
Residential . . . . . . . . 12,169,417 1.1 % 12,032,342 6.4% 11,309,007 (7.5)%
Commercial . . . . . . . . . 17,041,446 6.5 15,996,307 4.0 15,384,055 (1.2)
Industrial . . . . . . . . . 13,356,351 5.9 12,618,018 6.7 11,827,605 2.3
Sales for resale and other(2) 1,586,162 (31.6) 2,317,793 6.5 2,176,096 28.6
---------- ---------- ----------
Total System . . . . . . . 44,153,376 2.8 42,964,460 5.6 40,696,763 (0.9)
Interconnection . . . . . . 1,978,135 (45.2) 3,611,455 12.7 3,204,357 (42.1)
---------- ---------- ----------
Total Electric . . . . . 46,131,511 (1.0)% 46,575,915 6.1% 43,901,120 (5.8)%
========== ========== ==========
Steam Heating
(thousands of lbs.) . . . . 3,109,596 3.5 % 3,004,394 -% 3,005,724 7.5%
========== ========== ==========
See footnote reference above.
5
6
Customers (at Year-End) 1994 1993 1992
----------------------- ---------- ---------- ----------
Electric
Residential . . . . . . . . . . . . . . . . 1,805,141 1,790,197 1,777,914
Commercial . . . . . . . . . . . . . . . . . 172,221 170,453 169,080
Industrial . . . . . . . . . . . . . . . . . 889 850 813
Other (2) . . . . . . . . . . . . . . . . . 1,967 2,034 1,985
--------- --------- ---------
Total System . . . . . . . . . . . . . . . 1,980,218 1,963,534 1,949,792
Interconnection . . . . . . . . . . . . . . 7 7 7
--------- --------- ---------
Total Electric . . . . . . . . . . . . . . 1,980,225 1,963,541 1,949,799
========= ========= =========
Steam Heating . . . . . . . . . . . . . . . . . . 367 378 412
========= ========= =========
See footnote reference on Page 5.
During 1994, sales to automotive and automotive-related customers
accounted for approximately 11% of total operating revenues. The Company's 30
largest industrial customers accounted for approximately 18% of total operating
revenues in 1994 and 1993 (as compared to 19% in 1992) and no one customer
accounted for more than 4%.
Set forth below are comparisons of total system sales by year and quarter.
1994 1993 1992
---------- ---------- ----------
(Thousands of kWh)
First Quarter . . . . . . . . . . . . . 10,892,135 10,583,641 10,133,257
Second Quarter . . . . . . . . . . . . . 10,696,503 10,170,611 9,938,869
Third Quarter . . . . . . . . . . . . . 11,790,735 11,606,908 10,359,706
Fourth Quarter . . . . . . . . . . . . . 10,774,003 10,603,300 10,264,931
---------- ---------- ----------
Total System . . . . . . . . . . . . . . 44,153,376 42,964,460 40,696,763
========== ========== ==========
The Company generally experiences its peak load and highest total system
sales during the third quarter of the year as a result of air conditioning and
cooling-related loads; however, in 1994 a new all-time peak of 9,684 MW was
reached in the second quarter.
For information on an interruptible rate, commonly known as R-10, and the
special manufacturing contracts which are expected to reduce revenues and peak
demand, see "Regulation and Rates" and for information on the Company's future
sales growth which may be limited by the economic base in the Company's service
territory, see Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
For further information on financial results of the Company's operations,
see Item 6 - Selected Financial Data, Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations, Item 8 - Financial
Statements and Supplementary Data and Item 14 - Exhibits, Financial Statement
Schedules and Reports on Form 8-K.
6
7
CERTAIN FACTORS AFFECTING PUBLIC UTILITIES
The Company, in common with other public utilities having industrialized
service areas, is experiencing increased competition and pressure to reduce
rates in order to retain industrial customers. These competitive issues are
further compounded by public interest in and existing and proposed regulations
dealing with cogeneration, transmission access and retail wheeling.
In response to competitive pressures, the Company has developed a DSM
program and has, also, entered into special manufacturing contracts with
Chrysler Corporation, Ford Motor Company and General Motors Corporation. These
competitive responses are expected to reduce revenues.
The Company has announced its intention to create a holding company.
Subject to the receipt of necessary approvals, the new structure will be in
place by year-end 1995. A holding company structure is responsive to
competitive issues and will allow the development of new non-utility revenue
sources while offering the utility protection from possible losses from
non-utility investments.
Also, in part, in response to competitive issues, in February 1995, the
MPSC announced its initiation of a thorough review of its powers and
jurisdiction, and current and future industry structure, to be able to
recommend statutory changes to the Michigan legislature, including
consideration of an overall recodification of the statutes governing energy
provision and utility regulation. This review would be in light of change in
the electric power and natural gas industries. The MPSC indicated it had no
specific time frame for completion of the review. The Company cannot predict
what suggestions for legislative changes may result from the review, or whether
it may result in regulation of the proposed holding company formation or
additional regulation of the relationship between the proposed holding company
and the Company.
On November 2, 1994, the Securities and Exchange Commission ("SEC")
issued a release requesting comments on possible revision of regulation of
public utility holding companies under the Public Utility Holding Company Act
of 1935. Various parties have suggested significant revisions to, or repeal
of, this statute. The Company cannot predict whether Congress will take any
action to significantly modify or repeal the Holding Company Act or whether the
SEC will take any action to significantly revise its rules promulgated under
such statute.
In addition, the Company, in common with other public utilities, is
subject to extensive environmental regulation. Additional costs may result as
the effects of various chemicals on the environment (including nuclear waste)
are studied and governmental regulations are developed and implemented. The
costs of future nuclear decommissioning activities are the subject of increased
regulatory attention.
CAPITAL EXPENDITURE PROGRAM
The Company has no current plans to construct additional generating
plants. However, an Integrated Resource Plan, reviewed by the MPSC biennially,
recognizes that the need for additional capacity may be satisfied by the return
to service of certain units in economy reserve status and various DSM programs.
See "Regulation and Rates - Michigan Public Service Commission - Integrated
Resource Plan".
7
8
Capital expenditures in 1994, 1993 and 1992 were $366 million (including
$4 million of AFUDC), $396 million (including $3 million of AFUDC) and $416
million (including $3 million of AFUDC), respectively. Also, the purchase of
leased equipment totaled $11.5 million in 1994 and $2.4 million in 1993.
Projections for the 1995-1999 period contemplate capital expenditures of
approximately $1.9 billion (including an estimated $18 million of AFUDC).
Also, projections for capitalized leases and non-utility investments for the
same period are estimated to be $250 million. The 1995 capital expenditure
program is budgeted at $398 million (including $4 million of AFUDC). The 1995
capital expenditure program includes planned expenditures for production plant
improvement projects ($68 million), transmission and distribution facilities
($140 million), general plant projects ($87 million) and miscellaneous
construction and construction overheads capitalized ($103 million). Planned
expenditures for 1995 capitalized rail-car leases and non-utility investments
are estimated to be $22 million and $40 million, respectively.
FINANCING
The Company is required to obtain financing authority from the MPSC as to
the issuance of long-term debt and equity securities and from the FERC as to
short-term obligations (maturities of two years or less).
An MPSC order permits the Company to issue approximately $3.5 billion of
securities for the purpose of refinancing debt and preferred and/or preference
stock (issued prior to 1993) prior to maturity (when economic) and at maturity,
and to replace funds used for those purposes. The Company also has MPSC
authority to refinance substantially all non-taxable debt obligations.
In 1994, the Company optionally redeemed $218 million of higher-cost
Mortgage Bonds and $20 million of tax-exempt debt obligations utilizing, in
part, the proceeds of a $200 million collateralized note issue and two new
tax-exempt issues totaling $20 million. In addition, the Company financed
certain pollution control projects with the proceeds of two new tax-exempt debt
issues totaling $30 million.
The Company currently has authority from the FERC for short-term
borrowings in the amount of up to $1 billion, which authority expires in May
1995; and an application is pending with FERC to extend this authority an
additional two years. At February 28, 1995, the Company had short-term credit
arrangements of $404 million under which $67.5 million of borrowings were
outstanding. See Note 8.
At December 31, 1994, the book value of the Company's Common Stock, after
deduction of Common and Preferred Stock expenses, was $22.89 per share as
compared to $22.34 per share at December 31, 1993.
PROPERTIES
The summer net rated capability of electric department generating units
is as follows:
8
9
Summer Net
Location By Rated Capability(2)(3)
Michigan ----------------------- Year
Plant Name(1) County (MW) % in Service
-------------------------------- ----------- ------- -------- -------------------------
Fossil-fueled Steam-Electric
Belle River (4) St. Clair 1,026 10.0% 1984 and 1985
Greenwood (5) St. Clair 785 7.7 1979
Harbor Beach Huron 103 1.0 1968
Marysville St. Clair 167 1.6 1930, 1943 and 1947
Monroe Monroe 3,000 29.4 1971, 1973 and 1974
River Rouge Wayne 500 4.9 1957 and 1958
St. Clair St. Clair 1,379 13.5 1953, 1954, 1961 and 1969
Trenton Channel Wayne 725 7.1 1949, 1950 and 1968
------ -----
7,685 75.2%
Oil or Gas-fueled Peaking Units Various 525 5.2 1966-1971 and 1981
Nuclear-fueled Steam-Electric
Fermi 2 (6) Monroe 1,085 10.6 1988
Hydroelectric Pumped Storage
Ludington (7) Mason 917 9.0 1973
------ -----
10,212 100.0%
====== =====
---------------
(1) See Note 10.
(2) Summer net rated capabilities of generating units in service are based on
periodic load tests and are changed depending on operating experience, the
physical condition of units, environmental control limitations and
customer requirements for steam, which otherwise would be used for
electric generation.
(3) Excludes two oil-fueled units, River Rouge Unit No. 1 (206 MW) and St.
Clair Unit No. 5 (250 MW), and one coal-fueled power plant, Conners Creek
(236 MW), all in economy reserve status.
(4) The Belle River capability represents the Company's entitlement to 81.39%
of the capacity and energy of the plant. See Note 4.
(5) Pursuant to MPSC orders, Greenwood Unit No. 1 was not in rate base during
the period January 1988 through January 21, 1994 with no return on the
investment during that period. See Note 3.
(6) Fermi 2 was out of service in 1994. See Note 2 and discussion below.
(7) Represents the Company's 49% interest in Ludington with a total capability
of 1,872 MW.
The four Monroe units, two Belle River units, Fermi 2 and one unit at each
of the Trenton Channel and St. Clair Power Plants account for 6,061 MW of the
Company's summer net rated capability. These units, which commenced commercial
operation during the period 1968 through 1988, are the Company's larger, more
efficient generating units. The Monroe, St. Clair and Belle River power plants
provided approximately 48%, 19% and 18%, respectively, of the Company's total
1994 power plant generation.
On December 25, 1993, the Fermi 2 reactor automatically shut down after a
turbine-generator failure. Major repairs have been completed and tests are
continuing to balance and synchronize the unit. See Note 2.
Sources of electric energy were as follows:
1994 1993 1992
------ ------ ------
(Thousands of MWh)
Power plant generation
Fossil . . . . . . . . . . . . . . . . . . . . . . . . 42,410 38,882 36,689
Nuclear . . . . . . . . . . . . . . . . . . . . . . . . - 8,274 7,338
Purchased power . . . . . . . . . . . . . . . . . . . . . 6,599 2,211 2,705
------ ------ ------
Net system output . . . . . . . . . . . . . . . . . . . . 49,009 49,367 46,732
====== ====== ======
9
10
The Company and Consumers are parties to an Electric Coordination
Agreement providing for emergency assistance, coordination of operations and
planning for bulk power supply, with energy interchanged at nine
interconnections. The Company and Consumers also have interchange agreements
to exchange electric energy through 12 interconnections with The Toledo Edison
Company, Indiana Michigan Power Company, Northern Indiana Public Service
Company and Ontario Hydro. In addition, the Company has interchange agreements
for the exchange of electric energy with Michigan South Central Power Agency,
Rouge Steel Company and the City of Wyandotte.
The Company also purchases energy from cogeneration facilities and other
small power producers. Energy purchased from cogeneration facilities and small
power producers amounted to $10.9 million, $13.9 million and $16.7 million for
1992, 1993 and 1994, respectively, and is currently estimated at $22.7 million
for 1995.
An all time peak demand of 9,684 MW was experienced for the Company's
system on June 16, 1994, with a reserve margin of 6.2%. The previous peak was
9,362 MW set in August 1993. Based on the current load forecast and planned
generating capability, the Company estimates that its summer reserve margin,
expressed as a percentage of peak demand, will be approximately 14% for 1995
and 17% for 1996. Included as part of the 1995 and 1996 reserve margin
projections are the Company's present and projected capacity purchases and
anticipated peak reductions due to the implementation of various DSM programs,
including the R-10 interruptible rate. The 1995 and 1996 reserve margins are
above the Company's current planning criterion, which specifies a minimum
reserve margin of 12%.
The Company has an agreement for the sale and assignment, from time to
time, of an undivided ownership interest in $200 million of the Company's
customer accounts receivable and unbilled revenues. The agreement has been
extended to February 1996, although the Company anticipates that all customer
accounts receivable and unbilled revenues subject to this agreement will be
repurchased in 1995. See Note 5.
Gross property additions and retirements from January 1, 1990 through
December 31, 1994 were $1.69 billion and $299 million, respectively.
The Company's electric generating plants are interconnected by a
transmission system operating at 24 to 345 kilovolts through 94 transmission
stations. As of December 31, 1994, electric energy was being distributed in
the Company's service area through 577 substations over 2,946 distribution
circuits.
FUEL COSTS AND SUPPLY
The Company's 1990 through 1994 generating capability was primarily
dependent upon coal. Fuel information for these periods is shown below.
10
11
Percent of
Cents Per Million BTU Total Fuel Consumed Average
------------------------------ ----------------------- Cost
Per Ton
All of Coal
Coal Nuclear Oil Gas Fuels Coal Nuclear Oil Gas Consumed
---- ------- --- --- ----- ---- ------- --- --- --------
1994 153 - 337 285 157 99% -% -% 1% $32.25
1993 154 111 358 259 148 81 18 - 1 31.68
1992 160 97 403 212 150 81 17 - 2 32.88
1991 159 109 409 196 153 84 14 1 1 33.21
1990 163 114 414 166 156 83 16 - 1 34.21
COAL. The Company estimates that it will require approximately 600
million tons of coal over the next 35 years for its coal-fueled generating
units. The Company expects to obtain a significant portion of its requirements
through long-term contracts and the balance through additional short-term
agreements and spot purchases. The Company has contracts with five coal
suppliers for a total purchase of up to 82 million tons of low-sulfur western
coal to be delivered during the period from 1995 through 2005. It also has
several contracts for the purchase of approximately 18 million tons of
Appalachian coal with varying contract expiration dates through 1999. These
existing long-term coal contracts include provisions for market price reopeners
and price escalation as well as deescalation.
Under current market conditions, the Company is able to purchase coal at
prices lower than some of its existing long-term contracts. As a result, the
Company is renegotiating some contracts and buying out others whenever it is
prudent and economic.
The low-sulfur western coal contracts have a maximum sulfur content of
0.55%. The Appalachian coal contracts range in maximum sulfur content from
0.70% to 3.0%. As required by the Michigan Air Pollution Control Commission,
the Company's aggregate consumption of both types of coal averages below 1%
sulfur content.
For further information on environmental matters, see "Environmental
Matters" and Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OIL. The Company purchases No. 2 oil, used principally for peaking units
and start-up for other units, and No. 6 oil, used principally by Greenwood Unit
No. 1, through spot market purchases.
GAS. Natural gas is used principally at one of the Company's steam
heating plants and Greenwood Unit No. 1. Natural gas requirements are met
through spot market purchases.
NUCLEAR. Renaissance holds title to the nuclear fuel utilized at Fermi
2. Under the terms of a heat purchase contract between the Company and
Renaissance, the Company makes quarterly payments to Renaissance for the cost
of the nuclear fuel consumed and interest expense. For information on nuclear
fuel financing, see Notes 8 and 9.
Since Fermi 2 is not scheduled for refueling in 1995, the Company is
currently maintaining a minimal inventory for nuclear fuel requirements. Also,
11
12
the Company believes that adequate uranium supplies exist to supplement
existing contracts to meet plant requirements beyond 1995. The Company has a
contract with the DOE for the future storage and disposal of spent nuclear fuel
from Fermi 2. Under the terms of the contract, the Company makes quarterly
payments to the DOE based upon a fee of 1 mill per kWh applied to the Fermi 2
electricity generated and sold. No fees were levied in 1994 due to Fermi 2
being out of service. The spent nuclear fuel will be stored on site until the
DOE accepts it for disposal. The DOE has stated that it will be unable to
store spent nuclear fuel at a permanent repository until after 2010. However,
the DOE and utilities with nuclear units are pursuing other interim storage
options. The Company estimates that existing temporary storage capacity at
Fermi 2 will be sufficient until the year 2000, or until 2015 with the
expansion of such storage capacity.
REGULATION AND RATES
MICHIGAN PUBLIC SERVICE COMMISSION. The Company is subject to the
general regulatory jurisdiction of the MPSC, which, from time to time, issues
its orders pertaining to the Company's conditions of service, rates and
recovery of certain costs, the issuance of securities (other than short-term
obligations), accounting and various other matters.
MPSC orders issued in December 1988 and on January 21, 1994 are currently
in effect with respect to the Company's rates and certain other revenue and
operating-related matters.
On January 21, 1994, the MPSC issued an order reducing the Company's
rates in the amount of $78 million annually. The order is the subject of
various appeals before the Michigan Court of Appeals. See Note 3 for a
discussion of the provisions of the January 21, 1994 order.
In 1994, the MPSC issued an order approving a settlement agreement
resolving the issues concerning the reconciliation of the Company's 1993 PSCR
plan and the Fermi 2 performance standard. The Company refunded approximately
$3.4 million, plus interest, to customers through a credit on their electric
bills. This refund is due to overcollection from its customers for its power
supply costs for calendar 1993. The order defers consideration of unamortized
nuclear fuel expense totaling $6.1 million until the Company's 1994 PSCR
reconciliation case. In addition, the Company refunded approximately $147,000
for 1993 to its customers due to provisions of the Fermi 2 performance
standard. On January 25, 1995, the MPSC approved a settlement agreement that
adopts a plan to utilize Fermi 2 insurance proceeds for the $6.1 million of
unamortized nuclear fuel and to substantially offset increased power supply
costs incurred during 1994 due to the forced outage at the Fermi 2 power plant.
The settlement will avoid the need for a potential surcharge to the Company's
PSCR customers to recover these increased costs for replacement power.
Conservation and Demand-Side Management Programs - As the result of a
generic review of Michigan conservation programs, the MPSC in June 1988 ordered
each Michigan gas and electric utility to file a biennial energy conservation
report, including a three-year plan. In December 1989, the MPSC issued an
order approving a settlement agreement under which the Company entered into a
number of conservation and DSM pilot programs to be funded by the existing 0.1
mill surcharge approved in a December 1988 MPSC order. On January 28, 1993,
the MPSC issued an order approving a settlement agreement of the reconciliation
of expenses and revenues for the period 1989-91. The order required that $4
million
12
13
be utilized for program expenses. In May 1992, the MPSC issued an order
approving a settlement agreement covering the Company's demand and energy
conservation programs for the years 1992 and 1993. Funding was provided by the
existing 0.1 mill surcharge. The Company was also required to contribute an
additional $4 million, which was not recovered through the surcharge, for use
in the Residential Low Income Program, which amount was charged to Other Income
and Deductions in 1992 and 1993. On September 8, 1994, the MPSC issued an
order approving a settlement agreement of the reconciliation of expenses and
revenues for the Company's demand and energy conservation programs for the
years 1992 and 1993. The order required that $3.5 million be utilized for
program expenses and that $1.3 million plus interest be refunded to customers
during the billing month of October 1994.
On April 11, 1994, the MPSC issued an order approving a partial
settlement agreement covering the Company's energy conservation programs for
the period 1994-1996. The order authorizes the Company to collect $21.2
million through a surcharge for the three-year program to install energy
conservation measures in low-income customer households.
Also, as discussed in Note 3, the January 21, 1994 MPSC order authorized
a three-year $41.5 million DSM program. On September 1, 1994, the Company
filed for approval of a DSM surcharge for 1995. The Company's 1995 DSM plan
includes measures which pass the Ratepayer Impact Measure test and customer
value DSM measures totaling $4.9 million. An MPSC order is expected by June
1995.
Integrated Resource Plan - The Company's Integrated Resource Plan ("IRP")
is designed to provide resource plans which have adequate flexibility to react
to major changes and at the same time address the concerns of its customers.
It attempts to minimize risks and costs to customers and shareholders alike,
while maintaining an appropriate balance between demand-side and supply-side
alternatives. The Company's first IRP proposed to meet future load
requirements by utilizing existing power plant units that are in economy
reserve status rather than building new plants.
On September 1, 1994, the Company filed its biennial third Integrated
Resource Plan with the MPSC. This IRP, which covers a 15-year (1994-2008)
study period, calls for the return to service of existing plant and a DSM
program that will continue to provide for interruptible service to large
primary customers which is expected to reduce peak demand by 500 MW in 1995.
The recommended IRP plan again indicates that the Company will not need to add
capacity before the year 2000, at which time the restart of the Conners Creek
coal-fired units that are currently in economy reserve is the next supply-side
option to be used as the avoided unit for future capacity solicitations.
Competitive Bidding - In July 1992, the MPSC issued an order establishing
a competitive bidding framework for future electric capacity solicitations for
the Company. The MPSC directed the Company to proceed with a capacity
solicitation proceeding based on its 1992 IRP, which outlined the Company's
long-range plan for meeting its customers' electricity needs, and to submit a
Request For Proposal ("RFP") to meet the need for any future electrical
capacity. On March 1, 1993, the Company submitted its direct testimony
indicating that as a result of the IRP update performed in the first quarter of
1993, there was no need for additional supply-side capacity until the year
2000. It was also stated that the restart of Conners Creek Power Plant
continues to be the most economical supply-side selection and at this time
would represent the "avoided cost" unit. On July
13
14
8, 1993, the MPSC issued an order dismissing that proceeding, in accordance
with the terms of a settlement agreement executed by the parties to the case.
The agreement provides that, based on a projected need for additional capacity
in the year 2000, the Company is scheduled to submit a new RFP filing on or
before May 1, 1995.
Retail Wheeling - The MPSC has been considering the propriety of retail
wheeling programs. In an interim order dated April 11, 1994, the MPSC approved
a framework for a five-year experimental retail wheeling program for the
Company to be limited to 90 MW and to be implemented when additional capacity
is required by the Company which is expected to be approximately the year 2000.
The interim order referred this case to the Administrative Law Judge for
further proceedings to determine rates for service to retail wheeling
customers. Both the Company's and the Michigan Attorney General's appeals of
the April 11, 1994 MPSC order to the Michigan Court of Appeals were dismissed
as premature. On August 26, 1994, the Company, in compliance with the MPSC's
April 11, 1994 interim order, filed its case for the pricing of retail wheeling
service. A final order is expected by the end of April 1995. On August 26,
1994, the Company also initiated a declaratory judgement action in the Federal
District Court for the Western District of Michigan asserting that the MPSC
lacks authority to compel the Company to undertake retail wheeling
involuntarily and the rates and terms and conditions for retail wheeling
transmission service are subject to federal rather than state jurisdiction. A
motion to dismiss, filed by the defendants, is pending.
Special Manufacturing Contracts - As part of a continuing response to the
challenge of competition, the Company has executed 10-year special
manufacturing contracts with Chrysler Corporation, Ford Motor Company and
General Motors Corporation, covering 54 of the Big Three automakers' largest
manufacturing locations in Southeastern Michigan. These long-term contracts are
expected to reduce annual operating revenues in amounts ranging from about $30
million in 1995 to $50 million in 1999 through 2004. The Company expects to
offset these reductions by further reducing operating expenses. On March 23,
1995, the MPSC issued an order approving the special manufacturing contracts.
The MPSC also found that the Company should assume full responsibility for
negotiating the discounted prices and that its shareholders should expect to
absorb much, if not all, of any revenue shortfall caused by the pricing and
other contract provisions that the Company negotiates. Therefore, unless the
Company can make a compelling showing why a different ratemaking treatment is
justified, the MPSC will not permit the Company to reallocate the costs of
serving contract customers to other ratepayer classes. In addition, the MPSC
agreed that other ratepayers should be protected from any underrecoveries of
PSCR costs and the other Company surcharges as a result of the contracts.
For further information on regulation and rates, see Note 3 and Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
FEDERAL ENERGY REGULATORY COMMISSION. The Company is subject to the
general jurisdiction of the FERC with respect to accounting, sales for resale
in interstate commerce, levels of short-term obligations, the licensing of
Ludington and other matters. The Company's electric transmission facilities,
interconnected with those of Ontario Hydro at the United States - Canada
border, are subject to safety regulation by various departments of the United
States
14
15
government and to a permit administered by the ERA. The transmission of
electric energy to Ontario Hydro is subject to regulation by the FERC and the
ERA.
On February 14, 1995, the Company filed an Application with FERC seeking
authority to establish a holding company. The application requests that FERC
approve the Company's request by late April 1995. Based upon applicable
precedent, the Company anticipates that the requested authority will be
granted.
NUCLEAR REGULATORY COMMISSION. The NRC has regulatory jurisdiction over
all phases of the operation, construction (including plant modifications),
licensing and decommissioning of Fermi 2. Reports on plant operation are filed
with the NRC on a periodic basis. The scope of regulation is such that from
time to time assertions may be made that deviations from prescribed standards
and the unit's operating license have occurred. Assertions of such a nature
are subject to the NRC's investigative, administrative and appeal procedures
and are considered to be pending until such time as review within the NRC is
completed. At the conclusion of an investigation, the NRC may assess a fine
which should, in accordance with NRC regulations, be calculated in a manner
designed to take into account the severity, length and safety significance of
the alleged infraction. In February 1994, the Company was assessed a fine of
$50,000 for failure to correct significant conditions adverse to quality.
On May 18, 1994, the NRC issued the fourteenth Systematic Assessment of
Licensee Performance ("SALP") report on Fermi 2 operations. The report rates
four functional areas of plant performance during the period July 1, 1992
through April 2, 1994. The report ratings remained unchanged from the SALP
report for the prior rating period except one area of performance was reduced
from a good rating to an acceptable rating. This is the first rating of Fermi
2 under the NRC's recently revised SALP categories. The next SALP period is
expected to end in August 1995.
The Company will request that the NRC consent to the transfer of control
of its NRC Licenses as part of the formation of the holding company. Based
upon controlling precedent, the Company anticipates that the NRC will issue
such consent in a timely manner.
See Note 2 for further information on matters related to Fermi 2.
ENVIRONMENTAL MATTERS
The Company, in common with other electric utilities, is subject to
applicable permit requirements and to increasingly stringent federal, state and
local standards covering, among other things, particulate and gaseous stack
emission limitations, the discharge of effluents (including heated cooling
water) into lakes and streams and the handling and disposal of waste material.
In November 1990, the federal Clean Air Act was amended to further strengthen
federal regulations governing air emissions. For further information on
matters related to the 1990 Amendments to the federal Clean Air Act, see Item 7
- Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Through 1994, the Company's capital expenditures for environmental
control and protection facilities were approximately $2.9 billion, including
expenditures of $24 million in 1994. The Company's 1995 capital expenditure
budget for environmental protection is approximately $19 million.
15
16
AIR. The Company's operations are subject to environmental regulations
of the EPA, the State of Michigan and Wayne County. Under the federal Clean
Air Act of 1970, as amended, the EPA has the authority to adopt and implement
additional regulations in support or in substitution of state and local
enactments where the EPA deems such enactments to be deficient in relation to
its regulations.
A May 1992 EPA rule provides an exemption from new source review for
major modifications at utility facilities associated with pollution control
projects unless the EPA administrator determines the modification renders the
unit "less environmentally beneficial."
The State of Michigan passed air fee legislation to provide revenues to
comply with Title V of the Clean Air Act. Beginning in 1995, it is anticipated
that the Company will pay less than $1 million in air fees annually.
On September 15, 1993, the Company received a Finding of Violation from
the EPA concerning alleged violations of asbestos regulations observed during
an EPA inspection of the Monroe Power Plant on February 9, 1993. On February
8, 1994, the Company and its contractor received an administrative order
proposing a penalty in the amount of $28,300. In May 1994, the Company and its
contractor signed a Consent Order with the EPA neither admitting nor denying
the allegations and the contractor paid the recalculated civil penalty of
$15,900.
Title III of the Clean Air Act Amendments, Hazardous Air Pollutants,
requires the EPA to conduct a four-year study of mercury emissions from fossil
fuel-fired boilers, to determine whether regulations are required. In May
1993, the Michigan Environmental Science Board recommended that the Governor
direct the MPSC to require utilities to compile an accurate emission inventory.
The Company has submitted a plan for such an inventory to the MPSC. Until
studies are completed and resulting regulations, if any, are promulgated, the
impact on the Company cannot be determined.
WATER. NPDES permits for the Company's power plants are issued by the
MDNR pursuant to delegation by the EPA under the federal Clean Water Act. In
1994, the Company submitted renewal applications for three Company facilities.
Two permits were issued in 1994, six permit applications (submitted in 1994 and
earlier) remain pending; the expired permits remain effective until new permits
are issued or denied.
In an effort to streamline the industrial facility permitting process, in
1993 the MDNR created a program to issue general storm water discharge permits
for various types of facilities across the state. Instead of applying for
individual permits, companies are now required to notify the state of the
operating facilities which should be included under the general permits. On
August 22, 1994, the Company filed Notices of Intent with the MDNR for coverage
for nine facilities under the NPDES general permit for storm water discharges
associated with industrial activity.
The Company is required to demonstrate that the cooling water intake
structures at all of its facilities reflect the "best technology available for
minimizing adverse environmental impact." The Company filed such
demonstrations in July 1976 and the MDNR Staff accepted all except those
relating to the St. Clair and Monroe Power Plants. The MDNR Staff rejected the
St. Clair demonstration and requested additional information, which was
submitted. The MDNR Staff has not made a formal initial decision about the
intake at the
16
17
Company's Monroe Power Plant but has requested additional information
which was submitted on alternative intake technologies. In the event of a
final adverse decision by the MDNR, the Company may be required to install
additional control technologies to further minimize the impact.
In January 1993, a number of environmental groups filed suit against
the EPA in the United States District Court for the Southern District of New
York. The suit sought a declaratory ruling that the EPA had failed to perform a
non-discretionary duty to adopt a technology-based requirement under Section
316b of the Federal Clean Water Act. The plaintiffs argue that Section 316b
requires the "best technology available" for cooling water intakes to protect
fish. The Utility Water Act Group ("UWAG") and the Company intervened in the
suit and the judge is currently considering jurisdictional arguments. Should
the suit prove successful, an adverse result in the rulemaking could require
the installation of cooling towers.
The Company was required under its Monroe Power Plant NPDES permit to
demonstrate that thermal discharge from the plant does not cause an adverse
environmental impact on Lake Erie. Such demonstration was submitted to the
MWRC and subsequently approved in 1976. The demonstration has been under
review by the EPA which indicated that it was unable to concur in the
acceptability of the demonstration until additional information had been
provided with respect to the cooling water intake effects of the plant.
Additional information was submitted, but it is unknown at this time when this
issue will be resolved, or what the impact, if any, upon the Company will be.
In November 1985, the National Wildlife Federation ("NWF") filed suit
against Consumers contending that Ludington had been illegally discharging
pollutants (fish and fish parts) without a NPDES permit. In March 1987, the
federal District Court ordered Consumers to apply for a NPDES permit. While
appealing the District Court order, Consumers filed a NPDES permit application
which was granted in June 1988 by the MWRC. Both the NWF and Consumers took
exception to the permit issuance and were granted combined contested case
status before the MWRC. In December 1988, the Sixth Circuit Court of Appeals
reversed the District Court, finding that no NPDES permit was required by
federal law. An Administrative Law Judge hearing the MWRC matter found in
favor of the companies and ruled that no state discharge permit was required
for the turbine discharge water. The decision was transmitted to the MWRC for
final action, but the MWRC remanded the matter back to the Administrative Law
Judge for clarification.
See Note 12 for further information on Ludington.
WASTES AND TOXIC SUBSTANCES. The Michigan Solid Waste and Hazardous
Waste Management Acts, the Michigan Environmental Response Act and the Federal
Resource Conservation and Recovery Act, Toxic Substances Control Act (TSCA),
and Comprehensive Environmental Response, Compensation and Liability Act
regulate the Company's handling, storage and disposal of its waste materials.
A nationwide environmental problem is the discovery of improperly
disposed of, hidden or buried hazardous wastes. The Company has extensive
property holdings, including approximately 400 miles of transmission corridors
which are accessible to the public. The Company could be responsible for
cleanup of wastes found on its property, despite the fact that the dumping may
have occurred without the Company's permission. The Company's Lulu-Milan
transmission corridor in northwestern Monroe County was used as a dump site for
drums of paint sludges,
17
18
solvents and some PCB's and a portion of the corridor and adjoining
property is listed on the MDNR's "Priority List of Environmental Contamination
Sites." Although not responsible for placing the drums there, the Company has
spent approximately $550,000 on cleanup and disposal costs. In June 1993, the
Company and the MDNR reached an agreement to hire contractors to perform
additional investigative and remedial work at the site. While the costs will
be shared between the Company and the state, it is impossible at this time to
predict what impact this will have upon the Company.
See Note 12 for information on the Carter Industrials site matter.
A landfill site abandoned by the South Macomb Disposal Authority and now
owned in part by the Company is being surveyed by the MDNR for possible
contamination. The Company could be required to contribute toward cleanup
costs, if any occur. It is unknown at this time what impact, if any, this
situation will have upon the Company.
The Company has received letters from the EPA requesting information
about its involvement with the following sites of identified contamination in
Michigan: Rasmussen Dump site in Green Oak Township, Livingston County;
Metamora Landfill site in Lapeer County; and the Pioneer Equipment Company site
in Detroit. The Company has examined its records and finds no evidence of any
involvement at these sites. This information has been communicated to the EPA,
but it remains unknown what impact, if any, the EPA's ongoing investigations
will have upon the Company.
In February 1992, the Company received formal notice from the MDNR that
the Port of Monroe Landfill Site had been identified as a site of environmental
contamination. Also in February 1992, after an investigation of its records,
the Company sent a letter to the MDNR stating its belief that it has never
disposed of hazardous material at the Port of Monroe Landfill Site. On March
14, 1994, the MDNR sent formal notice to the PRPs (but not to the Company) that
it is seeking reimbursement for its past costs and interest totaling $750,000.
The PRPs sent a letter to Detroit Edison on April 8, 1994 advising that they
will seek a contribution from the Company on grounds that they believe it to be
a party despite the MDNR's decision not to include it. It is unknown what
impact, if any, this situation will have upon the Company.
In March 1989, the EPA served the Company with an investigative subpoena
requesting extensive information regarding the Company's PCB activities. The
Company responded to the investigative subpoena in June 1989. It is unknown at
this time what impact, if any, the investigation will have upon the Company.
EPA rules for underground storage tanks became effective in December
1988. These rules are now administered by the State of Michigan and contain
requirements on new tank system installations, leak detection monitoring,
notification and cleanup of leaks, corrosion resistance for new and existing
tank systems and spill prevention. Of the original 90, the Company now has 70
remaining regulated underground storage tanks containing petroleum products.
Although most of the tanks have been upgraded to "new tank standards", in
accordance with further review of the rules, six tanks and 23 piping systems
still need upgrading or replacement by December 22, 1998. It is estimated that
it will cost the Company approximately $1.25 million to complete the
underground storage tanks program.
18
19
On July 1, 1991, the Michigan Environmental Response Act ("Act 307")
became effective. The law is patterned after the CERCLA and gives the MDNR
authority to list sites of environmental contamination and bring about
environmental cleanups within the State of Michigan. Several Company-owned
properties are on the Act 307 list as a result of diesel oil releases or
dredged disposal operations, including portions of the Superior Station and
portions of the St. Clair and Monroe Power Plants. The Company is addressing
these issues and it is unknown what impact, if any, they will have upon the
Company.
In 1993, the Company received a letter from the MDNR requesting
information regarding the Satterlee-Sumpter Township landfill site in Wayne
County. In April 1994, the Company received a letter formally naming it as a
PRP in the case and requesting the Company, along with the other PRPs, to
conduct a remedial investigation of the site and to pay past costs incurred by
the State. The PRPs have met with the MDNR to clarify the extent of the
desired investigation. At this time, it is impossible to predict what the
impact upon the Company will be.
In July 1994, the Company received a Third Party summons and complaint
from Oakland Disposal, Inc., Bestway Recycling, Inc., Aero Disposal, Inc., and
Oakland Disposal No. 1 regarding the use of the Waterford Hills Sanitary
Landfill for disposal of hazardous waste or hazardous waste constituents. An
investigation of Company records revealed no evidence that any hazardous
material was sent to the site. It is impossible to predict what impact this
issue will have upon the Company.
The Company received approval from the MDNR on October 5, 1993 to close
its hazardous waste storage facility at its Warren Service Center. The
facility's hazardous waste storage area has been closed but the issue of
corrective actions at solid waste management units has not yet been addressed
by the MDNR or the EPA.
The Company has been minimizing radioactive waste production and all
Fermi 2 final form radioactive waste is being stored in on-site facilities.
During 1994, 72 drums of mixed (radioactive and hazardous) waste were disposed
of at an approved facility. Two drums will be shipped in 1995, however, there
are no facilities available to receive the remaining six drums of mixed waste.
Temporary on-site storage will very likely continue to be the radioactive waste
management option available in the near future.
The federal Low-Level Radioactive Waste Policy Act makes each state
responsible for the disposal of low-level radioactive waste situated within
each state's borders. In June 1992, the United States Supreme Court upheld
most of the provisions of this statute. The Court upheld the responsibility of
each state to develop low-level waste facilities, but declared a provision
requiring the state to take title to low-level radioactive waste in 1996 to be
unconstitutional.
For further information on nuclear waste disposal, see "Fuel Costs and
Supply - Nuclear."
For further information on environmental matters, see Notes 2 and 12 and
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
19
20
EMPLOYES AND EXECUTIVE OFFICERS
EMPLOYES. The Company has 8,407 employes with an average length of
service of approximately 18 years. Of these, 3,264 employes are represented by
unions under two collective bargaining agreements. One agreement expires in
June 1995 for 2,713 employes and the other agreement expires in August 1996 for
551 employes.
EXECUTIVE OFFICERS. PRESENT
POSITION
NAME AGE(A) PRESENT POSITION HELD SINCE
---- ------ ---------------- ----------
John E. Lobbia . . . . . . . . . . . 53 Chairman of the Board 5- 1-90
and Chief Executive Officer
Anthony F. Earley, Jr. . . . . . . . 45 President and Chief Operating 3- 1-94
Officer
Larry G. Garberding . . . . . . . . . 56 Executive Vice President and 8- 1-90
Chief Financial Officer
Frank E. Agosti . . . . . . . . . . . . 58 Senior Vice President- 2- 1-90
Power Supply
Robert J. Buckler . . . . . . . . . . . 45 Senior Vice President- 12- 1-92
Energy Marketing and
Distribution
Douglas R. Gipson . . . . . . . . . . . 47 Senior Vice President- 4- 1-93
Nuclear Generation
Gerard M. Anderson . . . . . . . . . . 36 Vice President for Non-Utility 12- 1-93
Business Ventures
Susan M. Beale . . . . . . . . . . . . . 46 Vice President and Corporate 3-27-95
Secretary
Michael E. Champley . . . . . . . . . . 46 Vice President-Marketing and 12- 1-92
Sales
Haven E. Cockerham . . . . . . . . . . 47 Vice President-Human Resources 6- 1-94
Ronald W. Gresens . . . . . . . . . . . 61 Vice President and Controller 5- 1-87
Leslie L. Loomans . . . . . . . . . . . 51 Vice President and Treasurer 10 -1-89
Christopher C. Nern . . . . . . . . . . 50 Vice President and General 6- 1-93
Counsel
S. Martin Taylor . . . . . . . . . . . 54 Vice President-Corporate and 2- 1-89
Public Affairs
(a) As of March 1, 1995
Under the Company's By-Laws, the officers of the Company are elected
annually by the Board of Directors at a meeting held for such purpose, each to
serve until the next annual meeting of shareholders or until their respective
successors are chosen and qualified. With the exception of Messrs. Anderson,
Cockerham, Earley and Garberding, all of the above officers have been employed
by the Company in one or more management capacities during the past five years.
Gerard M. Anderson was a senior engagement manager at McKinsey & Company,
Inc., a management consulting firm, from 1988 to 1993. Effective December 1,
1993, he was elected Vice President of the Company.
20
21
Haven E. Cockerham, from 1991 until 1994, was president of Cockerham,
McCain & Associates, Inc., a management, business development and human
resources consulting firm in Columbia, South Carolina. From 1989 to 1991, Mr.
Cockerham owned Cockerham Chevrolet-Oldsmobile, an automobile dealership in
Newberry, South Carolina. Prior to 1989, Mr. Cockerham was employed by General
Motors in various executive positions in the human resources area. Effective
June 1, 1994, he was elected Vice President-Human Resources.
Anthony F. Earley, Jr., from 1989 to 1994, was President and Chief
Operating Officer of Long Island Lighting Company ("LILCO"), an electric and
gas utility company serving Long Island, New York. He previously served in
various executive capacities at LILCO from 1985 to 1989. Effective March 1,
1994, he was elected President and Chief Operating Officer and a member of the
Board of Directors of the Company.
Larry G. Garberding, from 1987 until 1990, was President of NICOR, Inc.,
a natural gas utility serving suburban Chicago. Effective August 1, 1990, he
was elected Executive Vice President, Chief Financial Officer and a member of
the Board of Directors of the Company.
On July 1, 1994, Malcolm G. Dade, Jr., Vice President, retired from the
Company.
On July 2, 1994, Saul J. Waldman, Vice President-Corporate Communications,
retired from the Company.
Pursuant to Article VI of the Company's Articles of Incorporation,
directors of the Company will not be personally liable to the Company or its
shareholders in the performance of their duties to the full extent permitted by
law.
Article VII of the Company's Articles of Incorporation provides that each
person who is or was or had agreed to become a director or officer of the
Company, or each such person who is or was serving or who had agreed to serve
at the request of the Board of Directors as an employe or agent of the Company
or as a director, officer, employe or agent of another corporation,
partnership, joint venture, trust or other enterprise (including the heirs,
executors, administrators or estate of such person), shall be indemnified by
the Company to the full extent permitted by the Michigan Business Corporation
Act or any other applicable laws as presently or hereafter in effect. In
addition, the Company has entered into indemnification agreements with all of
its officers and directors, which agreements set forth procedures for claims
for indemnification as well as contractually obligating the Company to provide
indemnification to the maximum extent permissible by law.
The Company and its directors and officers in their capacities as such
are insured against liability for wrongful acts (to the extent defined) under
three insurance policies providing aggregate coverage in the amount of $85
million.
OTHER INFORMATION. Pursuant to the provisions of the Company's By-Laws,
the Board of Directors has by resolution set the number of directors comprising
the full Board, effective as of April 24, 1995, at thirteen.
21
22
ITEM 3 - LEGAL PROCEEDINGS.
The Company in the ordinary course of its business, is involved in a
number of suits and controversies including claims for personal injuries and
property damage and matters involving zoning ordinances and other regulatory
matters. As of December 31, 1994, the Company was named as defendant in 194
lawsuits involving claims for personal injuries and property damage and had
been advised of 22 other potential claims not evidenced by lawsuits.
From time to time the Company has paid nominal penalties which were
administratively assessed by the United States Coast Guard, United States
Department of Transportation under the Federal Water Pollution Control Act, as
amended, with respect to minor accidental oil spills at the Company's power
plants into navigable waters of the United States. Payment of such penalties
represents full disposition of these matters.
The Company in its 1982 main electric rate case requested the MPSC to
recognize the costs associated with the abandoned Greenwood Unit Nos. 2 and 3
for ratemaking purposes. In March 1983, the MPSC, consistent with past
precedent, granted the Company authority to defer, amortize and recover these
costs (over a period of 10 years) through the ratemaking process. The Michigan
Attorney General appealed the MPSC's order. In August 1990, the Ingham County
Circuit Court remanded this matter to the MPSC for additional findings of fact.
On November 1, 1991, the MPSC issued its final order on remand affirming the
earlier decision to allow rate recovery of the costs. The Ingham County
Circuit Court has ordered that supplemental briefs be filed. The Company has
amortized the costs associated with the abandoned Greenwood Unit Nos. 2 and 3
in accordance with the MPSC's order. The amortization was completed in 1993.
The Company has announced its plans to form a holding company. The
holding company format is subject to approval by Common Stock Shareholders,
FERC and the NRC. The Company expects that the holding company structure will
be in place by year-end 1995 and that the new holding company will be exempt
from the practices of the federal Public Utility Holding Company Act of 1935.
See Note 12.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
22
23
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange,
which is the principal market for such stock, and the Chicago Stock Exchange.
The following table indicates the reported high and low sales prices of the
Company's Common Stock on the Composite Tape of the New York Stock Exchange and
dividends paid per share for each quarterly period during the past two years:
PRICE RANGE DIVIDENDS
------------------------ PAID
CALENDAR QUARTER HIGH LOW PER SHARE
---------------------- ------- ------- ---------
1993 First . . . . . . . . . 37-1/8 32 $0.495
Second . . . . . . . . 36-3/4 33-1/8 0.515
Third . . . . . . . . . 36 33-3/4 0.515
Fourth . . . . . . . . 34-3/4 29-7/8 0.515
1994 First . . . . . . . . . 30-1/4 26 0.515
Second . . . . . . . . 27-1/4 24-1/4 0.515
Third . . . . . . . . . 27-1/2 24-1/4 0.515
Fourth . . . . . . . . 27-1/2 24-3/4 0.515
At December 31, 1994, there were 144,863,447 shares of the Company's
Common Stock outstanding. These shares were held by a total of 151,077
shareholders.
The Company's By-Laws provide that Chapter 7B of the Michigan Business
Corporation Act ("Act") does not apply to the Company. The Act regulates
shareholder rights when an individual's stock ownership reaches at least 20
percent of a Michigan corporation's outstanding shares. As a result of the
amendment, a shareholder seeking control of the Company cannot require the
Company's Board of Directors to call a meeting to vote on issues related to
corporate control within 10 days, as stipulated by the Act.
The level of dividends is dependent on earnings and other business
conditions, each of which is periodically reviewed by the Company's Board of
Directors.
ITEM 6 - SELECTED FINANCIAL DATA.
Year Ended December 31
-------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Thousands, except per share amounts)
Operating Revenues . . . . $ 3,519,341 $ 3,555,211 $ 3,558,143 $ 3,591,537 $ 3,576,281
Net Income . . . . . . . . $ 419,909 $ 521,903 $ 588,047 $ 568,037 $ 514,459
Earnings for Common Stock . $ 390,269 $ 491,066 $ 557,549 $ 535,205 $ 479,280
Earnings Per Common Share . $ 2.67 $ 3.34 $ 3.79 $ 3.64 $ 3.26
Dividends Declared Per
Share of Common Stock . $ 2.06 $ 2.06 $ 1.98 $ 1.88 $ 1.78
At year-end:
Total Assets . . . . . . $10,992,978 $11,134,879 $10,309,061 $10,463,624 $10,573,325
Long-Term Debt
Obligations (including
capital leases) and
Redeemable Preferred
and Preference Stock
Outstanding . . . . . $ 3,979,763 $ 4,007,622 $ 4,525,504 $ 4,900,020 $ 5,300,962
23
24
THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and accompanying Notes thereto, contained
herein.
RESULTS OF OPERATIONS
In 1994, the Company's earnings for common stock were $390.3 million, or
$2.67 per share, a decrease of 20.5% from the $491.1 million, or $3.34 per
share earned in 1993. The earnings decrease was due in part to a January 21,
1994 order by the Michigan Public Service Commission ("MPSC"), which reduced
rates by $78 million annually and increased depreciation and operation expenses
by $84 million annually. In addition, accretion income decreased and
amortization of the Fermi 2 nuclear power plant phase-in plan increased
significantly in 1994. Also, the Company incurred additional one-time charges
at the Fermi 2 nuclear power plant, which was out of service in 1994 due to
equipment failure, for maintenance expenses and the establishment of a reserve
for estimated Fermi 2 performance in 1995-1997. The earnings decrease was
limited by higher system sales and lower interest expense due to the early
redemption and refinancing of higher cost debt and the redemption of maturing
debt.
At December 31, 1994, the book value of the Company's common stock was
$22.89 per share, an increase of 2.5% since December 31, 1993. Return on
average total common shareholders' equity was 11.6% in 1994, 15.2% in 1993 and
18.6% in 1992.
The ratio of earnings to fixed charges for 1994, 1993 and 1992 was 3.13,
3.25 and 3.09, respectively. The ratio of earnings to fixed charges and
preferred and preference stock dividend requirements for 1994, 1993 and 1992
was 2.73, 2.88 and 2.79, respectively.
OPERATING REVENUES
Total operating revenues increased (decreased) due to the following factors:
1994 1993
-----------------------------
(Millions)
Rate Changes
MPSC rate reduction $(81) $ -
Expense stabilization procedure - (63)
Power Supply Cost Recovery Clause (5) (106)
-----------------------------
(86) (169)
System sales volume and mix 103 158
Interconnection sales (17) 2
Fermi 2 capacity factor
performance standard reserve (31) -
Other - net (5) 6
-----------------------------
Total $(36) $ (3)
=============================
Rate Changes
The January 21, 1994 MPSC rate order reduced the Company's rates by $78
million annually. In keeping with the MPSC's recognition of the need for
industrial customers to be competitive, the January 1994 rate reduction was
allocated among the various classes of customers approximately as follows:
Industrial-$43 million, Commercial-$24 million, Residential-$10 million and
Governmental-$1 million.
A December 1988 MPSC rate order provided for a moratorium on base rate
changes for the five-year period 1989 - 1993, an expense stabilization
procedure ("ESP") surcharge, which provided annual revenues of $63 million in
1992 for the effects of inflation, and a suspension of the Power Supply Cost
Recovery ("PSCR") Clause for the four-year period 1989 - 1992. The ESP
surcharge expired for service rendered on or after January 1, 1993, and the
PSCR Clause was reinstated in 1993. As a result of these two items, 1993
operating revenues were reduced by approximately $169 million.
Kilowatthour Sales
Kilowatthour sales increased (decreased) as follows:
1994 1993
------------------------------
Residential 1.1% 6.4%
Commercial 3.5 4.0
Industrial 5.9 6.6
Other (includes primarily sales for resale) (14.1) 6.7
Total System 2.8 5.6
Interconnection (45.2) 12.7
Total (1.0) 6.1
1994
Residential sales increased due to substantially warmer weather in the
second quarter resulting in increased air conditioning and cooling-related
loads, partially offset by lower cooling-related loads in the third quarter.
The increased heating-related loads in the first quarter were offset by
decreased heating-related loads in the fourth quarter. Commercial sales
increased due primarily to improved economic conditions and increased
cooling-related loads. Industrial sales increased as a result of higher sales
to automotive, steel and other manufacturing customers reflecting the
improvement in the economy. The decreased sales to other customers reflect
lower sales to wholesale for resale customers.
1993
Residential and commercial sales increased due primarily to substantially
warmer summer weather resulting in increased air conditioning and
cooling-related loads, partially offset by warmer winter weather reducing
heating-related sales. Industrial sales increased due to higher automotive and
steel production and improved economic conditions. The increased sales to
other customers reflect increased load requirements of wholesale for resale
customers.
24
25
Interconnection Sales
Interconnection sales represent sales between utilities to meet energy needs as
a result of demand and/or generating unit availability.
1994
Interconnection sales decreased due to the reduced availability of energy
for sale as a result of the Fermi 2 outage and lower sales to Consumers Power
Company.
1993
Interconnection sales increased due primarily to increased sales to
Consumers Power Company, partially offset by a decrease in sales to Ontario
Hydro.
OPERATING EXPENSES
Fuel and Purchased Power
Fuel and purchased power expenses increased (decreased) due to the following
factors:
1994 1993
-------------------------------------
(Millions)
Net system output $ (6) $ 43
Average unit cost 59 (37)
Fermi 2 business interruption insurance proceeds (65) -
Other 6 5
-------------------------------------
Total $ (6) $ 11
=====================================
Net system output and average unit costs were as follows:
1994 1993 1992
-------------------------------------------
(Thousands of Megawatthours)
Power plant generation
Fossil 42,410 38,882 36,689
Nuclear - 8,274 7,338
Purchased power 6,599 2,211 2,705
-------------------------------------------
Net system output 49,009 49,367 46,732
===========================================
Average unit cost ($/Megawatthour) $16.94 $15.73 $16.49
===========================================
1994
The increase in average unit cost resulted from replacing lower-cost nuclear
generation with higher-cost fossil generation and purchased power due to the
Fermi 2 outage in 1994 as a result of a turbine-generator failure on December
25, 1993. This increase was offset by the receipt of Fermi 2 business
interruption insurance proceeds.
1993
The decrease in average unit cost was due to declining fuel prices resulting
from greater use of lower-cost Western low-sulfur coal, increases in lower-cost
nuclear generation and decreases in the buyback of Belle River Power Plant
capacity and energy from the Michigan Public Power Agency.
Other Operation
1994
Other operation expense increased due primarily to other postretirement
health care and life insurance benefits expense, service quality claims expense
and higher nuclear plant, transmission and distribution and demand-side
management expenses. These increases were partially offset by lower incentive
award expenses related to a shareholder value improvement plan, expenses
recorded in the year-earlier period for the write-off of obsolete and excess
stock material and a reserve for steam purchases under the agreement with the
Greater Detroit Resource Recovery Authority, lower uncollectible and employee
reorganization expenses and lower injuries and damages expense.
1993
Other operation expense increased due primarily to the write-off of obsolete
and excess stock material, higher injuries and damages expenses, a provision
for employee reorganization expenses, a reserve for steam purchases under the
agreement with the Greater Detroit Resource Recovery Authority, incentive award
expenses related to a shareholder value improvement plan and expenses related
to the new collective bargaining agreement with employees represented by the
Utility Workers Union of America - Local 223. These increases were partially
offset by lower uncollectible expenses and a 1992 accrual for low-level nuclear
waste disposal.
Maintenance
1994
Maintenance expense increased due primarily to higher nuclear plant and
storm expenses, partially offset by lower fossil plant and line clearance
expenses. Since Fermi 2 was down for repair in 1994, the Company elected to
upgrade various plant facilities which resulted in higher nuclear plant
maintenance expense.
1993
Maintenance expense decreased due primarily to lower line clearance and
storm expenses, partially offset by expenses related to the new collective
bargaining agreement with employees represented by the Utility Workers Union of
America - Local 223.
Depreciation and Amortization
1994 and 1993
Depreciation and amortization expense increased due to increases in plant in
service and, for 1994, to increased Fermi 2 decommissioning costs authorized by
the January 21, 1994 MPSC rate order.
Deferred Fermi 2 Depreciation and Amortization
1994 and 1993
Deferred Fermi 2 depreciation, a non-cash item of income, was recorded
beginning with the implementation of the Fermi 2 rate phase-in plan in January
1988. The annual amount deferred decreased each year through 1992. Beginning
in 1993 and continuing through 1998, these deferred amounts are amortized to
operating expense as the cash recovery is realized
25
26
through revenues. Deferred Fermi 2 amortization, also a non-cash item of
income, was recorded beginning with the Company's purchase of the Wolverine
Power Supply Cooperative, Inc.'s ownership interest in Fermi 2 in February
1990. The annual amount deferred decreases each year through 1999.
Amortization of Deferred Fermi 2 Depreciation and Return
1994 and 1993
Beginning in 1993, the Company began amortizing to operating expense
deferred Fermi 2 depreciation and return as discussed herein.
Taxes Other Than Income Taxes
1994
Taxes other than income taxes decreased due primarily to lower property
taxes, partially offset by higher Michigan Single Business Tax ("MSBT").
1993
Taxes other than income taxes increased due primarily to higher MSBT expense
and higher property taxes.
Income Taxes
1994
Income taxes decreased due primarily to lower pretax income, partially
offset by higher prior years' federal income tax accrual. In March 1994, the
Company and the Internal Revenue Service ("IRS") reached a settlement of the
Company's income tax returns for the years 1987 and 1988.
1993
Income taxes decreased due primarily to lower pretax income and prior years'
federal income tax accrual, partially offset by an increase in the federal
corporate income tax rate from 34% to 35% retroactive to January 1, 1993 and
higher taxes due to the reduction of deferred Fermi 2 depreciation,
amortization and return.
Deferred Fermi 2 Return
1993
Deferred Fermi 2 return, a non-cash item of income, was recorded beginning
with the implementation of the Fermi 2 rate phase-in plan in January 1988. The
annual amount deferred decreased each year through 1992. Beginning in 1993 and
continuing through 1998, these deferred amounts are amortized to operating
expense as the cash recovery is realized through revenues.
Other Income and Deductions
1994
Other deductions increased slightly due primarily to the write-off of
premiums and expenses related to the $50 million portion of 1989 Series A
Mortgage Bonds not refinanced and an accrual for a contribution to the Detroit
Edison Foundation.
1993
Other deductions increased due primarily to an increase in the accrual for
decommissioning expenses for Fermi 1, an experimental nuclear unit that has
been shut down since 1972.
Accretion Income
1994 and 1993
Accretion income, a non-cash item of income, was recorded beginning in
January 1988 to restore to income, over the period 1988-1998, losses recorded
due to discounting indirect disallowances of plant costs. The annual amount of
accretion income recorded decreases each year through 1998. Also, effective in
January 1994, accretion income decreased due to the return to rate base of
Greenwood Unit No. 1.
Long-Term Debt Interest Charges
1994 and 1993
Long-term debt interest charges decreased due to the early redemption and
refinancing of securities when economic and the redemption of maturing
securities.
Other Interest Charges
1994
Other interest charges increased due to higher levels of short-term
borrowings, accruals for prior years' MSBT audits and the settlement of 1987
and 1988 IRS audits.
Preferred and Preference Stock Dividend Requirements
1994
Preferred and preference stock dividend requirements decreased slightly due
to the optional and mandatory redemption of outstanding shares in 1993.
1993
Preferred and preference stock dividend requirements increased slightly due
to issuance of cumulative preferred stock, partially offset by optional and
mandatory redemption of outstanding shares.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity has improved since the 1988 commercial operation of
Fermi 2, a nuclear generating unit comprising 28% of the Company's total assets
and 11% of the Company's summer net rated capability, and lower levels of
capital expenditures.
Fermi 2
The commercial operation of Fermi 2 completed the Company's power plant
construction program. The Company has no current plans for additional
generating plants. Ownership of an operating nuclear generating unit such as
Fermi 2 subjects the Company to significant additional risks. Nuclear plants
are highly regulated by a number of governmental agencies concerned with public
health and safety as well as the environment, and consequently, are subject to
greater risks and scrutiny than conventional fossil-fueled plants.
Fermi 2 was out of service in 1994. On December 25, 1993, the reactor
automatically shut down following a turbine-generator failure. Safety systems
responded within design and regulatory specifications. The turbine suffered
mechanical damage, the exciter and generator incurred mechanical and
26
27
fire damage, and the condenser had some internal damage. The fire was
contained in the turbine building, and there was no release of radioactive
contaminants during the event. The nuclear part of the plant was not damaged.
Major repairs have been completed and tests are continuing to balance
and synchronize the unit. The Company expects that most repair costs related to
returning the Fermi 2 turbine-generator to service will be covered by
insurance. These costs are estimated to be in the $70 million to $80 million
range. The Company has received partial insurance payments of $25 million for
property damage. In addition, the Company has received insurance payments of
$66 million for replacement power costs. As a result of an investigation as to
the cause of the December 1993 mechanical failure, the Company will replace
major Fermi 2 turbine components. Installation of new low-pressure turbine
sections is expected to add about 20 megawatts ("MW") of generating capacity to
the plant, which would expand the plant's capability by about 2%.
In the interim period the Company will operate Fermi 2 without the
large seventh and eighth stage turbine blades until the next refueling, which
will reduce the Fermi 2 power output to a range of about 800 MW to 900 MW.
During the lower output period, new turbine shafts and blades will be
manufactured for the plant's three low-pressure turbines. These major
components will be installed during the next refueling outage in 1996.
Replacing the major turbine components in 1996 is expected to cost between
$30 million and $40 million. These costs will not be covered by insurance.
These costs will be capitalized and are expected to be recovered in rates
because such costs are less than the cumulative amount available under the cap
on Fermi 2 capital expenditures, a provision of the MPSC's December 1988 order.
At December 31, 1994, Fermi 2 was insured for property damage in the amount
of $2.75 billion and the Company had available approximately $8.5 billion in
public liability insurance. To the extent that insurable claims for
replacement power, property damage, decontamination, repair and replacement and
other costs arising from a nuclear incident at Fermi 2 exceed the policy limits
of insurance, or to the extent that such insurance becomes unavailable in the
future, the Company will retain the risk of loss.
Cash Generation and Cash Requirements
Consolidated Statement of Cash Flows
The Company generates substantial cash flows from operating activities as shown
in the Consolidated Statement of Cash Flows. Net cash from operating
activities, which is the Company's primary source of liquidity, was $1,063
million in 1992, $1,141 million in 1993 and $953 million in 1994. Net cash
from operating activities decreased in 1994 due to lower net income and changes
in current assets and liabilities, partially offset by higher non-cash charges
to income for the Fermi 2 phase-in plan and depreciation and amortization. Net
cash from operating activities increased in 1993 due to lower non-cash items of
income for the Fermi 2 phase-in plan, higher depreciation and amortization, and
changes in current assets and liabilities, partially offset by lower net income
and deferred income taxes.
Net cash used for investing activities increased in 1994 due primarily to
increased funding of nuclear decommissioning trust funds, the purchase of
leased equipment and non-utility investments, partially offset by lower plant
and equipment expenditures. Net cash used for investing activities decreased
in 1993 due primarily to lower plant and equipment expenditures.
During the period 1992-1994, the Company has engaged in an extensive debt
refinancing program. Assuming favorable economic conditions, the Company
expects that it will continue to refinance existing higher-cost debt and equity
securities. Also, in 1994, as a result of a plan change, the Company entered
into the one-time purchase of common stock from the trustee of the Detroit
Edison Savings & Investment Plans.
Additional Information
An MPSC order permits the Company to issue approximately $3.5 billion of
securities for the purpose of refinancing debt and preferred and/or preference
stock (issued prior to 1993) prior to maturity (when economic) and at maturity,
and to replace funds used for those purposes. The Company also has MPSC
authority to refinance substantially all non-taxable debt obligations.
Cash requirements for scheduled long-term debt redemptions are expected to
be $19 million, $119 million, $144 million, $169 million and $219 million for
1995, 1996, 1997, 1998 and 1999, respectively.
Cash requirements for capital expenditures were $363 million in 1994 and are
expected to be approximately $1.9 billion for the period 1995 through 1999. In
1995, cash requirements for capital expenditures are estimated at $394 million.
Environmental expenditures are expected to approximate $79 million for the
period 1995 through 1999, including expenditures for Clean Air Act compliance
requirements. See "Environmental Matters" herein.
The Company's internal cash generation is expected to be sufficient to meet
cash requirements for capital expenditures as well as scheduled long-term debt
redemption requirements.
In May 1993, the Federal Energy Regulatory Commission ("FERC") issued its
order authorizing the continuation of the Company's $1 billion of short-term
borrowing authority. This authority will be in effect through May 31, 1995.
The Company had total short-term credit arrangements of approximately $405
million at December 31, 1994, under which $39.5 million of borrowings were
outstanding.
27
28
Capitalization
The Company's capital structure ratios (excluding amounts of long-term debt and
preferred and preference stock due within one year) were as follows:
December 31
---------------------------------------
1994 1993 1992
---- ---- ----
Common Shareholders' Equity 44.2% 43.9% 42.0%
Preferred and Preference Stock 5.0 5.1 4.5
Long-Term Debt 50.8 51.0 53.5
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Competition
An electric public utility must compete with other energy suppliers to meet its
customers' energy needs. Serious issues facing the entire electric utility
industry include deregulation, municipalization, cogeneration, independent
power production, open access to transmission lines and a more competitive bulk
power supply market. Utility customers have the option of self-generation or
cogeneration and, depending on the extent of future deregulation, may be able
to enter into contracts with other power suppliers. In the future, electric
utilities may be required to unbundle their products and services to
accommodate emerging competitive alternatives brought about by possible
industry restructuring due to deregulation.
On December 5, 1994, the Company's Board of Directors approved the formation
of a holding company. The Company's shareholders will be asked to approve this
organizational structure at the Company's April 24, 1995 Annual Meeting of
Common Shareholders. This organizational structure will be subject to receipt
of a number of regulatory approvals.
A holding-company structure will provide greater financial flexibility to
develop and operate new non-utility businesses. It also will offer a mechanism
for better defining and separating the Company's regulated and unregulated
businesses, and for protecting the Company's utility business and customers
from any risks that may be involved in non-utility ventures.
When all approvals are in place, the Company's common stock will be
exchanged share-for-share for the common stock of the holding company. The
holding-company structure could be in place before the end of 1995.
As a result of the Energy Policy Act of 1992, the Company expects that, over
time, non-utility generation resources will be developed which will result in
greater competition for power sales. In addition, in April 1994, the MPSC
issued an interim order setting forth a framework for a retail wheeling
experiment. The 90 MW experiment would last five years commencing with the need
for additional capacity, which is expected to be approximately the year 2000,
and would be implemented concurrently with the Company's next Request for
Proposal case under the MPSC's capacity solicitation process. The Company has
appealed the MPSC's interim order with the U.S. District Court for the Western
District of Michigan claiming that the MPSC does not have the authority to
order the Company to participate in retail wheeling, and that the jurisdiction
over transmission rates for wheeling resides with the FERC. The MPSC is
expected to issue a final order by the end of April 1995.
In response to the changing market for electricity, the Company has
developed a number of programs designed to increase its efficiency and
competitive status and address customer needs. An aggressive demand-side
management program has been developed, an integral part of which is an
interruptible rate for large industrial customers. This rate, commonly
referred to as R-10 and approved by the MPSC, permits its customers to achieve
economic benefits while enabling the Company to reduce its peak demand
requirements. The January 21, 1994 MPSC rate order increased the 400 MW
available under the R-10 rate to 525 MW in 1994 and 650 MW in 1995, with the
Company absorbing revenue losses associated with the additional 250 MW made
available under this rate.
As part of a continuing response to the challenge of competition, the
Company has executed 10-year special manufacturing contracts with Chrysler
Corporation, Ford Motor Company and General Motors Corporation, covering 54 of
the Big Three automakers' largest manufacturing locations in Southeastern
Michigan. On August 3, 1994, the Company filed the executed special
manufacturing contracts with the MPSC. The MPSC must approve these contracts
before they can become effective. An order approving these long-term contracts
is expected to be issued in March 1995.
The special manufacturing contracts are available to customers with a total
connected load of 100 MW or more for specific locations of 5 MW and over.
Service under the special manufacturing contracts will include both firm and
interruptible service, which is priced to provide customers with
competitively-based electric rates.
A major feature of the special manufacturing contracts will be the
establishment of a long-term, 10-year relationships with these customers during
which the Company will be the customers' sole supplier of electricity through
the year 2000. The customers may reduce their purchases by 20% annually during
the last four years of the contracts. The special manufacturing contracts
provide that the customers' existing self-generation will only be used for
emergency back-up. It is anticipated that this will result in additional sales
and revenue for the Company. The contracts also provide for a corporate
minimum take-or-pay provision for 1995 through 1999 with specified price
reductions for 1995 through 2000. Through these agreements, the customers will
be assured of both a more competitive and predictable price for electric
energy. Detroit Edison will be assured that the customers will purchase their
electric requirements from the Company.
28
29
Pursuant to the terms of the special manufacturing contracts, the customers
will be able to designate a percentage of their load at each facility as
interruptible. The customers will also have the ability to designate
interruptions on a corporate basis with the flexibility to shift interruptible
load among separate facilities. In total, approximately 160 MW of
interruptible capacity is expected.
In order to forge an energy partnership with these customers, the Company
will provide service delivery quality guarantees and on-site engineering
expertise to implement better service, identify energy conservation efficiency
improvement opportunities and achieve valuable energy savings for each
customer. The goal of these provisions of the special manufacturing contracts
is to combine the customers' energy conservation efforts with the knowledge and
skills provided by the Company. The Company also may invest in energy saving
projects with these customers.
The Company will serve the special manufacturing contract customers at rates
above its marginal cost. Further, at this time the Company is not requesting a
change in electric rates charged to other customers. As a result, annual
revenue reductions will range in amounts from about $30 million in 1995 to $50
million for 1999 through 2004. The Company expects to offset these reductions
by further reducing operating expenses.
In 1994, the Company completed its accelerated reliability improvement
program which upgraded its transmission and distribution system. This program
has helped reduce interruptions and the duration of outages thus increasing
customer satisfaction.
The Company is reviewing potential energy services as a method of remaining
competitive while diversifying within the scope of its core business.
Meeting Energy Demands
Since 1980, the compound annual sales growth was 1.8% and peak demand growth
was 2.4% (after adjusting for the effects of unusual weather). System sales
and demand are expected to grow at a compound annual rate of about 1.5% per
year for the next 15 years.
Sales to the non-manufacturing segment, which include customers such as
agribusiness, grocery stores, restaurants and government, are projected to grow
at a strong pace in the next 15 years, a compound annual increase of 1.9% per
year. This projected increase indicates the Company's customer base is
becoming more diverse and less dependent on the manufacturing segment.
The Company expects to meet its near-term demand for energy by the return to
service, subject to environmental regulations, of power plant units currently
in economy reserve status when energy demand and consumption requirements
provide economic justification. The return to service of these units is
conditioned upon the outcome of a competitive bidding process which was
established by an MPSC order issued in July 1992. The Company will submit a
new plan to the MPSC detailing its proposed method of meeting energy demands on
or before May 1, 1995.
Inflation
Inflation is a measure of the purchasing power of the dollar. In 1994, the
inflation rate, as defined by the Consumer Price Index, was 2.7%. Although the
current inflation rate is relatively low, its compound effect through time can
be significant, primarily in its effect on the Company's ability to replace its
investment in utility plant.
The regulatory process limits the amount of depreciation expense recoverable
through revenues to the historical cost of the Company's investment in utility
plant. Such amount produces cash flows which are inadequate to replace such
property in future years. However, the Company believes that it will be able
to recover the increased cost of replacement facilities when, and if,
replacement occurs.
Regulation and Rates
The Company has no plans to seek increased rates for electric service from the
MPSC in the near future.
Environmental Matters
Protecting the environment from damage, as well as correcting past
environmental damage, continues to be the focus of state and federal
regulators. Committees at both the state and federal level are studying the
effects of a wide array of chemicals and electromagnetic fields as well as
global warming (as potentially affected by carbon dioxide emissions).
Legislation and/or rulemaking resulting from these and any future studies could
further impact the electric utility industry including the Company.
The Environmental Protection Agency ("EPA") and the Michigan Department of
Natural Resources have aggressive programs regarding the cleanup of
contaminated property. The Company anticipates that it will be periodically
included in these types of environmental proceedings. Further, additional
environmental expenditures, although difficult to quantify, will be necessary
as the Company prepares to comply with the phase-in of the 1990 Amendments to
the federal Clean Air Act. The Company currently meets the first phase of
sulfur dioxide emissions and nitrogen oxides emissions requirements. The
second phase begins in the year 2000. The Company currently burns low-sulfur
coal (less than 1% sulfur) at all its coal-fired units and believes it can meet
the second phase sulfur dioxide emission requirements through additional
blending of coals. Current projections indicate that annual fuel costs may
increase by $13-20 million in the period 2000-2009 in order to comply with new
sulfur dioxide emissions requirements. In addition, approximately $59 million
in capital expenditures may be necessary for nitrogen oxides emissions
requirements.
The Company expects that substantially all of the costs of environmental
compliance will be recovered through the ratemaking process.
29
30
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements and schedules are
included herein.
Page
----
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Consolidated Statement of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statement of Common Shareholders' Equity . . . . . . . . . . . . . . . . . 36
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 37
Schedule VIII - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . 59
Note:
All other schedules and portions of included schedules are omitted
because they are not applicable or the required information is shown in the
consolidated financial statements or notes thereto.
The Company's individual financial statements have been omitted since
the Company is primarily an operating company and all subsidiaries included in
the consolidated financial statements being filed, in the aggregate, do not
have minority equity interests and/or indebtedness to any person other than the
Company or its consolidated subsidiaries in amounts which together exceed 5
percent of the total assets as shown in the December 31, 1994 Consolidated
Balance Sheet.
30
31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of The Detroit Edison Company
In our opinion, the consolidated financial statements listed in the
index on page 30 present fairly, in all material respects, the financial
position of The Detroit Edison Company and its subsidiary companies at December
31, 1994 and 1993, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Detroit, Michigan
January 23, 1995
31
32
The Detroit Edison Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands)
-------------------------------------------
Year Ended December 31
---------------------------------------------------------------------------------------------------------------------
1994 1993 1992
-------------------------------------------
OPERATING REVENUES
Electric - System $3,448,351 $3,467,357 $3,472,583
Electric - Interconnection 43,141 60,363 58,447
Steam 27,849 27,491 27,113
---------------------------------------------------------------------------------------------------------------------
Total Operating Revenues $3,519,341 $3,555,211 $3,558,143
---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel $ 719,215 $ 750,127 $ 704,371
Purchased power 116,947 91,747 126,101
Other operation 621,066 604,882 548,520
Maintenance 262,409 251,149 262,803
Depreciation and amortization 476,415 432,512 423,407
Deferred Fermi 2 depreciation and amortization (7,465) (8,959) (14,984)
Amortization of deferred Fermi 2 depreciation and return 84,828 30,888 -
Taxes other than income 255,874 261,449 252,011
Income taxes 270,657 297,469 302,758
---------------------------------------------------------------------------------------------------------------------
Total Operating Expenses $2,799,946 $2,711,264 $2,604,987
---------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 719,395 $ 843,947 $ 953,156
---------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Allowance for other funds used during construction $ 1,684 $ 2,055 $ 1,363
Deferred Fermi 2 return - - 13,785
Other income and deductions (24,973) (24,961) (21,179)
Income taxes 8,111 8,594 7,108
Accretion income 13,644 44,130 45,695
Income taxes - disallowed plant costs and accretion income (4,252) (14,062) (15,576)
---------------------------------------------------------------------------------------------------------------------
Net Other Income and Deductions $ (5,786) $ 15,756 $ 31,196
---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES $ 713,609 $ 859,703 $ 984,352
---------------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Long-term debt $ 273,763 $ 325,194 $ 388,580
Amortization of debt discount, premium and expense 10,832 9,114 3,952
Other 11,170 4,928 5,169
Allowance for borrowed funds used during construction (credit) (2,065) (1,436) (1,396)
---------------------------------------------------------------------------------------------------------------------
Net Interest Charges $ 293,700 $ 337,800 $ 396,305
---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 419,909 $ 521,903 $ 588,047
PREFERRED AND PREFERENCE STOCK DIVIDEND REQUIREMENTS 29,640 30,837 30,498
---------------------------------------------------------------------------------------------------------------------
EARNINGS FOR COMMON STOCK $ 390,269 $ 491,066 $ 557,549
=====================================================================================================================
COMMON SHARES OUTSTANDING - AVERAGE 146,151,505 147,031,446 146,998,485
---------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $2.67 $3.34 $3.79
=====================================================================================================================
(See accompanying Notes to Consolidated Financial Statements.)
32
33
The Detroit Edison Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
------------------------------------------------
Year Ended December 31
-----------------------------------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 419,909 $ 521,903 $ 588,047
Adjustments to reconcile net income to net cash from
operating activities:
Accretion income (13,644) (44,130) (45,695)
Depreciation and amortization 476,415 432,512 423,407
Deferred Fermi 2 depreciation, amortization and return - net 77,363 21,929 (28,769)
Deferred income taxes and investment tax credit - net 93,287 85,574 132,179
Fermi 2 refueling outage - net (19,507) 17,856 (6,084)
Other (31,091) 32,367 6,714
Changes in current assets and liabilities:
Customer accounts receivable and unbilled revenues (505) 10,733 9,068
Other accounts receivable (7,593) (2,247) 17,815
Inventories (1,774) 33,839 5,239
Accounts payable (13,858) 21,364 (24,930)
Taxes payable (18,031) (6,499) (8,109)
Interest payable (6,174) (19,769) (15,199)
Other (2,189) 35,350 9,807
-----------------------------------------------------------------------------------------------------------------------
Net cash from operating activities $ 952,608 $ 1,140,782 $ 1,063,490
-----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Plant and equipment expenditures $ (366,392) $ (396,407) $ (415,937)
Purchase of leased equipment (11,500) (2,402) -
Nuclear decommissioning trust funds (46,563) (5,346) (4,482)
Non-utility investments (12,843) 182 (614)
Changes in current assets and liabilities 5,042 10,225 (7,897)
Other (11,537) (19,988) 2,047
-----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities $ (443,793) $ (413,736) $ (426,883)
-----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Sale of cumulative preferred stock $ - $ 200,000 $ -
Sale of general and refunding mortgage bonds 200,000 1,510,000 350,000
Funds received from Trustees: Installment sales contracts and
loan agreements 50,470 76,510 348,960
Increase (decrease) in short-term borrowings (98,715) 109,210 (9,000)
Redemption of long-term debt (258,034) (2,024,289) (957,859)
Redemption of preferred and preference stock - (164,158) (22,005)
Premiums on reacquired long-term debt and
preferred and preference stock (11,563) (81,453) (16,556)
Purchase of common stock (59,855) - -
Dividends on common, preferred and preference stock (331,445) (330,792) (318,349)
Other (2,622) (20,417) (9,225)
-----------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities $ (511,764) $ (725,389) $ (634,034)
-----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS $ (2,949) $ 1,657 $ 2,573
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF THE PERIOD 11,071 9,414 6,841
-----------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF THE PERIOD $ 8,122 $ 11,071 $ 9,414
=======================================================================================================================
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid (excluding interest capitalized) $ 289,375 $ 346,542 $ 406,571
Income taxes paid 183,172 233,542 178,786
New capital lease obligations 9,328 36,606 39,320
For purposes of the consolidated financial statements, the Company considers
investments purchased with a maturity of three months or less to be temporary
cash investments.
(See accompanying Notes to Consolidated Financial Statements.)
33
34
The Detroit Edison Company and Subsidiary Companies
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
-----------------------------
December 31
ASSETS
1994 1993
-----------------------------
UTILITY PROPERTIES
Plant in service
Electric $12,941,414 $12,557,267
Steam 69,813 70,948
-----------------------------------------------------------------------------------------------------------
$13,011,227 $12,628,215
Less: Accumulated depreciation and amortization (4,529,692) (4,137,881)
-----------------------------------------------------------------------------------------------------------
$ 8,481,535 $ 8,490,334
Construction work in progress 104,431 160,230
-----------------------------------------------------------------------------------------------------------
Net utility properties $ 8,585,966 $ 8,650,564
-----------------------------------------------------------------------------------------------------------
Property under capital leases (less accumulated amortization
of $94,678 and $101,381, respectively) $ 134,542 $ 154,837
Nuclear fuel under capital lease (less accumulated amortization
of $374,405) 193,411 184,083
-----------------------------------------------------------------------------------------------------------
Net property under capital leases $ 327,953 $ 338,920
-----------------------------------------------------------------------------------------------------------
Total owned and leased properties $ 8,913,919 $ 8,989,484
-----------------------------------------------------------------------------------------------------------
OTHER PROPERTY AND INVESTMENTS
Non-utility property $ 11,281 $ 10,053
Investments and special funds 18,722 15,914
Nuclear decommissioning trust funds 76,492 29,929
-----------------------------------------------------------------------------------------------------------
$ 106,495 $ 55,896
-----------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments $ 8,122 $ 11,071
Customer accounts receivable and unbilled revenues (less allowance
for uncollectible accounts of $30,000 and $34,000, respectively) 195,824 195,319
Other accounts receivable 34,212 26,619
Inventories (at average cost)
Fuel 136,331 129,024
Materials and supplies 155,921 165,187
Prepayments 10,516 10,914
-----------------------------------------------------------------------------------------------------------
$ 540,926 $ 538,134
-----------------------------------------------------------------------------------------------------------
DEFERRED DEBITS
Unamortized debt expense $ 42,876 $ 45,396
Unamortized loss on reacquired debt 123,996 124,567
Recoverable income taxes 663,101 771,277
Other postretirement benefits 36,562 48,568
Fermi 2 phase-in plan 390,764 475,592
Fermi 2 deferred amortization 52,259 44,794
Other 122,080 41,171
-----------------------------------------------------------------------------------------------------------
$ 1,431,638 $ 1,551,365
-----------------------------------------------------------------------------------------------------------
TOTAL $10,992,978 $11,134,879
===========================================================================================================
(See accompanying Notes to Consolidated Financial Statements.)
34
35
The Detroit Edison Company and Subsidiary Companies
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
-----------------------------
December 31
--------------------------------------------------------------------------------------------------------------
LIABILITIES
1994 1993
-----------------------------
CAPITALIZATION
Common stock - $10 par value, 400,000,000 shares authorized;
144,863,447 and 147,047,918 shares outstanding, respectively
(311,804 and 334,002 shares, respectively, reserved for conversion
of preferred stock) $ 1,448,635 $ 1,470,479
Premium on common stock 545,825 553,966
Common stock expense (47,461) (48,175)
Retained earnings used in the business 1,379,081 1,319,685
-----------------------------------------------------------------------------------------------------------------
Total common shareholders' equity $ 3,326,080 $ 3,295,955
Cumulative preferred stock - $100 par value, 6,747,484 shares
authorized; 3,905,470 and 3,909,419 shares outstanding,
respectively (1,539,827 shares unissued)
Redeemable solely at the option of the Company 380,283 380,683
Long-term debt 3,825,296 3,830,596
-----------------------------------------------------------------------------------------------------------------
Total Capitalization $ 7,531,659 $ 7,507,234
-----------------------------------------------------------------------------------------------------------------
OTHER NON-CURRENT LIABILITIES
Obligations under capital leases $ 126,076 $ 141,043
Other postretirement benefits 37,143 48,567
Other 48,707 15,130
-----------------------------------------------------------------------------------------------------------------
$ 211,926 $ 204,740
-----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term borrowings $ 39,489 $ 138,204
Amounts due within one year
Long-term debt 19,214 19,649
Obligations under capital leases 201,877 197,877
Accounts payable 147,020 159,870
Property and general taxes 31,608 38,592
Income taxes 5,304 16,839
Accumulated deferred income taxes 32,625 63,046
Interest 60,214 66,388
Dividends payable 82,012 83,143
Payrolls 71,958 67,778
Fermi 2 refueling outage 1,267 20,774
Other 97,215 103,193
-----------------------------------------------------------------------------------------------------------------
$ 789,803 $ 975,353
-----------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS
Accumulated deferred income taxes $ 2,014,821 $ 1,986,463
Accumulated deferred investment tax credits 346,379 359,205
Other 98,390 101,884
-----------------------------------------------------------------------------------------------------------------
$ 2,459,590 $ 2,447,552
-----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4, 9, 12 and 13)
-----------------------------------------------------------------------------------------------------------------
TOTAL $10,992,978 $11,134,879
=================================================================================================================
(See accompanying Notes to Consolidated Financial Statements.)
35
36
The Detroit Edison Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
(Dollars in Thousands)
-----------------------------------------------------------------------------
Common Stock Premium Retained
-------------------------- on Common Earnings
$10 Par Common Stock Used in the
Shares Value Stock Expense Business
-----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1991 146,983,123 $1,469,831 $553,463 $(48,150) $ 872,428
Issuance of common stock on conversion of
convertible cumulative preferred stock,
5 1/2% series 33,568 336 261 (13)
Expense associated with preferred and
preference stock redeemed (847)
Net income 588,047
Cash dividends declared
Common stock - $1.98 per share (291,066)
Cumulative preferred and
preference stock* (30,403)
-----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 147,016,691 $1,470,167 $553,724 $(48,163) $1,138,159
Issuance of common stock on conversion of
convertible cumulative preferred stock,
5 1/2% series 31,227 312 242 (12)
Expense associated with preferred and
preference stock redeemed (6,634)
Net income 521,903
Cash dividends declared
Common stock - $2.06 per share (302,894)
Cumulative preferred and
preference stock* (30,849)
-----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 147,047,918 $1,470,479 $553,966 $(48,175) $1,319,685
Issuance of common stock on conversion of
convertible cumulative preferred stock,
5 1/2% series 22,164 222 173 (9)
Common stock reacquired from Detroit Edison
Savings & Investment Plans,
August 4, 1994 (2,206,635) (22,066) (8,314) 723 (30,198)
Net income 419,909
Cash dividends declared
Common stock - $2.06 per share (300,676)
Cumulative preferred stock* (29,639)
-----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 144,863,447 $1,448,635 $545,825 $(47,461) $1,379,081
=============================================================================================================================
*At established rate for each series.
(See accompanying Notes to Consolidated Financial Statements.)
36
37
THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
INDUSTRY SEGMENT - The Detroit Edison Company ("Company") is a regulated
public utility engaged in the generation, purchase, transmission, distribution
and sale of electric energy.
REGULATION - The Company is subject to regulation by the Michigan Public
Service Commission ("MPSC") and the Federal Energy Regulatory Commission
("FERC") with respect to accounting matters and maintains its accounts in
accordance with Uniform Systems of Accounts prescribed by these agencies. As a
regulated entity, taking into account the cost recovery restrictions contained
in the December 1988 and January 21, 1994 MPSC rate orders and the provisions
of the Energy Policy Act of 1992 ("Energy Act"), the Company meets the criteria
of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for
the Effects of Certain Types of Regulation." This accounting standard
recognizes the ratemaking process which results in differences in the
application of generally accepted accounting principles between regulated and
non-regulated businesses. Such differences concern mainly the time at which
various items enter into the determination of net income in order to follow the
principle of matching costs and revenues.
PRINCIPLES APPLIED IN CONSOLIDATION - The Consolidated Financial Statements
include the accounts of all subsidiary companies, all of which are
wholly-owned.
REVENUES - The Company records unbilled revenues for electric and steam heating
services provided after cycle billings through month-end.
PROPERTY, RETIREMENT AND MAINTENANCE, DEPRECIATION AND AMORTIZATION - Utility
properties are recorded at original cost less regulatory disallowances. In
general, the cost of properties retired in the normal course of business is
charged to accumulated depreciation. Expenditures for maintenance and repairs
are charged to expense, and the cost of new property installed, which replaces
property retired, is charged to property accounts. The annual provision for
depreciation is calculated on the straight-line remaining life method by
applying annual rates approved by the MPSC to the average of year-beginning and
year-ending balances of depreciable property by primary plant accounts.
Provision for depreciation of Fermi 2, excluding decommissioning expense, was
3.26% of average depreciable property for 1994 and 2.63% for 1993 and 1992,
except for $300 million being amortized over 10 years commencing in 1989 and
$513 million being amortized over 19 years commencing in 1990. See Note 3 and
Deferred Fermi 2 Amortization below. Provision for depreciation of all other
utility plant, as a percent of average depreciable property, was 3.2% for 1994,
3.4% for 1993 and 3.3% for 1992.
DEFERRED FERMI 2 DEPRECIATION AND RETURN - An MPSC authorized phase-in plan for
Fermi 2, effective in January 1988, provided for gradual rate increases in the
early years of plant operation rather than a one-time substantial rate increase
which conventional ratemaking would provide. SFAS No. 92, "Regulated
Enterprises - Accounting for Phase-in Plans," permits the capitalization of
costs deferred for future recovery under a phase-in plan. Accordingly, the
Company recorded non-cash income of deferred depreciation and deferred return
totaling $506.5 million through 1992. In 1992, deferred depreciation was $4.5
million and deferred return was $13.8 million. Beginning in 1993 and
continuing through 1998, these deferred amounts will be amortized to operating
expense as the cash recovery is realized through revenues. Amortization of
these deferred amounts totaled $84.8 million in 1994 and $30.9 million in 1993.
DEFERRED FERMI 2 AMORTIZATION - The December 1988 MPSC rate order provides for
the Company's February 1990 purchase of Wolverine Power Supply Cooperative,
Inc.'s ("Cooperative") ownership interest in Fermi 2 for $513 million to be
treated as a regulatory asset with a 19-year principal amortization and
associated interest of 8%, which is the composite average of the Cooperative
debt assumed by the Company at the time of the purchase. Since the
straight-line amortization of the regulatory asset exceeds the revenues
provided for such amortization during the first 10 years of the recovery
period, the Company is recording deferred amortization, a non-cash item of
income, totaling $67.2 million through 1999. For 1994, 1993 and 1992, the
amounts deferred were $7.5 million, $9 million and $10.5 million,
respectively. The deferred amounts will be amortized to operating expense as
the cash recovery is realized through revenues during the years 2000 through
2008.
PROPERTY TAXES - The Company accrues property taxes monthly during the fiscal
period of the applicable taxing authority.
INCOME TAXES - Deferred income taxes are provided for temporary differences
between book and taxable income to the extent authorized by the MPSC. For
federal income tax purposes, the Company computes depreciation using
accelerated methods and shorter depreciable lives. Investment tax credits
utilized which relate to utility property were deferred and are amortized over
the estimated composite service life of the related property. See Note 6.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION ("AFUDC") - AFUDC, a non-operating
non-cash item, is defined in the FERC Uniform System of Accounts to include
"the net cost for the period of construction of borrowed funds used for
construction purposes and a reasonable rate on other funds when so used."
AFUDC involves an accounting procedure whereby the approximate interest expense
and the cost of other (common, preferred and preference shareholders' equity)
funds applicable to the cost of construction are transferred from the income
statement to construction work in progress in the balance sheet. The cash
recovery of AFUDC, as well as other costs of construction, occurs as
37
38
completed projects are placed in service and related depreciation is authorized
to be recovered through customer rates. The Company capitalized
AFUDC at 7.66% in 1994 and 9.65% in 1993 and 1992.
ACCRETION INCOME - In 1988, the Company adopted SFAS No. 90, "Regulated
Enterprises - Accounting for Abandonments and Disallowances of Plant Costs,"
and recorded indirect losses for Greenwood Unit No. 1, for the abandoned
Greenwood Unit Nos. 2 and 3 and for a portion of Fermi 2 as a discount
(reduction) of the Company's investment in these units. These net after-tax
losses, due to discounting, originally totaled $198 million, which amounts are
being restored to net income over the period 1988-1998 as the Company records a
non-cash return (accretion income) on its investment in these units. The
Company recorded $8.9 million, $29.5 million and $30.2 million of net after-tax
accretion income in 1994, 1993 and 1992, respectively.
CAPITALIZATION - DISCOUNT, PREMIUM AND EXPENSE - The discount, premium and
expense related to the issuance of long-term debt are amortized over the life
of each issue. In accordance with MPSC regulations, the discount, premium and
expense, when related to debt redeemed without refunding, are written off to
other income and deductions, and when related to debt redeemed with refunding,
are amortized over the life of the replacement issue. Capital stock premium
and expense related to redeemed preferred and preference stock are written off
against retained earnings used in the business.
FERMI 2 REFUELING OUTAGES - The Company recognizes the cost of Fermi 2
refueling outages over periods in which related revenues are recognized. Under
this procedure, the Company records a provision for incremental costs
anticipated to be incurred during the next scheduled Fermi 2 refueling outage.
See Note 2.
LEASES - See Note 9.
EMPLOYEES' RETIREMENT PLAN AND OTHER POSTRETIREMENT BENEFITS - See Note 13.
NOTE 2 - FERMI 2
GENERAL - Fermi 2, a nuclear generating unit, began commercial operation in
January 1988. Fermi 2 has a design electrical rating (net) of 1,139 megawatts
("MW"). However, due to certain equipment limitations, Fermi 2 is rated at
1,116 MW until modifications can be made to achieve the design rating. This
unit represents approximately 28% of total assets, 11% of total operation and
maintenance expenses and 11% of summer net rated capability.
MPSC rate orders issued in April 1986, January 1987, December 1988 and
January 1994 contain provisions with respect to the recovery of Fermi 2 costs.
See Note 3 for a discussion of Fermi 2 rate matters and the MPSC's treatment of
Fermi 2 project costs of $4.858 billion.
LICENSING AND OPERATION - The Nuclear Regulatory Commission ("NRC") maintains
jurisdiction over the licensing and operation of Fermi 2.
Fermi 2 was out of service in 1994. On December 25, 1993, the reactor
automatically shut down following a turbine-generator failure. Safety systems
responded within design and regulatory specifications. The turbine suffered
mechanical damage, the exciter and generator incurred mechanical and fire
damage, and the condenser had some internal damage. The fire was contained in
the turbine building, and there was no release of radioactive contaminants
during the event. The nuclear part of the plant was not damaged.
Major repairs have been completed and tests are continuing to balance
and synchronize the unit. The Company expects that most repair costs related
to returning the Fermi 2 turbine-generator to service will be covered by
insurance. These costs are estimated to be in the $70 million to $80 million
range. The Company has received partial insurance payments of $25 million for
property damage. In addition, the Company has received insurance payments of
$66 million for replacement power costs. As a result of an investigation as to
the cause of the December 1993 mechanical failure, the Company will replace
major Fermi 2 turbine components. Installation of new low-pressure turbine
sections is expected to add about 20 MW of generating capacity to the plant,
which would expand the plant's capability by about 2%.
In the interim period the Company will operate Fermi 2 without the
large seventh and eighth stage turbine blades until the next refueling, which
will reduce the Fermi 2 power output to a range of about 800 MW to 900 MW.
During the lower output period, new turbine shafts and blades will be
manufactured for the plant's three low-pressure turbines. These major
components will be installed during the next refueling outage in 1996.
Replacing the major turbine components in 1996 is expected to cost between
$30 million and $40 million. These costs will not be covered by insurance.
These costs will be capitalized and are expected to be recovered in rates
because such costs are less than the cumulative amount available under the cap
on Fermi 2 capital expenditures, a provision of the MPSC's December 1988 order.
See Note 3.
INSURANCE - The Company insures Fermi 2 with property damage insurance provided
by Nuclear Mutual Limited ("NML") and Nuclear Electric Insurance Limited
("NEIL"). The NML and NEIL insurance policies provide $500 million of
composite primary coverage (with a $1 million deductible) and $2.25 billion of
excess coverage, respectively, for stabilization, decontamination and debris
removal costs and repair and/or replacement of property. Accordingly, the
combined limits provide total property damage insurance of $2.75 billion.
38
39
The Company maintains an insurance policy with NEIL providing for extra
expenses, including certain replacement power costs necessitated by Fermi 2's
unavailability due to an insured event. This policy, which has a 21-week
waiting period, provides for three years of coverage.
Under the NML and NEIL policies, the Company could be liable for maximum
retrospective assessments of up to approximately $28 million per loss if any
one loss should exceed the accumulated funds available to NML or NEIL.
As required by federal law, the Company maintains $200 million of public
liability insurance for a nuclear incident. Further, under the Price-Anderson
Amendments Act of 1988, deferred premium charges of $75.5 million could be
levied against each licensed nuclear facility, but not more than $10 million
per year per facility. On December 31, 1994, there were 110 licensed nuclear
facilities in the United States. Thus, deferred premium charges in the
aggregate amount of approximately $8.3 billion could be levied against all
owners of licensed nuclear facilities in the event of a nuclear incident.
Accordingly, public liability for a single nuclear incident is currently
limited to approximately $8.5 billion.
DECOMMISSIONING - The NRC has jurisdiction over the decommissioning of nuclear
power plants. An NRC rule requires decommissioning funding based upon a
site-specific estimate or a predetermined NRC formula. Using the NRC's
formula, the Company estimates that the cost of decommissioning Fermi 2 when
its license expires in the year 2025 is $489 million in current 1994 dollars
and $3 billion in future 2025 dollars. The assumed annual inflation rate used
to increase the cost to decommission is 6%, compounded annually.
The MPSC and FERC regulate the recovery of costs of decommissioning nuclear
power plants. A January 1994 MPSC order authorized a $500 million external
trust fund in 1994 dollars to finance the decommissioning of Fermi 2. The
MPSC's January 21, 1994 rate order includes an increase in rates for the
decommissioning of Fermi 2, which the Company believes will be adequate to fund
the estimated cost of decommissioning using the NRC formula. See Note 3. The
order approves a decommissioning surcharge on customer bills under which the
Company is currently collecting approximately $31.4 million annually, including
$3.5 million for the recovery of low-level radioactive waste disposal. The
FERC has approved the recovery of decommissioning expense in base rates, most
recently in its June 1993 order.
The Company has established external trust funds to hold decommissioning and
low-level radioactive waste disposal funds collected from customers. During
1994, 1993 and 1992, the Company collected $26.9 million, $3.7 million and $3.4
million, respectively, from customers for decommissioning Fermi 2. Also, in
1994, the Company collected $3.3 million from customers for low-level
radioactive waste disposal. Such amounts were recorded as components of
depreciation and amortization expense in the Consolidated Statement of Income
and accumulated depreciation and amortization in the Consolidated Balance
Sheet. Earnings on the external decommissioning trust fund assets during 1994,
1993 and 1992 were $1.3 million, $1.2 million and $1.0 million, respectively.
Earnings on the external low-level radioactive waste disposal trust fund assets
were $0.2 million in 1994. Trust fund earnings are recorded as an investment
with a corresponding credit to accumulated depreciation and amortization.
Trust fund assets are assumed to earn an after-tax rate of return of 7%,
compounded annually.
The external trust fund for low-level radioactive waste disposal costs was
initially established by charges to other operation expense in the Consolidated
Statement of Income of $1.4 million in 1993 and $5.9 million in 1992.
At December 31, 1994, the Company had a reserve of $51.5 million for the
future decommissioning of Fermi 2 and $10.8 million for low-level radioactive
waste disposal costs. These reserves are included in accumulated depreciation
and amortization in the Consolidated Balance Sheet with a like amount deposited
in external trust funds.
The Company also had a reserve of $14.2 million at December 31, 1994 for the
future decommissioning of Fermi 1, an experimental nuclear unit on the Fermi 2
site that has been shut down since 1972. This reserve is included in other
deferred credits in the Consolidated Balance Sheet with a like amount deposited
in an external trust fund. The Company estimates that the cost of
decommissioning Fermi 1 in the year 2025 is $19 million in current 1994 dollars
and $114 million in future 2025 dollars.
The staff of the Securities and Exchange Commission has questioned certain
of the current accounting practices of the electric utility industry regarding
the recognition, measurement and classification of decommissioning costs for
nuclear generating units in the financial statements of electric utilities. In
response to these questions, the Financial Accounting Standards Board has
agreed to review the accounting for removal costs, including decommissioning.
If current electric utility industry accounting practices for such
decommissioning are changed: (1) annual provisions for decommissioning could
increase, (2) the estimated cost for decommissioning could be recorded as a
liability rather than as accumulated depreciation, and (3) trust fund income
from the external decommissioning trusts could be reported as investment income
rather than as a reduction to decommissioning expense.
The Energy Act provided for a fund to be established for the decommissioning
and decontamination of existing United States Department of Energy ("DOE")
uranium enrichment facilities. Utilities with nuclear units are required to
pay for a portion of the cost by making annual payments into the fund over a 15
year period. The law directs state regulators to treat these payments as a
necessary and reasonable cost of fuel and, accordingly, the Company has
recorded a regulatory asset and liability in the Consolidated Balance Sheet to
reflect these costs.
39
40
NUCLEAR FUEL DISPOSAL COSTS - The Company has a contract with the DOE for the
future storage and disposal of spent nuclear fuel from Fermi 2. Under the
terms of the contract, the Company makes quarterly payments to the DOE based
upon a fee of 1 mill per kilowatthour applied to the Fermi 2 electricity
generated and sold. The spent nuclear fuel disposal cost is included as a
component of the Company's nuclear fuel expense. The DOE has stated that it
will be unable to store spent nuclear fuel at a permanent repository until
after 2010. However, the DOE and utilities with nuclear units are pursuing
other interim storage options. The Company estimates that existing temporary
storage capacity at Fermi 2 will be sufficient until the year 2000, or until
2015 with the expansion of such storage capacity.
NOTE 3 - RATE MATTERS
The Company is subject to the primary regulatory jurisdiction of the MPSC,
which, from time to time, issues its orders pertaining to the Company's
conditions of service, rates and recovery of certain costs including the costs
of generating facilities. MPSC orders issued in December 1988 and on January
21, 1994 are currently in effect with respect to the Company's rates and
certain other revenue and operating-related matters.
On January 21, 1994, the MPSC issued an order reducing the Company's rates
in the amount of $78 million annually. The rate reduction was determined by
using a 1994 test year and an overall rate of return of 7.66%, incorporating an
11% return on common equity and a capital structure comprised of 40% common
equity, 55.01% long-term debt and 4.99% preferred stock. The MPSC order
includes the recovery of (1) increased Fermi 2 decommissioning costs of $28.1
million annually, which includes the recovery of low-level radioactive waste
disposal costs, (2) full recovery of 1994 other postretirement benefit costs
plus recovery and amortization of the 1993 deferred cost (see Note 13), (3)
costs associated with the return to rate base of Greenwood Unit No. 1, (4)
Fermi 2 phase-in plan revenue requirements of $70.8 million in 1994 and (5)
costs associated with a three-year $41.5 million ($7.6 million in 1994, $14.9
million in 1995 and $19 million in 1996) demand-side management program. In
keeping with the MPSC's recognition of the need for industrial customers to be
competitive, the January 1994 rate reduction was allocated among the various
classes of customers approximately as follows: Industrial-$43 million,
Commercial-$24 million, Residential-$10 million and Governmental-$1 million.
The order was effective for service rendered on and after January 22, 1994 and
is the subject of various appeals before the Michigan Court of Appeals.
INDUSTRIAL RATES - In August 1994, the Company entered into 10-year special
manufacturing contracts which, if approved by the MPSC, will lower costs for
the Company's three largest customers (Chrysler Corporation, Ford Motor Company
and General Motors Corporation) without impacting the rates or service of other
customers. Annual revenue reductions will range in amounts from about $30
million in 1995 to $50 million for 1999 through 2004. The Company expects to
offset these reductions by further reducing operating expenses.
In August 1994, the Company filed an application with the MPSC seeking
approval of the special manufacturing contracts. The Commission scheduled
expedited hearings in this case, which were completed in December 1994. An
order approving these long-term contracts is expected to be issued in March
1995.
FERMI 2 - The December 1988 MPSC order established, for the period
January 1989 through December 2003, (1) a cap on Fermi 2 capital additions of
$25 million per year, in 1988 dollars adjusted by the Consumers Price Index
("CPI"), cumulative, (2) a cap on Fermi 2 non-fuel operation and maintenance
expenses adjusted by the CPI and (3) a capacity factor performance standard
based on a three-year rolling average commencing in 1991. For a capital
investment of $200 million or more (in 1988 dollars adjusted by the CPI), the
Company must obtain prior MPSC approval to be included in rate base. See Note
1 - Regulation.
Under the cap on Fermi 2 capital expenditures, the cumulative amount
available totals $50 million (in 1994 dollars) at December 31, 1994. Under the
cap on non-fuel operation and maintenance expenses, the cumulative amount
available totals $31 million (in 1994 dollars) at December 31, 1994.
Under the capacity factor performance standard, a disallowance of net
incremental replacement power cost will be imposed for the amount by which the
Fermi 2 three-year rolling average capacity factor is less than the greater of
either the average of the top 50% of U.S. boiling water reactors or 50%. For
purposes of the capacity factor performance standard, the capacity for Fermi 2
for the period 1989-1993 shall be 1,093 MW, and 1,139 MW for each year
thereafter until December 31, 2003.
As discussed in Note 2, Fermi 2 was out of service in 1994 and will operate
at a reduced power output until the installation of major turbine components
during the next refueling outage in 1996. As a result, the three-year rolling
average capacity factor will be unfavorably affected in 1994-1997. The plant's
capacity factor was 0%, 86.5% and 76.6% during 1994, 1993 and 1992,
respectively, or a three-year rolling average of 54.4% in 1994. The average
capacity factor for the top 50% of U.S. boiling water reactors for the
36-month period ending September 1994, was 79.2%. The Company has accrued
for the Fermi 2 capacity factor performance standard disallowances that will be
imposed during the period 1994-1997.
In accordance with April 1986 and December 1988 MPSC rate orders, ratemaking
treatment of the Company's Fermi 2 project costs of $4.858 billion is as
follows: (1) $3.018 billion
40
41
in rate base with recovery and return, (2) $300 million
amortized over 10 years with no return, (3) $513 million amortized over 19
years with associated interest of 8% and (4) $1.027 billion disallowed and
written off by the Company in 1988.
At December 31, 1994, the Company's net plant investment in Fermi 2 was $3.1
billion ($3.9 billion less accumulated depreciation and amortization of $0.8
billion).
Under the December 1988 MPSC order, if nuclear operations at Fermi 2
permanently cease, amortization in rates of the $300 million and $513 million
investments in Fermi 2 would continue and the remaining net rate base
investment amount shall be removed from rate base and amortized in rates,
without return, over 10 years with such amortization not to exceed $290 million
per year. In this event, unamortized amounts of deferred depreciation and
deferred return, recorded in the Consolidated Balance Sheet under the phase-in
plan prior to the removal of Fermi 2 from rate base, will continue to be
amortized, with a full return on such unamortized balances, so that all amounts
deferred are recovered during the period ending no later than December 31,
1998. The December 1988 and January 21, 1994 rate orders do not address the
costs of decommissioning if operations at Fermi 2 prematurely cease.
The Company has and believes it will continue to operate under the terms of
all applicable MPSC orders with no significant adverse effects as a result of
any cost recovery restrictions contained therein.
NOTE 4 - JOINTLY-OWNED UTILITY PLANT
The Company's portion of jointly-owned utility plant is as follows:
------------------------------------------------------------------------------------
LUDINGTON
PUMPED
BELLE RIVER STORAGE
------------------------------------------------------------------------------------
In-service date 1984-1985 1973
Undivided ownership interest * 49%
Investment (millions) $1,026.6 $174.3
Accumulated depreciation
(millions) $ 297.8 $ 67.1
* The Company's undivided ownership interest is 62.78% in Unit No. 1,
81.39% of the portion of the facilities applicable to Belle River
used jointly by the Belle River and St. Clair Power Plants, 49.59%
in certain transmission lines and, at December 31, 1994, 75% in
facilities used in common with Unit No. 2.
BELLE RIVER - The Michigan Public Power Agency ("MPPA") has an undivided
ownership interest in Belle River Unit No. 1 and certain other related
facilities. MPPA is entitled to 18.61% of the capacity and energy of the
entire plant and is responsible for the same percentage of the plant's
operation and maintenance expenses and capital improvements. The Company is
obligated to provide MPPA with backup power when either unit is out of service.
The Company was required to purchase MPPA's capacity and energy entitlement
through 1994. Such purchases were 80% for 1992, 20% for 1993 and 10% for 1994.
The cost for the buyback of power was based on MPPA's plant-related investment,
interest costs incurred by MPPA on their original project financing plus 2.5%,
and certain other costs such as depreciation and operation and maintenance
expenses. Buyback payments to MPPA were $50.9 million, $12.5 million and $6.0
million for 1992, 1993 and 1994, respectively.
LUDINGTON PUMPED STORAGE - Operation, maintenance and other expenses of the
Ludington Pumped Storage Plant ("Ludington") are shared by the Company and
Consumers Power Company ("Consumers") in proportion to their respective
interests in the plant. See Note 12 for a discussion of litigation related to
Ludington.
NOTE 5 - SALE OF ACCOUNTS RECEIVABLE AND UNBILLED REVENUES
The Company has an agreement providing for the sale and assignment, from time
to time, of an undivided ownership interest in $200 million of the Company's
customer accounts receivable and unbilled revenues.
At December 31, 1994 and 1993, customer accounts receivable and unbilled
revenues in the Consolidated Balance Sheet have been reduced by $200 million
reflecting the sale. All expenses associated with the program are being
charged to other income and deductions in the Consolidated Statement of Income.
NOTE 6 - INCOME TAXES
Total income tax expense as a percent of income before tax varies from the
statutory federal income tax rate for the following reasons:
----------------------------------------------------------------------------------------------------------
Percent of Income Before Tax
------------------------------------------------------
1994 1993 1992
----------------------------------------------------------------------------------------------------------
Statutory income tax rate 35.0% 35.0% 34.0%
Deferred Fermi 2 depreciation
and return 3.5 1.1 (0.6)
Investment tax credit (1.9) (1.7) (1.9)
Depreciation 5.5 3.9 3.3
Other-net (3.2) (1.6) (0.2)
------------------------------------------------------
Effective income tax rate 38.9% 36.7% 34.6%
======================================================
41
42
Components of income taxes were applicable to the following:
--------------------------------------------------------------------------------------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------
(Thousands)
Operating expenses
Current $195,848 $243,480 $204,346
Deferred-net ---------------------------------------------
Borrowed funds component of AFUDC (1,081) (1,081) (1,081)
Depreciation and amortization 52,873 74,567 70,864
Property taxes (23,640) (9,590) 3,952
Alternative minimum tax - 28,174 50,537
Fermi 2 capitalized labor and
expenses (1,998) (1,692) (1,692)
Nuclear fuel 14,645 (1,543) 6,313
Fermi 2 performance reserve (10,850) - -
Reacquired debt losses 43,162 - -
Indirect construction costs (1,268) (1,268) (1,268)
Uncollectible accounts 1,380 (700) (3,060)
Contributions in aid of construction (6,898) (3,756) (4,877)
Fermi 2 refueling outage 6,798 (6,136) 2,068
Shareholder value improvement plan 2,244 559 (2,256)
Coal contract buyouts (401) (1,411) (1,918)
Injuries and damages (1,071) (5,855) -
Steam purchase reserve - (3,850) -
Employee reorganization expenses 4,200 (4,200) -
Pensions and benefits 10,130 4,925 3,708
Other (590) 1,073 (6,110)
---------------------------------------------
87,635 68,216 115,180
---------------------------------------------
Investment tax credit-net
Utilized 2,612 250 (417)
Amortized (15,438) (14,477) (16,351)
---------------------------------------------
(12,826) (14,227) (16,768)
---------------------------------------------
Total 270,657 297,469 302,758
---------------------------------------------
Other income and deductions
Current (8,083) (7,712) (5,464)
Deferred-net (28) (882) (1,644)
---------------------------------------------
Total (8,111) (8,594) (7,108)
---------------------------------------------
Disallowed plant costs and accretion income
Current (18,384) (18,405) (19,835)
Deferred-net
Disallowed plant costs 17,863 17,863 19,874
Accretion income 4,773 14,604 15,537
---------------------------------------------
Total 4,252 14,062 15,576
---------------------------------------------
Total income taxes $266,798 $302,937 $311,226
=============================================
The Fermi 2 phase-in plan required the Company to record additional deferred
income tax expense related to deferred depreciation totaling $33.5 million,
with this amount amortized to income over the six-year period ending December
31, 1998.
In January 1993, the Company adopted SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires an asset and liability approach for financial
accounting and reporting for income taxes. At January 1, 1993, the Company
recorded an increase in accumulated deferred income tax liabilities of $740
million representing (a) the tax effect of temporary differences not previously
recognized and (b) the recomputing of its tax liability at the current tax
rate. The liability increase was offset by a regulatory asset of equal value,
titled "Recoverable Income Taxes" in the Consolidated Balance Sheet. This
regulatory asset represents the future revenue recovery from customers for
these taxes as they become payable, with no effect on net income. In August
1993, the Omnibus Budget Reconciliation Act of 1993 increased the federal
corporate income tax rate from 34% to 35% retroactive to January 1, 1993. As a
result, the Company recorded (1) an increase of $88.1 million in accumulated
deferred income tax liabilities, offset by a corresponding increase in
"Recoverable Income Taxes," and (2) an increase of $10.4 million in income tax
expense.
At December 31, 1994, "Recoverable Income Taxes" totaled $663.1 million
(deferrals of $828.1 million in 1993 less amortization of $108.2 million in
1994 and $56.8 million in 1993).
Deferred income tax assets (liabilities) are comprised of the following at
December 31:
------------------------------------------------------------------------------------------------------------
1994 1993
------------------------------------------------------------------------------------------------------------
(Thousands)
Property $(2,070,943) $(2,023,328)
Fermi 2 deferred depreciation and return (170,668) (207,724)
Property taxes (52,913) (76,553)
Investment tax credit 187,000 195,000
Reacquired debt losses (43,162) -
Other 103,240 63,096
----------- -----------
$(2,047,446) $(2,049,509)
=========== ===========
Deferred income tax liabilities $(2,566,578) $(2,590,064)
Deferred income tax assets 519,132 540,555
----------- -----------
$(2,047,446) $(2,049,509)
=========== ===========
In 1993, the MPSC issued an order, in a generic proceeding, authorizing
accounting procedures consistent with SFAS No. 109 and providing assurance that
the effects of previously flowed-through tax benefits will continue to be
allowed rate recovery.
The federal income tax returns of the Company are settled through the year
1988. The Company believes that adequate provisions for federal income taxes
have been made through December 31, 1994.
42
43
NOTE 7 - COMMON STOCK AND CUMULATIVE PREFERRED AND PREFERENCE STOCK
At December 31, the outstanding Cumulative Preferred Stock redeemable solely at
the option of the Company was:
------------------------------------------------------------------------------------------------------------
Date of Issuance 1994 1993
------------------------------------------------------------------------------------------------------------
(Thousands)
CUMULATIVE PREFERRED STOCK
5 1/2% Convertible Series, 55,470 and 59,419 shares,
respectively October 1967 $ 5,547 $ 5,942
7.68% Series, 500,000 shares March 1971 50,000 50,000
7.45% Series, 600,000 shares November 1971 60,000 60,000
7.36% Series, 750,000 shares December 1972 75,000 75,000
7.75% Series, 1,500,000 shares February 1993 150,000 150,000
7.74% Series, 500,000 shares April 1993 50,000 50,000
Preferred stock expense (10,264) (10,259)
-----------------------
Total Cumulative Preferred Stock $380,283 $380,683
=======================
The Convertible Cumulative Preferred Stock, 5 1/2% Series, is convertible by
the holder into Common Stock. The conversion price was $17.79 per share at
December 31, 1994. The number of shares converted during 1994, 1993 and 1992
was 3,949, 5,563 and 5,978, respectively. The number of shares of Common Stock
reserved for issuance upon conversion and the conversion price are subject to
further adjustment in certain events. This Series may be redeemed at any time
in whole or in part at the option of the Company at $100 per share, plus
accrued dividends.
The Company's 7.68% Series, 7.45% Series and 7.36% Series Cumulative
Preferred Stock are redeemable solely at the option of the Company at a per
share redemption price of $101, plus accrued dividends.
The Company's 7.75% Series and 7.74% Series Cumulative Preferred Stock are
redeemable solely at the option of the Company at a per share redemption price
of $100 (equivalent to $25 per Depositary Share), plus accrued dividends, on
and after April 15, 1998 and July 15, 1998, respectively.
Apart from MPSC approval and the requirement that common, preferred and
preference stock be sold for at least par value, there are no legal
restrictions on the issuance of additional authorized shares of such stock.
At December 31, 1994, there was no outstanding Cumulative Preferred Stock
subject to mandatory redemption.
At December 31, 1994, the Company had Cumulative Preference Stock of $1 par
value, 30,000,000 shares authorized with 30,000,000 shares unissued.
On August 4, 1994, the Company purchased 2,206,635 shares of its $10 par
value Common Stock at a price of $27.125 per share, totaling $59.9 million,
from the trustee of the Detroit Edison Savings & Investment Plans. These
shares were canceled and reverted to the status of authorized but unissued
shares.
NOTE 8 - SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS
As described below, at December 31, 1994, the Company had total short-term
credit arrangements of approximately $405 million. At December 31, 1994 and
December 31, 1993, $39.5 million and $138.2 million of short-term borrowings
were outstanding with weighted average interest rates of 6.2% and 3.4%,
respectively.
The Company had bank lines of credit of $200 million, all of which had
commitment fees in lieu of compensating balances. Commitment fees incurred in
1994 for bank lines of credit were approximately $0.3 million. The Company
uses bank lines of credit to support the issuance of commercial paper and bank
loans. All borrowings are at prevailing money market rates which are below the
banks' prime lending rates.
In May 1993, FERC issued its order authorizing the continuation of the
Company's $1 billion of short-term borrowing authority. This authority will be
in effect through May 31, 1995.
The Company has a nuclear fuel financing arrangement (heat purchase
contract) with Renaissance Energy Company ("Renaissance"), an unaffiliated
company. Renaissance may issue commercial paper or borrow from participating
banks on the basis of promissory notes. To the extent the maximum amount of
funds available to Renaissance (currently $400 million) is not needed by
Renaissance to purchase nuclear fuel, such funds may be loaned to the Company
for general corporate purposes pursuant to a separate Loan Agreement. At
December 31, 1994, approximately $205 million was available to the Company
under such Loan Agreement. See Note 9 for a discussion of the Company's heat
purchase contract with Renaissance.
Renaissance entered into five-year interest rate swap agreements, guaranteed
by the Company, in December 1990, with five banks for a nominal amount of $125
million. These agreements are used to reduce the potential impact of increases
in interest rates on the variable rate debt by exchanging the receipt of
variable rate amounts for fixed interest payments at rates ranging from 8.12%
to 8.145% over the life of the agreements. The differential to be paid or
received is recognized as an adjustment to the interest component included as
part of nuclear fuel expense.
43
44
NOTE 9 - LEASES
Future minimum lease payments under long-term noncancellable leases, consisting
of nuclear fuel ($221 million computed on a projected units of production
basis), lake vessels ($48 million), locomotives and coal cars ($149 million),
office space ($28 million) and computers, vehicles and other equipment ($6
million) at December 31, 1994 are as follows:
----------------------------------------------------------------------------------------------------------
(MILLIONS) (MILLIONS)
----------------------------------------------------------------------------------------------------------
1995 $103 1998 $ 41
1996 99 1999 23
1997 61 Remaining years 125
----
Total $452
====
----------------------------------------------------------------------------------------------------------
The Company has a heat purchase contract with Renaissance which provides for
the purchase by Renaissance for the Company of up to $400 million of nuclear
fuel, subject to the continued availability of funds to Renaissance to purchase
such fuel. Title to the nuclear fuel is held by Renaissance. The Company
makes quarterly payments under the heat purchase contract based on the
consumption of nuclear fuel for the generation of electricity. Renaissance's
investment in nuclear fuel was $193 million and $184 million at December 31,
1994 and 1993, respectively. The increase in 1994 from 1993 of $9 million
includes purchases of $3 million and capitalized interest of $6 million.
Under SFAS No. 71, amortization of leased assets is modified so that the
total of interest on the obligation and amortization of the leased asset is
equal to the rental expense allowed for ratemaking purposes. For ratemaking
purposes, the MPSC has treated all leases as operating leases. Net income is
not affected by capitalization of leases.
Rental expenses for both capital and operating leases were $49 million
(including $8 million for nuclear fuel), $126 million (including $89 million
for nuclear fuel) and $108 million (including $70 million for nuclear fuel) for
1994, 1993 and 1992, respectively.
NOTE 10 - LONG-TERM DEBT
The Company's 1924 Mortgage and Deed of Trust ("Mortgage"), the lien of which
covers substantially all of the Company's properties, provides for the issuance
of additional bonds. At December 31, 1994, approximately $3.1 billion principal
amount of Mortgage Bonds could have been issued on the basis of property
additions, combined with an earnings test provision, assuming an interest rate
of 8.9% on any such additional Mortgage Bonds. An additional $1.2 billion
principal amount of Mortgage Bonds could have been issued on the basis of bond
retirements.
Long-term debt outstanding at December 31 was:
---------------------------------------------------------------------------------------------------------------------
Interest Rate 1994 1993
---------------------------------------------------------------------------------------------------------------------
(Thousands)
GENERAL AND REFUNDING MORTGAGE BONDS
Series R, due 12/1/96 6 % $ 100,000 $ 100,000
Series S, due 10/1/98 6.4 150,000 150,000
1989 Series A, due 7/1/19 9 7/8 - 168,285
1990 Series A, due 3/31/20 7.904 163,254 169,533
1990 Series B, due 3/31/16 7.904 209,352 218,868
1990 Series C, due 3/31/14 8.357 68,380 71,799
1992 Series D, due 8/1/02 and 8/1/22 7.605 * 290,000 300,000
1992 Series E, due 12/15/99 6.83 50,000 50,000
1993 Series B, due 12/15/99 6.83 50,000 50,000
1993 Series C, due 1/15/03 and 1/13/23 7.939 * 225,000 225,000
1993 Series D, due 4/1/99 6.45 100,000 100,000
1993 Series E, due 3/15/00, 3/17/03 and 3/15/23 6.854 * 390,000 400,000
1993 Series G, due 5/1/97 and 5/1/01 5.921 * 225,000 225,000
1993 Series J, due 6/1/18 7.74 270,000 300,000
Less: Unamortized net discount (182) (1,906)
Amount due within one year (19,214) (19,214)
-------------------------
$2,271,590 $2,507,365
-------------------------
REMARKETED NOTES
Secured by corresponding amounts of General and
Refunding Mortgage Bonds
1993 Series H, due 7/15/28 5.839 ** $ 50,000 $ 50,000
1993 Series K, due 8/15/33 4 5/8 ** 160,000 160,000
1994 Series C, due 8/15/34 6.708 ** 200,000 -
Less: Unamortized net discount (177) (181)
-------------------------
$ 409,823 $ 209,819
-------------------------
Interest Rate 1994 1993
------------------------------------------------------------------------------------------------------------------------
(Thousands)
TAX EXEMPT REVENUE BOND OBLIGATIONS
Secured by corresponding amounts of General and
Refunding Mortgage Bonds
Installment Sales Contracts, due 9/1/05 - 9/1/24 7.32%* $ 302,155 $ 306,440
Less: Unamortized net discount (279) (293)
Funds on deposit with Trustee - (160)
Amount due within one year - (435)
-----------------------------
$ 301,876 $ 305,552
-----------------------------
Loan Agreements, due 7/15/08 - 8/1/24 6.73 * $ 487,495 $ 467,025
Less: Unamortized net discount (73) -
-----------------------------
$ 487,422 $ 467,025
-----------------------------
Unsecured
Installment Sales Contracts, due 12/15/15 - 12/1/19 8.95 * $ 314,060 $ 290,360
-----------------------------
Loan Agreements, due 4/15/10 - 10/1/24 5.02 * $ 40,525 $ 50,475
-----------------------------
$1,143,883 $1,113,412
-----------------------------
Total Long-Term Debt $3,825,296 $3,830,596
=============================
* Weighted average interest rate at December 31, 1994.
** Variable rate at December 31, 1994.
44
45
In 1995, 1996, 1997, 1998 and 1999, long-term debt maturities consist of $19
million, $119 million, $144 million, $169 million and $219 million,
respectively.
In June 1992, the Company entered into a three-year interest rate swap
agreement matched to a $31 million variable rate tax exempt revenue bond. This
agreement is used to reduce the potential impact of increases in interest rates
on the variable rate debt by exchanging the receipt of variable rate amounts
for fixed interest payments at a rate of 4.32% over the life of the agreement.
The differential to be paid or received is recognized as an adjustment to
interest expense related to the debt.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
CASH AND TEMPORARY CASH INVESTMENTS/SHORT-TERM BORROWINGS
The carrying amount approximates fair value because of the short maturity of
those instruments.
OTHER INVESTMENTS
The fair value of the Company's other investments was not estimated since
they are not material and because some are already recorded at fair value.
NUCLEAR DECOMMISSIONING TRUST FUNDS
The fair value of the Company's nuclear decommissioning trust funds is
estimated based on quoted market prices for securities and carrying amount for
the cash equivalents.
SALE OF ACCOUNTS RECEIVABLE AND UNBILLED REVENUES
The carrying amount approximates fair value because of the short maturity of
accounts receivable and unbilled revenues pledged for sale.
CUMULATIVE PREFERRED STOCK
The fair value of the Company's preferred stock outstanding is estimated
based on the quoted market prices for the same or similar issues.
LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
CUSTOMER SURETY DEPOSITS
Surety deposits, including interest as specified by MPSC regulation, are
returned to customers. The carrying amount approximates fair value.
The estimated fair values of the Company's financial instruments at December
31, all of which are held or issued for purposes other than trading, are as
follows:
1994 1993
-------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Thousands)
Cash and temporary cash investments $ 8,122 $ 8,122 $ 11,071 $ 11,071
Other investments 15,168 15,168 2,809 2,809
Nuclear decommissioning trust funds 76,492 76,492 29,929 31,290
Sale of accounts receivable and
unbilled revenues 200,000 200,000 200,000 200,000
Cumulative preferred stock 390,547 336,249 390,942 396,154
Long-term debt 3,844,510 3,511,459 3,850,405 4,106,216
Short-term borrowings 39,489 39,489 138,204 138,204
Customer surety deposits 10,870 10,870 10,819 10,819
NOTE 12 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS - The Company has entered into purchase commitments of
approximately $638 million at December 31, 1994, which includes, among other
things, the costs of major turbine components to be replaced at Fermi 2 and
line construction and clearance costs. The Company also has entered into
substantial long-term fuel supply and transportation commitments.
The Company has an Energy Purchase Agreement ("Agreement") for the purchase
of steam and electricity from the Detroit Resource Recovery Facility. Under
the Agreement, the Company will purchase steam through the year 2008 and
electricity through June 30, 2024. Purchases of steam and electricity were
$21.3 million, $23.6 million and $24.5 million for 1992, 1993 and 1994,
respectively, and annual purchase commitments are approximately $30.0 million,
$33.2 million, $35.8 million, $37.0 million and $38.3 million for 1995, 1996,
1997, 1998 and 1999, respectively.
CONTINGENCIES - In 1986, the Michigan Attorney General and the Michigan Natural
Resources Commission filed a state lawsuit against the Company and Consumers as
co-owners of Ludington for claimed aquatic losses. The Company is a 49%
co-owner of Ludington. The suit, which alleges violations of the Michigan
Environmental Protection Act and the common law for claimed aquatic losses,
seeks past damages (including interest) of approximately $148 million and
future damages (from the time of the filing of the lawsuit) in the amount of
approximately $89,500 per day (of which 49% would be applicable to the
Company).
In 1986, two environmental organizations requested FERC to withdraw the
Ludington license or provide some mitigation for fish mortality. In April
1989, Consumers and the Company were ordered by the FERC to install a temporary
barrier net around the plant to protect fish on an interim basis until
45
46
permanent measures could be developed. A net has been in operation for
six seasons and the companies have proposed that it be utilized as part of the
permanent solution.
On October 5, 1994, the Company and all other parties to the state action and
the FERC proceeding, except certain Indian tribes, reached a tentative
settlement. The settlement agreement is subject to FERC and MPSC approval.
(The Michigan Supreme Court is holding this matter in abeyance pending approval
of a settlement.) The settlement provides for damages and use of the net as a
permanent solution. The net present value of the Company's portion of the
damages is estimated to be approximately $30 million which will be paid over a
24-year period, including $10 million to enhance recreational opportunities on
Company-owned and donated property. At December 31, 1994, the Company has
recorded a regulatory asset and liability of $7 million for past damages,
pending approval by the FERC and MPSC.
In January 1989, the Environmental Protection Agency ("EPA") issued an
administrative order under the Comprehensive Environmental Response,
Compensation and Liability Act ordering the Company and 23 other potentially
responsible parties ("PRPs") to begin removal activities at the Carter
Industrials superfund site. In June 1993, a Consent Decree was entered by the
U.S. District Court for the Eastern District of Michigan. It included a
provision for the payment of past costs incurred by the EPA of which the
Company's share was approximately $1.3 million, paid in June 1993. The Company
has recorded a liability of $8.4 million, which amount was charged to other
operation expense in the Consolidated Statement of Income in 1989-1992, as its
anticipated cost of the clean-up in 1995-1997. On July 7, 1994, the PRPs in
this matter petitioned the EPA to consider amending the clean-up plan to permit
landfill disposal of certain contaminated soil and on December 12, 1994, the
EPA issued a public notice of its intent to amend the Consent Decree to
incorporate the proposed change in the clean-up plan. Should the procedure be
approved, the Company's portion of the clean-up costs will be reduced by
approximately $3 million. There is, however, the possibility that EPA may,
through subsequent proceedings, require a clean-up of the sewer and sewer
outfall emptying into the Detroit River.
In August 1993, the Company, along with approximately 28 other parties,
received a "Notice of Demand" from the Michigan Department of Natural Resources
("MDNR"), acting pursuant to a Michigan statute, for all past ($142,000) and
future costs incurred by the state in performing response activities related to
the Carter Industrials site. In addition, the notice indicated the need to
conduct a PCB-sediment sampling program at the sewer outfall emptying into the
Detroit River. In response to the "Notice of Demand," the Carter Industrials
Site Group (the group, including the Company, of PRPs formed to jointly
remediate the Carter Industrials site) paid $126,600 of past costs incurred by
the MDNR, of which approximately 45% ($57,000) was paid by the Company. The
group declined to commit to pay future costs which the MDNR may incur and
declined to conduct the program of Detroit River sediment sampling and analysis
requested by the MDNR. At this time, it is impossible to predict what impact,
if any, this matter will have upon the Company.
The Energy Act became effective in October 1992. While the Company is unable
to predict the ultimate impact of this legislation on its operations, the
Company expects that, over time, non-utility generation resources will be
developed which will result in greater competition for power sales.
In addition to the matters reported herein, the Company is involved in
litigation and environmental matters dealing with the numerous aspects of its
business operations. The Company believes that such litigation and the matters
discussed above will not have a material effect on its financial position or
results of operations.
See Notes 2 and 3 for a discussion of contingencies related to Fermi 2.
NOTE 13 - EMPLOYEES' RETIREMENT PLAN AND OTHER POSTRETIREMENT BENEFITS
EMPLOYEES' RETIREMENT PLAN - The Company has a trusteed and non-contributory
defined benefit retirement plan ("Plan") covering all eligible employees who
have completed six months of service. The Plan provides retirement benefits
based on the employee's years of benefit service, average final compensation
and age at retirement. The Company's policy is to fund pension cost calculated
under the projected unit credit actuarial cost method, provided that this
amount is at least equal to the minimum funding requirement of the Employee
Retirement Income Security Act of 1974, as amended, and is not greater than the
maximum amount deductible for federal income tax purposes. Contributions were
made to the Plan totaling $23.7 million in 1992, $29.4 million in 1993 and
$45.8 million in 1994.
Net pension cost included the following components:
-----------------------------------------------------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------------------------------------------------
(Thousands)
Service cost - benefits earned during
the period $ 25,146 $ 22,945 $ 21,644
Interest cost on projected benefit
obligation 75,922 74,490 70,511
Actual return on Plan assets (3,272) (119,037) (56,208)
Net deferral and amortization:
Deferral of net gain (loss) during
current period (90,069) 33,435 (23,528)
Amortization of unrecognized prior
service cost 3,613 3,297 2,776
Amortization of unrecognized net
asset resulting from initial
application (4,507) (4,507) (4,507)
--------------------------------------------
Net pension cost $ 6,833 $ 10,623 $ 10,688
============================================
46
47
Assumptions used in determining net pension cost are as follows:
------------------------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------------
Discount rate 7.5% 8.0% 8.0%
Annual increase in future compensation
levels 4.5 5.0 5.0
Expected long-term rate of return on
Plan assets 9.5 9.5 9.5
------------------------------------------------------------------------------------------------------------
The following reconciles the funded status of the Plan to the amount
recorded in the Company's Consolidated Balance Sheet:
------------------------------------------------------------------------------------------------------------
December 31
-------------------------------
1994 1993
------------------------------------------------------------------------------------------------------------
(Thousands)
Plan assets at fair value, primarily equity
and debt securities $1,054,048 $1,059,775
-------------------------------
Less actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested
benefits of $852,374 and $872,138, respectively 872,530 892,761
Increase in future compensation levels 138,411 152,279
-------------------------------
Projected benefit obligation 1,010,941 1,045,040
-------------------------------
Plan assets in excess of projected benefit obligation 43,107 14,735
Unrecognized net asset resulting from initial
application (33,288) (37,795)
Unrecognized net loss (gain) 3,856 (7,315)
Unrecognized prior service cost 40,391 45,518
-------------------------------
Asset recorded as Other Deferred Debits
in the Consolidated Balance Sheet $ 54,066 $ 15,143
===============================
------------------------------------------------------------------------------------------------------------
Assumptions used in determining the projected benefit obligation are as
follows:
-----------------------------------------------------------------------------------------------------------
December 31
--------------------------
1994 1993
-----------------------------------------------------------------------------------------------------------
Discount rate 8.0% 7.5%
Annual increase in future compensation levels 4.5 4.5
-----------------------------------------------------------------------------------------------------------
The unrecognized net asset at date of initial application is being amortized
over approximately 15.4 years, which was the average remaining service period
of employees at January 1, 1987.
In addition to the Plan, the Company has several supplemental non-qualified,
non-contributory, unfunded retirement benefit plans for certain management
employees.
OTHER POSTRETIREMENT BENEFITS - The Company provides certain postretirement
health care and life insurance benefits for retired employees. Substantially
all of the Company's employees will become eligible for such benefits if they
reach retirement age while working for the Company. These benefits are
provided principally through insurance companies and other organizations.
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
The standard required the Company to change its accounting for postretirement
benefits from the pay-as-you-go (cash) basis to the accrual of such benefits
during the active service periods of employees to the date they attain full
eligibility for benefits. The transition obligation at the time of adoption is
being amortized over 20 years. The Company's incremental cost upon adoption of
the standard was $49 million for 1993 which is being deferred in accordance
with the January 21, 1994 MPSC rate order. See Note 3. This amount is being
amortized and recovered in rates over the estimated four-year period 1994-1997.
Net other postretirement benefits cost included the following components:
-----------------------------------------------------------------------------------------------------------
1994 1993
-----------------------------------------------------------------------------------------------------------
(Thousands)
Service cost - benefits earned
during the period $16,267 $15,312
Interest cost on accumulated
postretirement benefit obligation 33,459 33,787
Actual return on assets (208) (18)
Deferral of net loss during current period (833) -
Amortization of unrecognized
transition obligation 20,633 21,685
-----------------------------
Net other postretirement benefits cost $69,318 $70,766
=============================
-----------------------------------------------------------------------------------------------------------
Assumptions used in determining net other postretirement benefits cost are
as follows:
----------------------------------------------------------------------------------------------------------
1994 1993
----------------------------------------------------------------------------------------------------------
Discount rate 7.5% 8.0%
Annual increase in future compensation levels 4.5 5.0
Expected long-term rate of return on assets 9.5 9.5
-----------------------------------------------------------------------------------------------------------
47
48
The following reconciles the funded status to the amount recorded in the
Company's Consolidated Balance Sheet:
----------------------------------------------------------------------------------------------------------
December 31
----------------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(Thousands)
Actuarial present value of benefit obligation:
Retirees $(256,370) $(242,787)
Fully eligible active participants (67,581) (65,933)
Other active participants (140,710) (129,075)
----------------------------
Accumulated postretirement benefit obligation (464,661) (437,795)
Less assets at fair value, primarily
equity and debt securities 58,080 599
----------------------------
Benefit obligation in excess of assets (406,581) (437,196)
Unrecognized transition obligation 369,459 392,026
Unrecognized net gain (21) (3,397)
----------------------------
Liability recorded as Other Non-Current
Liabilities in the Consolidated Balance Sheet $ (37,143) $ (48,567)
============================
------------------------------------------------------------------------------------------------------------
Assumptions used in determining the accumulated benefit obligation are as
follows:
-----------------------------------------------------------------------------------------------------------
December 31
-----------------------------
1994 1993
-----------------------------------------------------------------------------------------------------------
Discount rate 8.0% 7.5%
Annual increase in future compensation levels 4.5 4.5
-----------------------------------------------------------------------------------------------------------
Benefit costs were calculated assuming health care cost trend rates beginning
at 12.6% for 1994 and decreasing to 6.0% in 2008 and thereafter for persons
under age 65 and decreasing from 7.4% to 6.0% for persons age 65 and over. A
one-percentage-point increase in health care cost trend rates would increase
the aggregate of the service cost and interest cost components of benefit costs
by $6 million for 1994 and increase the accumulated benefit obligation by $47
million at December 31, 1994.
NOTE 14 - SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
------------------------------------------------------------------------------------------------------------
1994 Quarter Ended
------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------------------------------------------------------------------------------------------------------------
(Thousands, except per share amounts)
Operating Revenues $899,589 $872,690 $944,389 $802,673
Operating Income 189,319 161,832 200,298 167,946
Net Income 112,870 87,283 124,381 95,375
Earnings for Common Stock 105,458 79,872 116,972 87,967
Earnings Per Share 0.72 0.54 0.80 0.61
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
1993 Quarter Ended
-----------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------------------------------------------------------------------------------------------------------------
(Thousands, except per share amounts)
Operating Revenues $874,847 $835,171 $976,248 $868,945
Operating Income 221,732 186,498 228,436 207,281
Net Income 135,203 102,664 153,365 130,671
Earnings for Common Stock 127,060 94,799 145,950 123,257
Earnings Per Share 0.86 0.64 0.99 0.84
------------------------------------------------------------------------------------------------------------
The fourth quarter of 1994 includes a decrease in operating revenues of $59
million, a decrease in operation expense of $65 million and a decrease in
maintenance expense of $1 million related to a settlement agreement, with the
parties intervening in the 1994 PSCR reconciliation case with the MPSC, for
business interruption insurance proceeds associated with the December 25, 1993
outage at Fermi 2. See Note 2.
Earnings per share amounts for each quarter are required to be computed
independently and, therefore, may not equal the amount computed for the total
year.
48
49
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company's Board of Directors, upon the recommendation of the
Board's Audit Committee, has appointed Deloitte & Touche LLP as independent
accountants of the Company for the year 1995. The appointment is subject to
ratification by the Company's Common Stock Shareholders at the Annual Meeting
of Common Stock Shareholders to be held on April 24, 1995 ("Annual Meeting").
(The Company's Board of Directors has also approved the formation of a holding
company; and ratification of the appointment of Deloitte & Touche LLP as
independent accountants of the Company will be considered ratification of the
firm's appointment as independent accountants for the holding company if the
holding company is approved at the Annual Meeting.)
In prior years, Price Waterhouse LLP served as independent accountants of the
Company. During the Company's two fiscal years ending December 31, 1994 and
the subsequent interim period from January 1, 1995 through the date hereof,
there have been no disagreements with Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to its satisfaction, would have
caused Price Waterhouse LLP to make reference thereto in their report on the
financial statements for such years. None of Price Waterhouse LLP's reports on
the financial statements for the past two years contained an adverse opinion or
a disclaimer of opinion, or was qualified or modified as to uncertainty, audit
scope or accounting principles.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the Company's executive officers is incorporated
herein by reference to Items 1 and 2 - Business and Properties, "Employes and
Executive Officers" on pages 20-21 hereof; information regarding compliance
with section 16(a) of the Securities Exchange Act of 1934 is incorporated
herein by reference to the data under the heading "Compliance with Section
16(a) of the Securities Exchange Act of 1934" on page 35 of the Company's
definitive proxy statement dated March 9, 1995, in connection with its Annual
Meeting of Shareholders to be held on April 24, 1995; and information regarding
directors is incorporated herein by reference to the data under the heading
"The Election of Directors" on pages 5-9 of the Company's definitive proxy
statement dated March 9, 1995, in connection with its Annual Meeting of
Shareholders to be held on April 24, 1995.
ITEM 11 - EXECUTIVE COMPENSATION.
Information regarding "Executive Compensation" is incorporated herein
by reference to the data under the heading "Board Compensation Committee Report
on Executive Compensation" on pages 10-15 of the Company's definitive proxy
statement dated March 9, 1995, in connection with its Annual Meeting of
Shareholders to be held on April 24, 1995.
49
50
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding ownership of equity securities is incorporated
herein by reference to the heading "Security Ownership of Management" on page 9
of the Company's definitive proxy statement dated March 9, 1995, in connection
with its Annual Meeting of Shareholders to be held on April 24, 1995.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions
is incorporated herein by reference to the heading "Compensation Committee
Interlocks and Insider Participation" on page 15 of the Company's definitive
proxy statement dated March 9, 1995, in connection with its Annual Meeting of
Shareholders to be held on April 24, 1995.
50
51
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report
on Form 10-K.
(1) Consolidated financial statements. See "Item 8 - Financial
Statements and Supplementary Data" on page 30.
(2) Financial statement schedules. See "Item 8 - Financial
Statements and Supplementary Data" on page 30.
(3) Exhibits (* Denotes management contract or compensatory
plan or arrangement required to be filed as an exhibit to
this report pursuant to Item 14 (c) of this report).
(i) Exhibits filed herewith.
Exhibit
Number
-------
4-169 - Supplemental Indenture, dated as of
December 1, 1994, establishing the
Series KKP No. 15 and 1994 Series DP
Mortgage Bonds.
4-170 - Supplemental Indenture, dated as of
October 15, 1985, establishing the
Series KKP No. 9 Mortgage Bonds.
4-171 - Supplemental Indenture, dated as of
July 15, 1989, establishing the
Series KKP No. 10 Mortgage Bonds.
4-172 - Supplemental Indenture, dated as of
December 1, 1989, establishing the
Series KKP No. 11 and 1989 Series BP
Mortgage Bonds.
4-173 - Supplemental Indenture, dated as of
February 15, 1990, establishing the
1990 Series A, 1990 Series B, 1990
Series C, 1990 Series D, 1990 Series
E and 1990 Series F Mortgage Bonds.
*10-56 - Amended and Restated 1994 Officers'
Shareholder Value Improvement Plan
(1994 and subsequent years, January
23, 1995).
*10-57 - 1995 Officers' Shareholder Value
Improvement Plan (January 23, 1995).
*10-58 - Plan for Deferring the Payment of
Directors' Fees (January 23, 1995).
*10-59 - Retirement Plan for Non-Employe
Directors (February 27, 1995).
51
52
Exhibit
Number
-------
11-21 - Primary and Fully Diluted Earnings
Per Share of Common Stock.
12-26 - Computation of Ratio of Earnings to
Fixed Charges.
12-27 - Computation of Ratio of Earnings to
Fixed Charges and Preferred and
Preference Stock Dividend
Requirements.
23-7 - Consent of Independent Accountants.
(ii) Exhibits incorporated herein by reference.
4(a) - Restated Articles of Incorporation of
the Company, as filed December 10,
1991 with the State of Michigan,
Department of Commerce - Corporation
and Securities Bureau (Exhibit 4-117
to Form 10-Q for quarter ended March
31, 1993).
4(b) - Certificate containing resolution of
the Board of Directors establishing
the Cumulative Preferred Stock, 7.75%
Series as filed February 22, 1993
with the State of Michigan,
Department of Commerce - Corporation
and Securities Bureau (Exhibit 4-134
to Form 10-Q for quarter ended March
31, 1993).
4(c) - Certificate containing resolution of
the Board of Directors establishing
the Cumulative Preferred Stock, 7.74%
Series, as filed April 21, 1993 with
the State of Michigan, Department of
Commerce - Corporation and Securities
Bureau (Exhibit 4-140 to Form 10-Q
for quarter ended March 31, 1993).
4(d) - By-Laws of the Company as amended
November 25, 1991 (Exhibit 4-118 to
Form 10-K for year ended December 31,
1991).
4(e) - Mortgage and Deed of Trust, dated as
of October 1, 1924, between the
Company (File No. 1-2198) and Bankers
Trust Company as Trustee (Exhibit B-1
to Registration No. 2-1630) and
indentures supplemental thereto,
dated as of dates indicated below,
and filed as exhibits to the filings
as set forth below:
September 1, 1947 Exhibit B-20 to
Registration No. 2-7136
October 1, 1968 Exhibit 2-B-33 to
Registration No. 2-30096
52
53
Exhibit
Number
-------
November 15, 1971 Exhibit 2-B-38 to
Registration No. 2-42160
January 15, 1973 Exhibit 2-B-39 to
Registration No. 2-46595
June 1, 1978 Exhibit 2-B-51 to
Registration No. 2-61643
June 30, 1982 Exhibit 4-30 to
Registration No. 2-78941
August 15, 1982 Exhibit 4-32 to
Registration No. 2-79674
November 30, 1987 Exhibit 4-139 to
Form 10-K for year
ended December 31, 1992
November 1, 1990 Exhibit 4-110 to
Form 10-K for year
ended December 31, 1990
April 1, 1991 Exhibit 4-111 to
Form 10-Q for quarter
ended March 31, 1991
May 1, 1991 Exhibit 4-112 to
Form 10-Q for quarter
ended June 30, 1991
May 15, 1991 Exhibit 4-113 to Form 10-Q
for quarter ended June 30,
1991
September 1, 1991 Exhibit 4-116 to Form 10-Q
for quarter ended September
30, 1991
November 1, 1991 Exhibit 4-119 to Form 10-K
for year ended December 31,
1991
January 15, 1992 Exhibit 4-120 to Form 10-K
for year ended December 31,
1991
February 29, 1992 Exhibit 4-121 to Form 10-Q
for quarter ended March 31,
1992
April 15, 1992 Exhibit 4-122 to Form 10-Q
for quarter ended June 30,
1992
July 15, 1992 Exhibit 4-123 to Form 10-Q
for quarter ended September
30, 1992
July 31, 1992 Exhibit 4-124 to Form 10-Q
for quarter ended September
30, 1992
November 30, 1992 Exhibit 4-130 to
Registration No. 33-56496
January 1, 1993 Exhibit 4-131 to
Registration No. 33-56496
March 1, 1993 Exhibit 4-141 to Form 10-Q
for quarter ended March 31,
1993
March 15, 1993 Exhibit 4-142 to Form 10-Q
for quarter ended March 31,
1993
April 1, 1993 Exhibit 4-143 to Form 10-Q
for quarter ended March 31,
1993
April 26, 1993 Exhibit 4-144 to Form 10-Q
for quarter ended March 31,
1993
May 31, 1993 Exhibit 4-148 to
Registration No. 33-64296
June 30, 1993 Exhibit 4-149 to Form 10-Q
for quarter ended June 30,
1993 (1993 Series AP)
53
54
Exhibit
Number
-------
June 30, 1993 Exhibit 4-150 to Form 10-Q
for quarter ended June 30,
1993 (1993 Series H)
September 15, 1993 Exhibit 4-158 to Form 10-Q
for quarter ended September
30, 1993
March 1, 1994 Exhibit 4-163 to
Registration No. 33-53207.
June 15, 1994 Exhibit 4-166 to Form 10-Q
for quarter ended June 30,
1994.
August 15, 1994 Exhibit 4-168 to Form 10-Q
for quarter ended September
30, 1994.
4(f) - Collateral Trust Indenture (notes),
dated as of June 30, 1993 (Exhibit
4-152 to Registration No. 33-50325).
4(g) - First Supplemental Note Indenture,
dated as of June 30, 1993 (Exhibit
4-153 to Registration No. 33-50325).
4(h) - Second Supplemental Note Indenture,
dated as of September 15, 1993
(Exhibit 4-159 to Form 10-Q for
quarter ended September 30, 1993).
4(i) - Third Supplemental Note Indenture,
dated as of August 15, 1994 (Exhibit
4-169 to Form 10-Q for quarter ended
September 30, 1994).
4(j) - Amended and Restated Standby Note
Purchase Credit Facility, dated as of
April 26, 1994, among The Detroit
Edison Company, The Bank of New York,
The Toronto-Dominion Bank, acting
through its Houston Agency,
Toronto-Dominion (Texas), Inc., as
Administrative Agent and Citicorp
Securities, Inc., as Remarketing
Agent (Exhibit 99-5 to Registration
No. 33-50325).
4(k) - Standby Note Purchase Credit
Facility, dated as of August 17,
1994, among The Detroit Edison
Company, Barclays Bank PLC, as Bank
and Administrative Agent, Bank of
America, The Bank of New York, The
Fuji Bank Limited, The Long-Term
Credit Bank of Japan, LTD, Union Bank
and Citicorp Securities, Inc. and
First Chicago Capital Markets, Inc.
as Remarketing Agents (Exhibit 99-18
to Form 10-Q for quarter ended
September 30, 1994).
54
55
Exhibit
Number
-------
*10(a)- Form of Indemnification Agreement
between the Company and (1) Frank E.
Agosti, (2) Gerard M. Anderson, (3)
Robert J. Buckler, (4) Malcolm G.
Dade, Jr., (5) Ronald W. Gresens, (6)
Leslie L. Loomans, (7) S. Martin
Taylor, (8) Saul J. Waldman, (9)
Susan M. Beale, (10) Frederick S.
Karwacki, (11) Douglas R. Gipson,
(12) Robert J. Horn, (13) Thomas A.
Hughes, (14) Christopher C. Nern,
(15) Ronald J. Gdowski, (16) Elaine
M. Godfrey, (17) Allen W. Anning,
(18) Christopher C. Arvani, (19)
James R. McGillivary, (20) Thomas J.
Howlin, (21) Donald J. Brett, (22)
Michael E. Champley, (23) T. Michael
Holton, and (24) Haven E. Cockerham
(Exhibit 10-41 to Form 10-Q for
quarter ended June 30, 1993).
*10(b)- 1991 Shareholder Value Improvement
Plan - A, as amended effective
January 25, 1993 (Exhibit 10-43 to
Form 10-Q for quarter ended June 30,
1993).
*10(c)- 1990 Shareholder Value Improvement
Plan - A, as amended January 25, 1993
(Exhibit 10-44 to Form 10-Q for
quarter ended June 30, 1993).
*10(d)- 1994 Officers' Shareholder Value
Improvement Plan, January, 1994
(Exhibit 10-50 to Form 10-K for year
ended December 31, 1993).
*10(e)- Certain Arrangements Pertaining to
the Employment of S. Martin Taylor
(Exhibit 10-38 to Form 10-K for year
ended December 31, 1992).
*10(f)- Certain arrangements pertaining to
the employment of Anthony F. Earley,
Jr. (Exhibit 10-53 to Form 10-Q for
quarter ended March 31, 1994).
*10(g)- Amended and Restated Savings
Separation Plan, June 1994 (Exhibit
10-54 to Form 10-Q for quarter ended
June 30, 1994.)
*10(h)- Certain arrangements pertaining to
the employment of Haven E. Cockerham
(Exhibit 10-55 to Form 10-Q for
quarter ended September 30, 1994).
*10(i)- Key Employe Deferred Compensation
Plan (January 1990). (Exhibit 10-21
to Form 10-K for year ended December
31, 1989).
55
56
Exhibit
Number
*10(j)- Retirement Reparation Plan for
Certain Employes of The Detroit
Edison Company (as amended through
May 22, 1989). (Exhibit 10-25 to
Form 10-K for year ended December 31,
1989).
*10(k)- Benefit Equalization Plan for Certain
Employes of The Detroit Edison
Company (as amended through May 22,
1989). (Exhibit 10-26 to Form 10-K
for year ended December 31, 1989).
*10(l)- Certain Arrangements Pertaining to
the Employment of Larry G. Garberding
(Exhibit 28-52 to Form 10-Q for
quarter ended June 30, 1990).
*10(m)- Form of Indemnification Agreement,
between the Company and (1) John E.
Lobbia, (2) Larry G. Garberding and
(3) Anthony F. Earley, Jr. (Exhibit
19-7 to Form 10-Q for quarter ended
March 31, 1992).
*10(n)- Form of Indemnification Agreement,
dated March 17, 1992, between the
Company and (1) Terence E. Adderley,
(2) Wendell W. Anderson, Jr., (3)
Walter J. McCarthy, Jr., (4) Lillian
Bauder, (5) David Bing, (6) Alan E.
Schwartz, (7) William Wegner, (8)
Theodore S. Leipprandt, (9) Patricia
S. Longe, (10) Eugene A. Miller, (11)
Dean E. Richardson, (12) David M.
Gates, and (13) Otis M. Smith
(Exhibit 19-8 to Form 10-Q for
quarter ended March 31, 1992).
*10(o)- Supplemental Long Term Disability
Plan, dated November 5, 1991 (Exhibit
10-32 to Form 10-K for year ended
December 31, 1991).
*10(p)- Executive Vehicle Program, dated
October 1, 1993 (Exhibit 10-47 to
Form 10-Q for quarter ended September
30, 1993).
*10(q)- Amendment No. 1 to Executive Vehicle
Plan, November 1993 (Exhibit 10-58 to
Form 10-K for year ended December 31,
1993).
*10(r)- Certain arrangements pertaining to
the employment of Gerard M. Anderson
(Exhibit 10-40 to Form 10-K for year
ended December 31, 1993).
*10(s)- Restated Management Supplemental
Benefit Plan, January 1994 (Exhibit
10-57 to Form 10-K for year ended
December 31, 1993).
99(a)- Belle River Participation Agreement
between the Company and Michigan
Public Power Agency, dated as of
December 1, 1982 (Exhibit 28-5 to
Registration No. 2-81501).
56
57
Exhibit
Number
-------
99(b)- Belle River Transmission Ownership
and Operating Agreement between the
Company and Michigan Public Power
Agency, dated as of December 1, 1982
(Exhibit 28-6 to Registration No.
2-81501.)
99(c)- 1988 Amended and Restated Loan
Agreement, dated as of October 4,
1988, between Renaissance Energy
Company (an unaffiliated company)
("Renaissance") and the Company
(Exhibit 99-6 to Registration No.
33-50325).
99(d)- First Amendment to 1988 Amended and
Restated Loan Agreement, dated as of
February 1, 1990, between the Company
and Renaissance (Exhibit 99-7 to
Registration No. 33-50325).
99(e)- Second Amendment to 1988 Amended and
Restated Loan Agreement, dated as of
September 1, 1993, between the
Company and Renaissance (Exhibit 99-8
to Registration No. 33-50325).
99(f)- Third Amendment, dated as of August
31, 1994, to 1988 Amended and
Restated Nuclear Fuel Heat Purchase
Contract, dated October 4, 1988,
between The Detroit Edison Company
and Renaissance Energy Company
(Exhibit 99-21 to Form 10-Q for
quarter ended September 30, 1994).
99(g)- $200,000,000 364-Day Credit
Agreement, dated as of September 1,
1993, among the Company, Renaissance
and Barclays Bank PLC, New York
Branch, as Agent (Exhibit 99-12 to
Registration No. 33-50325).
99(h)- First Amendment, dated as of August
31, 1994, to $200,000,000 364-Day
Credit Agreement, dated September 1,
1993, among The Detroit Edison
Company, Renaissance Energy Company,
the Banks party thereto and Barclays
Bank, PLC, New York Branch, as Agent
(Exhibit 99-19 to Form 10-Q for
quarter ended September 30, 1994).
99(i)- $200,000,000 Three-Year Credit
Agreement, dated September 1, 1993,
among the Company, Renaissance and
Barclays Bank PLC, New York Branch,
as Agent (Exhibit 99-13 to
Registration No. 33-50325).
99(j)- 1988 Amended and Restated Nuclear
Fuel Heat Purchase Contract, dated
October 4, 1988, between the Company
and Renaissance (Exhibit 99-9 to
Registration No. 33-50325).
99(k)- First Amendment to 1988 Amended and
Restated Nuclear Fuel Heat Purchase
Contract, dated as of February 1,
1990, between the Company and
Renaissance (Exhibit 99-10 to
Registration No. 33-50325).
57
58
Exhibit
Number
-------
99(l)- Second Amendment, dated as of
September 1, 1993, to 1988 Amended
and Restated Nuclear Fuel Heat
Purchase Contract between the Company
and Renaissance (Exhibit 99-11 to
Registration No. 33-50325).
99(m)- First Amendment, dated as of
September 1, 1994, to $200,000,000
Three-Year Credit Agreement, dated as
of September 1, 1993, among The
Detroit Edison Company, Renaissance
Energy Company, the Banks party
thereto and Barclays Bank, PLC, New
York Branch, as Agent (Exhibit 99-20
to Form 10-Q for quarter ended
September 30, 1994).
99(n)- Master Trust Agreement, dated as of
June 30, 1994, between the Company
and Fidelity Management Trust Company
relating to the Employes Savings
Plans (Exhibit 4-167 to Form 10-Q for
quarter ended June 30, 1994).
(b) Registrant did not file any reports on Form 8-K during the
fourth quarter of 1994.
(c) * Denotes management contract or compensatory plan or
arrangement required to be filed as an exhibit to this
report.
58
59
THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at ------------------------- Balance
Beginning Charged to Charged at End
of Costs and to Other of
Description Period Expenses Accounts(a) Deductions(b) Period
----------- ---------- ---------- ----------- ------------- -------
(Thousands)
YEAR 1994
Allowance for
uncollectible accounts
(shown as deduction
from accounts receivable
in balance sheet) . . . . . . . $34,000 $11,585 $3,246 $(18,831) $30,000
YEAR 1993
Allowance for
uncollectible accounts
(shown as deduction
from accounts receivable
in balance sheet) . . . . . . . $32,000 $21,953 $2,752 $(22,705) $34,000
YEAR 1992
Allowance for
uncollectible accounts
(shown as deduction
from accounts receivable
in balance sheet) . . . . . . . $23,000 $31,834 $2,127 $(24,961) $32,000
-----------------------
(a) Collection of accounts previously written off.
(b) Uncollectible accounts written off.
59
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE DETROIT EDISON COMPANY
----------------------------------
(Registrant)
By /s/ JOHN E. LOBBIA By /s/ LARRY G. GARBERDING
---------------------------------- ----------------------------------
John E. Lobbia Larry G. Garberding
Chairman of the Board, Executive Vice President,
Chief Executive Chief Financial Officer and Director
Officer and Director
By /s/ ANTHONY F. EARLEY, JR. By /s/ RONALD W. GRESENS
--------------------------------- ----------------------------------
Anthony F. Earley, Jr. Ronald W. Gresens
President and Chief Operating Vice President and Controller
Officer and Director
By /s/ TERENCE E. ADDERLEY By /s/ WALTER J. McCARTHY, JR.
--------------------------------- ----------------------------------
Terence E. Adderley, Director Walter J. McCarthy, Jr., Director
By /s/ WENDELL W. ANDERSON, JR. By /s/ EUGENE A. MILLER
--------------------------------- ----------------------------------
Wendell W. Anderson, Jr., Director Eugene A. Miller, Director
By /s/ LILLIAN BAUDER By
--------------------------------- ----------------------------------
Lillian Bauder, Director Dean E. Richardson, Director
By /s/ DAVID BING By /s/ ALAN E. SCHWARTZ
--------------------------------- ----------------------------------
David Bing, Director Alan E. Schwartz, Director
By /s/ THEODORE S. LEIPPRANDT By /s/ WILLIAM WEGNER
---------------------------------- ---------------------------------
Theodore S. Leipprandt, Director William Wegner, Director
By /s/ PATRICIA S. LONGE
----------------------------------
Patricia S. Longe, Director
Date: March 27, 1995
60
61
THE DETROIT EDISON COMPANY
ANNUAL REPORT ON FORM 10-K FOR
YEAR ENDED DECEMBER 31, 1994
File No. 1-2198
EXHIBIT INDEX
Exhibit Page
Number Number
------- ------
Exhibits Filed Herewith
4-169 - Supplemental Indenture, dated as of
December 1, 1994, establishing the
Series KKP No. 15 and 1994 Series DP
Mortgage Bonds.
4-170 - Supplemental Indenture, dated as of
October 15, 1985, establishing the
Series KKP No. 9 Mortgage Bonds.
4-171 - Supplemental Indenture, dated as of
July 15, 1989, establishing the
Series KKP No. 10 Mortgage Bonds.
4-172 - Supplemental Indenture, dated as of
December 1, 1989, establishing the
Series KKP No. 11 and 1989 Series BP
Mortgage Bonds.
4-173 - Supplemental Indenture, dated as of
February 15, 1990, establishing the
1990 Series A, 1990 Series B, 1990
Series C, 1990 Series D, 1990 Series
E and 1990 Series F Mortgage Bonds.
*10-56 - Amended and Restated 1994 Officers'
Shareholder Value Improvement Plan
(1994 and subsequent years, January
23, 1995).
*10-57 - 1995 Officers' Shareholder Value
Improvement Plan (January 23, 1995).
*10-58 - Plan for Deferring the Payment of
Directors Fees (January 23, 1995).
*10-59 - Retirement Plan for Non-Employe
Directors (February 27, 1995).
11-21 - Primary and Fully Diluted Earnings
Per Share of Common Stock.
12-26 - Computation of Ratio of Earnings to
Fixed Charges.
12-27 - Computation of Ratio of Earnings to
Fixed Charges and Preferred and
Preference Stock Dividend
Requirements.
23-7 - Consent of Independent Accountants.
1
62
Exhibit Page
Number Number
------- ------
Exhibits incorporated herein by reference.
See Page Numbers
______ for location of
Exhibits Incorporated
By Reference
4(a) - Restated Articles of Incorporation of
the Company, as filed December 10,
1991 with the State of Michigan,
Department of Commerce - Corporation
and Securities Bureau.
4(b) - Certificate containing Resolution of
the Board of Directors establishing
the Cumulative Preferred Stock, 7.75%
Series, as filed February 22, 1993
with the State of Michigan,
Department of Commerce - Corporation
and Securities Bureau.
4(c) - Certificate containing resolution of
the Board of Directors establishing
the Cumulative Preferred Stock, 7.74%
Series, as filed April 21, 1993 with
the State of Michigan, Department of
Commerce - Corporation and Securities
Bureau.
4(d) - By-Laws of the Company as amended
November 25, 1991.
4(e) - Mortgage and Deed of Trust, dated as
of October 1, 1924, between the
Company and Bankers Trust Company as
Trustee and indentures supplemental
thereto, dated as of the dates indicated
below:
September 1, 1947
October 1, 1968
63
Exhibit
Number
-------
November 15, 1971
January 15, 1973
June 1, 1978
June 30, 1982
August 15, 1982
November 30, 1987
November 1, 1990
April 1, 1991
May 1, 1991
May 15, 1991
September 1, 1991
November 1, 1991
January 15, 1992
February 29, 1992
April 15, 1992
July 15, 1992
July 31, 1992
November 30, 1992
January 1, 1993
March 1, 1993
March 15, 1993
April 1, 1993
April 26, 1993
May 31, 1993
June 30, 1993 (1993 Series AP)
64
Exhibit
Number
-------
June 30, 1993 (1993 Series H)
September 15, 1993
March 1, 1994
June 15, 1994
August 15, 1994
4(f) Collateral Trust Indenture (notes),
dated as of June 30, 1993.
4(g) First Supplemental Note Indenture,
dated as of June 30, 1993.
4(h) Second Supplemental Note Indenture,
dated as of September 15, 1993.
4(i) Third Supplemental Note Indenture,
dated as of August 15, 1994.
4(j) Amended and Restated Standby Note
Purchase Credit Facility, dated as of
April 26, 1994, among The Detroit
Edison Company, The Bank of New York,
The Toronto-Dominion Bank, acting
through its Houston Agency,
Toronto-Dominion (Texas), Inc., as
Administrative Agent and Citicorp
Securities, Inc., as Remarketing
Agent.
4(k) Standby Note Purchase Credit
Facility, dated as of August 17,
1994, among The Detroit Edison
Company, Barclays Bank PLC, as Bank
and Administrative Agent, Bank of
America, The Bank of New York, The
Fuji Bank Limited, The Long-Term
Credit Bank of Japan, LTD, Union Bank
and Citicorp Securities, Inc. and
First Chicago Capital Markets, Inc.
as Remarketing Agents.
65
Exhibit
Number
-------
*10(a)- Form of Indemnification Agreement
between the Company and (1) Frank E.
Agosti, (2) Gerard M. Anderson, (3)
Robert J. Buckler, (4) Malcolm G.
Dade, Jr., (5) Ronald W. Gresens, (6)
Leslie L. Loomans, (7) S. Martin
Taylor, (8) Saul J. Waldman, (9)
Susan M. Beale, (10) Frederick S.
Karwacki, (11) Douglas R. Gipson,
(12) Robert J. Horn, (13) Thomas A.
Hughes, (14) Christopher C. Nern,
(15) Ronald J. Gdowski, (16) Elaine
M. Godfrey, (17) Allen W. Anning,
(18) Christopher C. Arvani, (19)
James R. McGillivary, (20) Thomas J.
Howlin, (21) Donald J. Brett, (22)
Michael E. Champley, (23) T. Michael
Holton, and (24) Haven E. Cockerham.
*10(b)- 1991 Shareholder Value Improvement
Plan - A, as amended effective
January 25, 1993.
*10(c)- 1990 Shareholder Value Improvement
Plan - A, as amended January 25, 1993.
*10(d)- 1994 Officers' Shareholder Value
Improvement Plan, January, 1994.
*10(e)- Certain Arrangements Pertaining to
the Employment of S. Martin Taylor.
*10(f)- Certain arrangements pertaining to
the employment of Anthony F. Earley,
Jr.
*10(g)- Amended and Restated Savings
Separation Plan, June 1994.
*10(h)- Certain arrangements pertaining to
the employment of Haven E. Cockerham.
*10(i)- Key Employe Deferred Compensation
Plan (January 1990).
66
Exhibit
Number
-------
*10(j)- Retirement Reparation Plan for
Certain Employes of The Detroit
Edison Company (as amended through
May 22, 1989).
*10(k)- Benefit Equalization Plan for Certain
Employes of The Detroit Edison
Company (as amended through May 22,
1989).
*10(l)- Certain Arrangements Pertaining to
the Employment of Larry G. Garberding.
*10(m)- Form of Indemnification Agreement,
between the Company and (1) John E.
Lobbia, (2) Larry G. Garberding and
(3) Anthony F. Earley, Jr.
*10(n)- Form of Indemnification Agreement,
dated March 17, 1992, between the
Company and (1) Terence E. Adderley,
(2) Wendell W. Anderson, Jr., (3)
Walter J. McCarthy, Jr., (4) Lillian
Bauder, (5) David Bing, (6) Alan E.
Schwartz, (7) William Wegner, (8)
Theodore S. Leipprandt, (9) Patricia
S. Longe, (10) Eugene A. Miller, (11)
Dean E. Richardson, (12) David M.
Gates, and (13) Otis M. Smith.
*10(o)- Supplemental Long Term Disability
Plan, dated November 5, 1991.
*10(p)- Executive Vehicle Program, dated
October 1, 1993.
*10(q)- Amendment No. 1 to Executive Vehicle
Plan, November 1993.
*10(r)- Certain arrangements pertaining to
the employment of Gerard M. Anderson.
*10(s)- Restated Management Supplemental
Benefit Plan, January 1994.
99(a)- Belle River Participation Agreement
between the Company and Michigan
Public Power Agency, dated as of
December 1, 1982.
67
Exhibit
Number
-------
99(b)- Belle River Transmission Ownership
and Operating Agreement between the
Company and Michigan Public Power
Agency, dated as of December 1, 1982.
99(c)- 1988 Amended and Restated Loan
Agreement, dated as of October 4,
1988, between Renaissance Energy
Company (an unaffiliated company)
("Renaissance") and the Company.
99(d)- First Amendment to 1988 Amended and
Restated Loan Agreement, dated as of
February 1, 1990, between the Company
and Renaissance.
99(e)- Second Amendment to 1988 Amended and
Restated Loan Agreement, dated as of
September 1, 1993, between the
Company and Renaissance.
99(f)- Third Amendment, dated as of August
31, 1994, to 1988 Amended and
Restated Nuclear Fuel Heat Purchase
Contract, dated October 4, 1988,
between The Detroit Edison Company.
99(g)- $200,000,000 364-Day Credit
Agreement, dated as of September 1,
1993, among the Company, Renaissance
and Barclays Bank PLC, New York
Branch, as Agent.
99(h)- First Amendment, dated as of August
31, 1994, to $200,000,000 364-Day
Credit Agreement, dated September 1,
1993, among The Detroit Edison
Company, Renaissance Energy Company,
the Banks party thereto and Barclays
Bank, PLC, New York Branch, as Agent.
99(i)- $200,000,000 Three-Year Credit
Agreement, dated September 1, 1993,
among the Company, Renaissance and
Barclays Bank PLC, New York Branch,
as Agent.
99(j)- 1988 Amended and Restated Nuclear
Fuel Heat Purchase Contract, dated
October 4, 1988, between the Company
and Renaissance.
99(k)- First Amendment to 1988 Amended and
Restated Nuclear Fuel Heat Purchase
Contract, dated as of February 1,
1990, between the Company and
Renaissance.
68
Exhibit
Number
-------
99(l)- Second Amendment, dated as of
September 1, 1993, to 1988 Amended
and Restated Nuclear Fuel Heat
Purchase Contract between the Company
and Renaissance.
99(m)- First Amendment, dated as of
September 1, 1994, to $200,000,000
Three-Year Credit Agreement, dated as
of September 1, 1993, among The
Detroit Edison Company, Renaissance
Energy Company, the Banks party
thereto and Barclays Bank, PLC, New
York Branch, as agent.
99(n)- Master Trust Agreement, dated as of
June 30, 1994, between the Company
and Fidelity Management Trust Company
relating to the Employes Savings
Plans.
* Denotes management contract or compensatory plan or
arrangement required to be filed as an exhibit to this
report.