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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION REGISTRANTS; STATE OF INCORPORATION; I.R.S. EMPLOYER
FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO.
- ----------- ------------------------------------ ------------------
1-11607 DTE Energy Company 38-3217752
(a Michigan corporation)
2000 2nd Avenue
Detroit, Michigan 48226-1279
313-235-4000
1-2198 The Detroit Edison Company 38-0478650
(a Michigan corporation)
2000 2nd Avenue
Detroit, Michigan 48226-1279
313-235-8000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ---------------------------------------------------------------------- -----------------------------------------
DTE ENERGY COMPANY
- ------------------
Common Stock, without par value New York and Chicago Stock Exchanges
THE DETROIT EDISON COMPANY
- --------------------------
Preferred Stock (7.74% and 7.75% Series), Cumulative, $100 par value New York Stock Exchange
General and Refunding Mortgage Bonds (only Series S) New York Stock Exchange
Quarterly Income Debt Securities (QUIDS)
(Junior Subordinated Deferrable Interest Debentures
- 8.50% and 7-5/8% Series) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
------------------
(TITLE OF CLASS)
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have 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 registrants' 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, 1997, 145,103,729 shares of DTE Energy's Common Stock,
substantially all held by non-affiliates, were outstanding, with an aggregate
market value of approximately $4,389,387,802 based upon the closing price on the
New York Stock Exchange.
(Over for continuation of cover page.)
2
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in DTE Energy's definitive proxy statement dated March 21,
1997 in connection with its Annual Meeting of Shareholders to be held on April
28, 1997 is incorporated herein by reference to Part III, Items 10, 11, 12 and
13 of DTE Energy's portion of this report and to Part III, Items 10, 11 and 13
of Detroit Edison's portion of this report hereof.
3
[This page intentionally left blank.]
4
CROSS REFERENCE TO INFORMATION CONTAINED IN
DTE ENERGY COMPANY'S DEFINITIVE PROXY STATEMENT
DATED MARCH 21, 1997
(INCORPORATED HEREIN BY REFERENCE)
ANNUAL REPORT
ON FORM 10-K LOCATION OF INFORMATION
FOR DTE ENERGY COMPANY IN PROXY STATEMENT
- ------------------------------------------ ---------------------------------------
Part III, Item 10 - Directors and "The Election of Directors" - Pages 2-6
Executive Officers of the Registrant
"Compliance with Section 16(a) of the
Securities Exchange Act of 1934" -
Page 21
Part III, Item 11 - Executive Compensation "Board Compensation Committee Report
on Executive Compensation" - Pages
9-16
Part III, Item 12 - Security Ownership of "Security Ownership of Certain
Certain Beneficial Owners and Management Beneficial Owners" - Pages 7-8
Part III, Item 13 - Certain Relationships "Compensation Committee Interlocks and
and Related Transactions Insider Participation" - Page 16
ANNUAL REPORT
ON FORM 10-K LOCATION OF INFORMATION
FOR THE DETROIT EDISON COMPANY IN PROXY STATEMENT
- ------------------------------------------ ---------------------------------------
Part III, Item 10 - Directors and "The Election of Directors" - Pages 2-6
Executive Officers of the Registrant
"Compliance with Section 16(a) of the
Securities Exchange Act of 1934" -
Page 21
Part III, Item 11 - Executive Compensation "Board Compensation Committee Report
on Executive Compensation" - Pages
9-16
Part III, Item 13 - Certain Relationships "Compensation Committee Interlocks and
and Related Transactions Insider Participation" - Page 16
2
5
DTE ENERGY COMPANY
AND
THE DETROIT EDISON COMPANY
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
This document contains the Annual Reports on Form 10-K for the fiscal year
ended December 31, 1996 for each of DTE Energy Company and The Detroit Edison
Company. Information contained herein relating to an individual registrant is
filed by such registrant on its own behalf. Accordingly, except for its
subsidiaries, The Detroit Edison Company makes no representation as to
information relating to DTE Energy Company or any other companies affiliated
with DTE Energy Company.
TABLE OF CONTENTS
PAGE
----
Definitions ............................................... 5
ANNUAL REPORT ON FORM 10-K FOR DTE ENERGY COMPANY:
Part I - Items 1 and 2 - Business and Properties ........ 6
General ........................................ 6
Non-Regulated Operations ....................... 6
Utility Operations ............................. 7
Certain Factors Affecting Public Utilities .... 9
Capital Expenditure Program - Detroit Edison .. 9
Financing ..................................... 10
Company ...................................... 10
Detroit Edison ............................... 10
Properties .................................... 11
Fuel Costs and Supply ......................... 13
Coal ......................................... 13
Oil .......................................... 13
Gas .......................................... 13
Nuclear ...................................... 13
Regulation and Rates .......................... 14
Michigan Public Service Commission ........... 14
Federal Energy Regulatory Commission ......... 20
Nuclear Regulatory Commission ................ 20
Environmental Matters ......................... 21
Air .......................................... 21
Water ........................................ 22
Wastes and Toxic Substances .................. 22
Employees and Executive Officers ............... 25
Employees ..................................... 25
Executive Officers ............................ 25
Other Information ............................. 26
3
6
TABLE OF CONTENTS (CONCLUDED)
Item 3 - Legal Proceedings .................................... 26
Item 4 - Submission of Matters to a Vote of Security Holders .. 27
Part II - Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters ................................ 27
Item 6 - Selected Financial Data .............................. 28
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 29
Item 8 - Financial Statements and Supplementary Data .......... 36
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................ 60
Part III - Item 10 - Directors and Executive Officers of the Registrant ... 60
Item 11 - Executive Compensation ............................... 60
Item 12 - Security Ownership of Certain Beneficial Owners and
Management ......................................... 61
Item 13 - Certain Relationships and Related Transactions ....... 61
ANNUAL REPORT ON FORM 10-K FOR THE DETROIT EDISON COMPANY:
Part I - Items 1 and 2 - Business and Properties ......................... 62
Item 3 - Legal Proceedings .................................... 63
Item 4 - Submission of Matters to a Vote of Security Holders .. 63
Part II - Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters ................................ 63
Item 6 - Selected Financial Data .............................. 64
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 64
Item 8 - Financial Statements and Supplementary Data .......... 64
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................ 64
Part III - Item 10 - Directors and Executive Officers of the Registrant ... 64
Item 11 - Executive Compensation ............................... 65
Item 12 - Security Ownership of Certain Beneficial Owners and
Management ......................................... 65
Item 13 - Certain Relationships and Related Transactions ....... 65
ANNUAL REPORTS ON FORM 10-K FOR DTE ENERGY COMPANY
AND THE DETROIT EDISON COMPANY:
Part IV - Item 14 - Exhibits, Financial Statement Schedules and Reports on
Form 8-K ............................................ 66
Signature Page to DTE Energy Company Annual Report on Form 10-K ............. 79
Signature Page to The Detroit Edison Company Annual Report on Form 10-K ..... 80
4
7
DEFINITIONS
ABATE ........... Association of Businesses Advocating Tariff Equity
AFUDC ........... Allowance for Funds Used During Construction (both
borrowed and other funds)
ALJ ............. Administrative Law Judge
BTU ............. British Thermal Unit
CERCLA .......... Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980
Company ......... DTE Energy Company and Subsidiary Companies
Consumers ....... Consumers Energy Company (a wholly owned subsidiary of
CMS Energy Corporation)
Detroit Edison .. The Detroit Edison Company (a wholly owned subsidiary of
DTE Energy Company) and Subsidiary Companies
DOE ............. United States Department of Energy
DSM ............. Demand-Side Management
EPA ............. United States Environmental Protection Agency
ERA ............. Department of Energy's Economic Regulatory Administration
FERC ............ Federal Energy Regulatory Commission
IRP ............. Integrated Resource Plan
ISO ............. Independent System Operator
kWh ............. Kilowatthour
Ludington ....... Ludington Hydroelectric Pumped Storage Plant (owned jointly
with Consumers)
MDEQ ............ Michigan Department of Environmental Quality
MJC ............. Michigan Jobs Commission
Mortgage Bonds .. Detroit Edison's General and Refunding Mortgage Bonds
MPSC ............ Michigan Public Service Commission
MW .............. Megawatt
MWh ............. Megawatthour
MWRC ............ Michigan Water Resources Commission
NOPR ............ Notice of Proposed Rulemaking
Note ............ Notes to Consolidated Financial Statements of the Company
and Detroit Edison
NPDES ........... National Pollutant Discharge Elimination System
NRC ............. Nuclear Regulatory Commission
PCB's ........... Polychlorinated Biphenyls
PFD ............. Proposal for Decision
PRP ............. Potentially Responsible Party
PSCR ............ Power Supply Cost Recovery
Registrant ...... Company or Detroit Edison, as the case may be
Renaissance ..... Renaissance Energy Company (an unaffiliated company)
RFP ............. Request for Proposal
SALP ............ Systematic Assessment of Licensee Performance
SEC ............. Securities and Exchange Commission
SFAS ............ Statement of Financial Accounting Standards
5
8
ANNUAL REPORT ON FORM 10-K FOR DTE ENERGY COMPANY
PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES.
GENERAL
DTE Energy Company, a Michigan corporation incorporated in 1995, is an
exempt holding company under the Public Utility Holding Company Act. On
January 1, 1996, the holders of Detroit Edison's common stock exchanged such
stock on a share-for-share basis for the common stock of the Company. Also on
January 1, 1996, Detroit Edison declared a dividend to the Company in the form
of the stock of five subsidiaries: DE Energy Services, Inc., DTE Capital
Corporation, Edison Development Corporation, Syndeco Realty Corporation and UTS
Systems, Inc. As a result of this corporate restructuring, DTE Energy became
the parent holding company of Detroit Edison and the five previously
wholly-owned Detroit Edison subsidiaries. During 1996, the Company established
two additional non-regulated subsidiaries: DTE Edison America, Inc., and Huron
Energy Services, Inc. The new holding company structure is designed to provide
financial flexibility for the development of new businesses, many of which are
expected to be energy-related. It is also a mechanism for separating the
regulated utility business of Detroit Edison from non-regulated businesses,
thereby protecting the utility business from the potential risks of non-utility
operations.
The Company has no significant operations of its own. Detroit Edison is
the Company's principal operating subsidiary, representing approximately 98.7%
of the Company's assets at December 31, 1996. Certain of the Company's
wholly-owned subsidiaries and affiliates are engaged in non-regulated
energy-related businesses, with other projects still in the formative stages.
NON-REGULATED OPERATIONS
Six wholly-owned subsidiaries, along with various affiliates, of the
Company are engaged in non-regulated businesses, including energy-related
services. Such services include the operation of landfill gas-to-energy
facilities, providing expertise in the application of new energy technologies,
real estate development, power marketing, specialty engineering services and
retail marketing of energy, communications and other convenience products. A
seventh wholly owned subsidiary, DTE Capital Corporation, provides financial
services to the Company's non-regulated subsidiaries.
At February 28, 1997, DTE Capital Corporation had a $200 million Revolving
Credit Agreement, backed by a Support Agreement from the Company, under which
no borrowings were outstanding.
Cash requirements for non-regulated investments and capital expenditures
in 1996, 1995 and 1994 were $60 million, $8 million and $15 million,
respectively, and are
6
9
estimated to range from $300 million to $350 million in 1997. Non-regulated
investments and capital expenditures are expected to be externally financed.
UTILITY OPERATIONS
Detroit Edison, 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.
Detroit Edison's service area includes about 13% of Michigan's total land area
and about half of its population (approximately five million people). Detroit
Edison'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.
1996 1995 1994
---------------- ---------------- ----------------
Percent Percent Percent
Operating Revenues Amount of Total Amount of Total Amount of Total
- ------------------------------ ------- -------- ------ --------- ------ --------
(Thousands, except percentages)
Electric
Residential ................. $1,198,265 32.9% $1,210,925 33.3% $1,136,169 32.3%
Commercial .................. 1,505,613 41.3 1,495,820 41.1 1,473,309 41.9
Industrial .................. 730,933 20.1 728,088 20.0 736,339 20.9
Sales for resale and other .. 136,521 3.8 125,637 3.5 102,534 2.9
---------- ----- ---------- ----- ---------- -----
Total System .............. 3,571,332 98.1 3,560,470 97.9 3,448,351 98.0
Interconnection ............. 45,124 1.2 50,979 1.4 43,141 1.2
---------- ----- ---------- ----- ---------- -----
Total Electric ............ 3,616,456 99.3 3,611,449 99.3 3,491,492 99.2
Steam Heating ................ 25,587 0.7 24,095 0.7 27,849 0.8
---------- ----- ---------- ----- ---------- -----
Total Operating Revenues .. $3,642,043 100.0% $3,635,544 100.0% $3,519,341 100.0%
========== ===== ========== ===== ========== =====
1996 1995 1994
---------------- ---------------- ----------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
From Prior From Prior From Prior
Sales Amount Year Amount Year Amount Year
- ------------------------------ ------- -------- ------ --------- ------ ---------
Electric (thousands of kWh)
Residential................. 12,948,602 (0.4)% 13,006,210 6.9% 12,169,417 1.1%
Commercial.................. 17,705,938 1.3 17,470,922 2.5 17,041,446 6.5
Industrial.................. 14,062,601 1.7 13,825,456 3.5 13,356,351 5.9
Sales for resale and other.. 1,690,132 1.2 1,670,409 5.3 1,586,162 (31.6)
---------- ---------- ----------
Total System.............. 46,407,273 0.9 45,972,997 4.1 44,153,376 2.8
Interconnection 2,045,487 (31.1) 2,968,706 50.1 1,978,135 (45.2)
---------- ---------- ----------
Total Electric 48,452,760 (1.0)% 48,941,703 6.1% 46,131,511 (1.0)%
========== ========== ==========
Steam Heating
(thousands of lbs.) 3,095,605 4.3% 2,968,324 (4.5)% 3,109,596 3.5 %
========== ========== ==========
7
10
Customers (at Year-End) 1996 1995 1994
----------------------- ---- ---- ----
Electric
Residential ....................... 1,847,193 1,824,917 1,805,141
Commercial ........................ 175,431 173,651 172,221
Industrial ........................ 980 956 889
Other ............................. 1,977 1,979 1,967
--------- --------- ---------
Total System ..................... 2,025,581 2,001,503 1,980,218
Interconnection ................... 7 7 7
--------- --------- ---------
Total Electric ................... 2,025,588 2,001,510 1,980,225
========= ========= =========
Steam Heating ...................... 336 344 367
========= ========= =========
During 1996, sales to automotive and automotive-related customers
accounted for approximately 11% of total Detroit Edison operating revenues.
Detroit Edison's 30 largest industrial customers accounted for approximately
17% of total operating revenues in 1996 and 1995, 18% in 1994, and no one
customer accounted for more than 3%.
Set forth below are comparisons of total system sales by year and quarter.
1996 1995 1994
---- ----- -----
(Thousands of kWh)
First Quarter ............................... 11,535,429 11,032,446 10,892,135
Second Quarter .............................. 11,225,623 11,004,935 10,696,503
Third Quarter ............................... 12,304,671 12,685,866 11,790,735
Fourth Quarter............................... 11,341,550 11,249,750 10,774,003
---------- ---------- ----------
Total System .............................. 46,407,273 45,972,997 44,153,376
========== ========== ==========
Detroit Edison 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. In 1996 a new all-time peak of 10,337
MW was reached in August. See "Properties".
For information on long-term service contracts, which are expected to
reduce revenues, see "Regulation and Rates" and for information on Detroit
Edison's future sales growth which may be limited by the economic base in its
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.
8
11
CERTAIN FACTORS AFFECTING PUBLIC UTILITIES
The electric utility industry is facing serious issues as legislators and
regulators consider various proposals designed to reduce rates and promote
economic growth through competition. Municipalization, deregulation,
cogeneration, independent power production, open access to transmission lines,
competitive bulk power supply markets and the unbundling of utility products
and services are issues under consideration.
Detroit Edison is participating at both the Federal and state (Michigan)
levels in legislative and administrative proceedings attempting to make the
electric energy market competitive. These proceedings are dealing with the
effects of competition on both public utilities and consumers. Issues under
consideration include: (1) the recovery of stranded costs by public utilities
now recovering capital costs under traditional ratemaking principles, (2)
retail wheeling and open transmission access, and (3) revisions to (and the
possible repeal of all or portions of) various federal and state energy-related
statutes.
The December 19, 1996 MPSC Staff Report on Electric Industry
Restructuring, if adopted by the MPSC and Michigan legislature as proposed,
would alter the regulatory process in Michigan and provide for a transition to
competition for the non-nuclear generation segment of Detroit Edison's
business. The Staff Report being considered provides for the recovery of
regulatory assets, capital costs of Fermi 2 and costs incurred to implement the
transition to competition. Also, if the Staff Report in its present form is
adopted, the non-nuclear generation segment of Detroit Edison's business would
not qualify for SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation", accounting following the transition period. However, Detroit
Edison believes that the nuclear generation and transmission and distribution
segments of its business will continue to be regulated and qualify under the
accounting model prescribed by SFAS No. 71.
In addition, Detroit Edison, in common with other domestic 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.
See Notes 1, 2 and 3, Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
and "Regulation and Rates" herein.
CAPITAL EXPENDITURE PROGRAM - DETROIT EDISON
Detroit Edison has no current plans to construct additional generating
plants. Capital expenditures in 1996, 1995 and 1994 were $479 million
(including $5 million of AFUDC), $444 million (including $4 million of AFUDC)
and $365 million (including $4 million of AFUDC), respectively. Also, the
purchase of leased equipment totaled $11.5 million in 1994.
9
12
Projections for the 1997-2001 period contemplate capital expenditures of
approximately $2.2 billion (including an estimated $15 million of AFUDC). The
1997 capital expenditure program is budgeted at $451 million (including $3
million of AFUDC). The 1997 capital expenditure program includes planned
expenditures for production plant improvement projects ($93 million),
transmission and distribution facilities ($285 million), and general plant and
miscellaneous construction projects ($73 million).
FINANCING
COMPANY. Apart from the Board of Directors' approval, the Company is not
required to obtain regulatory approval for the issuance of debt.
At December 31, 1996, the book value of the Company's common stock was
$23.69 per share as compared to $23.62 per share at December 31, 1995.
DETROIT EDISON. Orders of the MPSC permit Detroit Edison to issue
approximately $2.03 billion of securities for the purpose of refinancing
taxable debt and equity and to replace funds used for those purposes. Detroit
Edison also has MPSC authority to refinance a substantial portion of its
non-taxable debt obligations.
Detroit Edison has an effective Shelf Registration Statement on file with
the SEC pursuant to which it may issue up to $165 million in debt securities.
Outstanding FERC orders authorize Detroit Edison to issue up to $1 billion
of short-term debt through May 31, 1999. At February 28, 1997, Detroit Edison
had short-term credit arrangements of $464 million under which no borrowings
were outstanding.
----------------------------------------------
See Notes 5, 7, 8, and 9 and also see Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources for information on Detroit Edison's 1996 issuance of $185
million of Quarterly Income Debt Securities, the redemption of Cumulative
Preferred Stock totaling $185 million and the open market purchases of $56.5
million of Mortgage Bonds. From time to time, when economic, Detroit Edison
repurchases debt securities on the open market.
During the period January through March 24, 1997, Detroit Edison purchased
a total of $21 million of Mortgage Bonds on the open market, consisting of $14
million of 7.74% 1993 Series J and $7 million of 7.81% 1993 Series E. These
Mortgage Bonds have been cancelled.
10
13
PROPERTIES
The summer net rated capability of Detroit Edison's generating units is as
follows:
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 10.3% 1984 and 1985
Greenwood St. Clair 785 7.8 1979
Harbor Beach Huron 103 1.0 1968
Marysville St. Clair 167 1.7 1930, 1943 and 1947
Monroe Monroe 3,000 30.0 1971, 1973 and 1974
River Rouge Wayne 500 5.0 1957 and 1958
St. Clair St. Clair 1,379 13.8 1953, 1954, 1961 and 1969
Trenton Channel Wayne 725 7.2 1949, 1950 and 1968
----- -----
7,685 76.8%
Oil or Gas-fueled Peaking Units Various 525 5.2 1966-1971 and 1981
Nuclear-fueled Steam-Electric
Fermi 2 (5) Monroe 876 8.8 1988
Hydroelectric Pumped Storage
Ludington (6) Mason 917 9.2 1973
------ -----
10,003 100.0%
====== =====
- ---------------------
(1) See Note 8.
(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 Detroit Edison's entitlement to
81.39% of the capacity and energy of the plant. See Note 4.
(5) Fermi 2 has a design electrical rating (net) of 1,139 MW, but is expected
to operate at 1,085 MW with its scheduled second quarter 1997 return to
service. See Note 2.
(6) Represents Detroit Edison's 49% interest in Ludington with a total
capability of 1,872 MW. Detroit Edison is leasing 312 MW to The Toledo
Edison Company for the six-year period June 1, 1996 through May 31, 2002.
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 5,852 MW of
Detroit Edison's summer net rated capability. These units, which commenced
commercial operation during the period 1968 through 1988, are Detroit Edison's
larger, more efficient generating units. The Monroe, Belle River, St. Clair,
and Fermi 2 Power Plants provided approximately 42%, 16%, 16%, and 10%
respectively, of Detroit Edison's total 1996 power plant generation.
11
14
Sources of electric energy were as follows:
1996 1995 1994
---- ---- ----
(Thousands of MWh)
Power plant generation
Fossil ......................... 41,829 41,636 42,410
Nuclear ........................ 4,750 5,092 -
Purchased power .................. 5,149 5,423 6,599
------ ------ ------
Net system output ................ 51,728 52,151 49,009
====== ====== ======
Detroit Edison 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. Detroit Edison 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, Detroit Edison has interchange
agreements for the exchange of electric energy with Michigan South Central
Power Agency, Rouge Steel Company and the City of Wyandotte.
Detroit Edison also purchases energy from cogeneration facilities and
other small power producers. Energy purchased from cogeneration facilities and
small power producers amounted to $28.3 million, $20.6 million and $16.7
million for 1996, 1995 and 1994, respectively, and is currently estimated at
$41 million for 1997.
An all time peak demand of 10,337 MW was experienced for Detroit Edison's
system on August 7, 1996. The new peak was served using a combination of
installed generation, long-term purchases and seasonal capacity purchases.
Previous peaks were 10,049 MW set in August 1995 and 9,878 MW set in June 1995.
Based on the current load forecast and planned generating capability, Detroit
Edison estimates that its summer reserve margin, expressed as a percentage of
peak demand, will be approximately 12% for 1997 and 1998. Included as part of
the 1997 and 1998 reserve margin projections are Detroit Edison'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 1997 and 1998 reserve margins meet Detroit Edison's current planning
criterion, which specifies a minimum reserve margin of 12%.
Detroit Edison's electric generating plants are interconnected by a
transmission system operating at up to 345 kilovolts through 94 transmission
stations. As of December 31, 1996, electric energy was being distributed in
Detroit Edison's service area through 582 substations over 2,996 distribution
circuits.
See Note 14 for information on the write-off of the remaining net book
value of Detroit Edison's steam heating plant assets.
12
15
FUEL COSTS AND SUPPLY
Detroit Edison's 1992 through 1996 generating capability was primarily
dependent upon coal. Fuel information for these periods is shown below.
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
---------- --------- ---------- ---------- --------- ---- ---------- ---------- --- --------
1996 137 cents 94 cents 389 cents 194 cents 133 cents 86% 13% -% 1% $27.51
1995 139 108 359 204 137 85 14 - 1 28.78
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
COAL. Detroit Edison estimates that it will require approximately 600
million tons of coal over the next 35 years for its coal-fueled generating
units. Detroit Edison expects to obtain a significant portion of its
requirements through long-term contracts and the balance through short-term
agreements and spot purchases. Detroit Edison has contracts with five coal
suppliers for a total purchase of up to 79 million tons of low-sulfur western
coal to be delivered during the period from 1997 through 2005. It also has
several contracts for the purchase of approximately 8 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 de-escalation.
The low-sulfur western coal contracts have a maximum sulfur content of
0.55%. The Appalachian coal contracts range in maximum sulfur content from
0.80% to 3.5%. As required by the Michigan Air Pollution Control Commission,
Detroit Edison'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. Detroit Edison 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 short-term agreements and spot market purchases.
GAS. Natural gas is used principally at one of Detroit Edison's steam
heating plants and Greenwood Unit No. 1. Natural gas requirements are met
through short-term agreements and spot market purchases.
NUCLEAR. Renaissance holds title to the nuclear fuel utilized at Fermi 2.
Under the terms of a heat purchase contract between Detroit Edison and
Renaissance, Detroit Edison makes quarterly payments to Renaissance for the
cost of the nuclear fuel
13
16
consumed and interest expense. For information on nuclear fuel financing, see
Notes 9 and 10.
Detroit Edison has sufficient supplies to meet 1998 Fermi 2 plant
refueling requirements. Also, Detroit Edison believes that adequate uranium
supplies exist to supplement existing contracts to meet plant requirements
beyond 1998. Detroit Edison 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, Detroit Edison makes quarterly payments to the DOE based upon a fee
of 1 mill per kWh applied to the Fermi 2 electricity generated and sold. Fees
levied for 1996 totaled $4 million. The spent nuclear fuel disposal cost is
included as a component of Detroit Edison's nuclear fuel expense. The Federal
Nuclear Waste Policy Act of 1982 provides that in return for this fee the DOE
is to provide a permanent repository for spent nuclear fuel by January 31, 1998
which statutory obligation was upheld in October 1996 by the United States
Court of Appeals for the District of Columbia Circuit. Nevertheless, the DOE
has indicated it will be unable to begin acceptance by the required date and
has requested comments from Detroit Edison and other affected companies. The
DOE and utilities with nuclear units are pursuing other interim storage
options. Detroit Edison estimates that existing temporary storage capacity at
Fermi 2 will be sufficient until the year 2001, or until 2017 with the
expansion of such storage capacity.
On January 31, 1997, Detroit Edison and 35 other utilities filed suit
against the DOE in the United States Court of Appeals for the District of
Columbia Circuit, seeking authorization to escrow payments into the Nuclear
Waste Fund because of the DOE's anticipated failure to meet its obligation to
begin taking high level waste and spent nuclear fuel by January 31, 1998. A
companion lawsuit seeking the same relief was filed by 46 states or state
agencies on the same date. The MPSC has issued an order commencing an inquiry
concerning the continuing collection from ratepayers of monies to pay into the
Nuclear Waste Fund.
REGULATION AND RATES
MICHIGAN PUBLIC SERVICE COMMISSION. Detroit Edison is subject to the
general regulatory jurisdiction of the MPSC, which, from time to time, issues
its orders pertaining to Detroit Edison's conditions of service, rates and
recovery of certain costs, accounting and various other matters.
As discussed below and in "Certain Factors Affecting Public Utilities"
herein and Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations, a restructuring of utility regulation is currently
under consideration in Michigan. While all orders and proceedings discussed
below are presently in effect, approval and implementation of a statutory
restructuring may result in substantial changes to, if not reversal of, these
orders and possible termination of the proceedings.
14
17
MPSC orders issued in December 1988 and on January 21, 1994 are currently
in effect with respect to Detroit Edison's rates and certain other revenue and
operating-related matters.
On January 21, 1994, the MPSC issued an order reducing Detroit Edison's
rates in the amount of $78 million annually. The order was appealed before the
Michigan Court of Appeals, which issued a favorable opinion on February 7,
1997. The Court's decision is now the subject of a motion for rehearing. See
Note 3 for a discussion of the provisions of the January 21, 1994 order.
For information on the MPSC Staff Report on Electric Industry
Restructuring, see Note 1 and Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
In an order dated February 5, 1997, the MPSC requested that Detroit Edison
and Consumers make informational filings with the MPSC to disclose how they
would propose to implement the Staff Report on Electric Industry Restructuring.
The filings were to include, among other items, detailed calculations of
anticipated stranded costs and transition changes.
On March 7, 1997, Detroit Edison filed its response with the MPSC.
Detroit Edison continues to support its position that direct access must be
coupled with the opportunity to recover stranded costs. In addition, Detroit
Edison indicated its support of restructuring contemplates the completion of
all regulatory and legislative proceedings by December 31, 1997.
In its filing, Detroit Edison establishes that neither available
transmission capacity nor market power concerns are real barriers to
implementation of the MPSC Staff's plan, especially during the 1997 - 2000
retail direct access phase-in period. Detroit Edison is a staunch advocate for
prompt development of a Michigan ISO and is fully engaged in the work being
carried on by 25 utilities in 10 states to develop a Midwest ISO. Detroit
Edison has set a goal internally for the formation of a Michigan based ISO by
June 1, 1998.
Using the MPSC Staff Report definition of stranded costs, and assuming
that all customers have direct access on January 1, 1997, Detroit Edison
estimates the net after-tax present value of its stranded costs with
reciprocity to be $5.4 billion. This value assumes that Detroit Edison can
successfully remarket lost sales at the prevailing market clearing price.
Without this mitigation, stranded costs without reciprocity would increase
significantly. The MPSC Staff's reciprocity requirement makes this mitigation
reasonable. Under the MPSC Staff's plan, the estimated $5.4 billion of
stranded costs will be recovered through a combination of securitization and
transition surcharges, Detroit Edison mitigation, and the adoption of an
appropriate phase-in of direct access. All of these mechanisms operate in a
manner that does not shift any costs to non-participants. Furthermore, the
securitization feature using rate reduction bonds has been designed to deliver
immediate rate decreases to all customers.
15
18
The components for the mitigation or the recovery of the estimated $5.4
billion of stranded costs are: nuclear decommissioning non-bypassable
surcharge $0.4 billion, securitization $2.4 billion, direct access phase-in
$1.4 billion, competitive transition surcharge $0.4 billion and self-mitigation
$0.8 billion.
Detroit Edison proposes to securitize approximately $2.8 billion in
assets. These assets will consist of $2 billion for Fermi 2 plant assets, $0.4
billion for regulatory assets and $0.4 billion for purchased power contracts
from qualifying facilities. The $2.8 billion securitization results in a
reduction of strandedness of $2.4 billion because the securitized amount
includes cost items which are not included in the stranded cost calculation or
Detroit Edison's balance sheet.
Implementing securitization will result in a net rate decrease for all
customers totaling approximately $295 million. The Company anticipates that
the rate reduction bonds would be 15-year AAA rated with a coupon rate of 7.5%.
During the transition period for each major customer group, utility
generation costs will be frozen at 1996 levels. The transition period for
industrial and large commercial customers served at primary voltage will end on
January 1, 2001 and for small commercial and residential customers on January
1, 2004. Detroit Edison's filing maintained that such safeguards are needed
for customers during the industry's move to a competitive market. The freeze
will provide price stability for customers who remain on the utility's system
during the transition period.
In the filing, Detroit Edison recommended that transition charges only be
assessed to customers leaving the utility system. Those who remain Detroit
Edison customers will be protected from cost shifting. Transition charges,
efforts to increase sales and operating efficiencies, and adoption of an
appropriate phase-in of direct access will prevent cost shifting and are part
of the stranded cost recovery process.
Both the MPSC Staff Report and Detroit Edison endorse a bidding program to
allocate capacity between customers interested in direct access, with the basic
presumption being that the program will be oversubscribed during the phase-in
period. An example of capacity allocations of 225 MW would be: residential 85
MW, small business 55 MW, large non-manufacturing 35 MW and industrial 50 MW.
In its filing, Detroit Edison acknowledged that the deregulation of
electric markets will result in financial uncertainty and risk to the
shareholders of the Company. Detroit Edison will bear the risk of full
replacement of electricity sales lost to retail wheeling, plus approximately an
additional $800 million in mitigation responsibility which should largely be in
place during the 2001 - 2004 time period, and which Detroit Edison anticipates
will be achieved largely through reductions in operating and maintenance
expenses.
16
19
The MPSC will hold four public hearings on the informational filings on
March 25, March 26, April 2, and April 3, 1997, and will receive additional
written comments by April 7, 1997.
On March 30, 1995, Detroit Edison submitted its 1994 PSCR reconciliation
filing with the MPSC. On December 7, 1995, the MPSC approved a partial
settlement agreement resolving most of the issues regarding the 1994 PSCR
reconciliation and the Fermi 2 capacity factor performance standard
disallowance for 1994. A January 1996 refund of $7.7 million plus interest was
made to PSCR customers. Also, Interruptible Supply Rider (R-10) customers
received a refund of $2.6 million. This partial settlement is intended to hold
customers harmless from the effects of the December 1993 turbine-generator
failure at Fermi 2. A final MPSC order was issued on April 10, 1996 which
resolved all outstanding contested issues. As a result of the order, no
additional refunds to customers will be required.
In March, 1996, Detroit Edison requested the MPSC to carry its 1995 PSCR
reconciliation case under-recovery of approximately $14.8 million forward to
its 1996 PSCR reconciliation. In a December 1996 PFD, an ALJ recommended a
$9.5 million disallowance of Fermi 2 nuclear fuel expense due to operations of
the plant in 1995 at a reduced power output. Detroit Edison and the MPSC Staff
believe the appropriate disallowance to be approximately $8 million. Detroit
Edison awaits an order of the MPSC. See Note 3.
On April 26, 1996, an MPSC ALJ issued his PFD in the Detroit Edison PSCR
Plan for 1996. The ALJ adopted the adjustment proposed by the Michigan
Attorney General to reduce 1996 PSCR expenses by $8.3 million because of lost
fuel efficiency at Fermi 2 caused by the unit operating at a reduced power
output until the installation of major turbine components during a scheduled
refueling and maintenance outage that commenced in September 1996. In
September, 1996, the MPSC approved Detroit Edison's request for the PSCR
billing factor for 1996 and deferred consideration of the adjustment proposed
by the Michigan Attorney General until the 1996 PSCR reconciliation. See Note
3.
On September 30, 1996, Detroit Edison filed its PSCR plan recommending a
fuel adjustment for bills rendered in 1997. Fuel and purchased power costs are
expected to decrease 10.6%, on average, in 1997 over the corresponding forecast
for 1996.
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. Detroit Edison continues to operate
programs in compliance with the generic order and the more recent order on
January 21, 1994.
On April 11, 1994, the MPSC issued an order approving a partial settlement
agreement covering Detroit Edison's energy conservation programs for the period
1994-1996. The order authorized Detroit Edison to collect $21.2 million
through a surcharge for
17
20
the three-year program to install energy conservation measures in
low-income customer households. The MPSC, at Detroit Edison's request,
approved the elimination of the surcharge in an order dated August 22, 1996.
Also, a January 21, 1994 MPSC order authorized a three-year DSM program.
Detroit Edison collected approximately $7 million for the 1994 DSM program. In
1995, a reduced DSM surcharge and programs totaling $4.9 million in 1995, was
approved by the MPSC. The MPSC has approved Detroit Edison's $4 million 1996
DSM plan which was a customer-focused demand reduction program that lowered
customer rates and eliminated the customer surcharge for the plan.
Detroit Edison's fourth MPSC approved biennial plan for 1997 and beyond
anticipates spending in 1997 (and 1998, if necessary) the remaining funds
collected for its 1994-1996 energy conservation programs.
Integrated Resource Plan - Detroit Edison's 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. Detroit
Edison'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, Detroit Edison filed its biennial third IRP with the
MPSC. This IRP, which covered a 15-year (1994-2008) study period, called 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. The recommended IRP indicated that the
restart of the Conners Creek coal-fired units that are currently in economy
reserve is the most economic supply-side option for use 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
Detroit Edison. The MPSC directed Detroit Edison to proceed with a capacity
solicitation proceeding based on its 1992 IRP, which outlined Detroit Edison's
long-range plan for meeting its customers' electricity needs, and to submit an
RFP to meet the need for any future electric capacity. On May 1, 1995, Detroit
Edison filed its preliminary RFP to solicit bids for the acquisition of new
capacity starting in the year 2004. The filing describes Detroit Edison's
future requirements for additional generating capacity and addresses the role
competitive bidding will play in meeting that capacity need. To better serve
its customers in an increasingly competitive marketplace, Detroit Edison is
proposing customer load management options which have the potential to provide
an additional 500 MW of peak reduction by the year 2003. On July 14, 1995,
Detroit Edison updated its case to reflect the MPSC's June 19, 1995 Retail
Wheeling order. On March 29, 1996, an MPSC ALJ issued a PFD finding a capacity
need and recommending immediate implementation of the retail wheeling
experiment. The PFD did not recommend that competitive capacity
18
21
solicitation be undertaken at this time. Exceptions to the PFD have been
filed and Detroit Edison awaits the final order of the MPSC.
Retail Wheeling - The MPSC has been considering the propriety of retail
wheeling programs. On June 19, 1995, the MPSC issued a final order finding
that an experimental retail wheeling program is in the public interest and
established rates and charges for the five-year experimental program. Under
the program, retail wheeling customers would make their own arrangements to
procure power. Implementation of the experimental program would be limited to
90 MW for Detroit Edison and will be coordinated with Detroit Edison's next
solicitation of new capacity. Detroit Edison's identified need date for new
capacity is 2004. The MPSC Staff supported a need date of 1997 and recommended
that the experiment should begin in 1998. The MPSC Staff is now recommending
that the MPSC open a new docket to consider a much larger retail wheeling
experiment than the 90 MW ordered previously.
On July 19, 1995, Detroit Edison filed a claim of appeal of the MPSC's
April 11, 1994 interim order and June 19, 1995 final order with the Michigan
Court of Appeals. Along with other claims, Detroit Edison asserts that the
MPSC lacks authority to compel Detroit Edison to undertake retail wheeling
involuntarily and that the rates, terms and conditions for retail wheeling
transmission service are subject to federal rather than state jurisdiction.
Appeals and/or cross appeals of the MPSC's retail wheeling orders have also
been filed by Consumers, Dow Chemical Company, ABATE and the Michigan Attorney
General.
Commercial and Industrial Rates - Detroit Edison is continuing to address
its competitive status by entering into long-term service contracts with
certain of its large commercial and industrial customers. These contracts must
be approved by the MPSC prior to implementation. At December 31, 1996 and 1995
these contracts accounted for revenues of approximately $299 million and $208
million, respectively. While there are revenue reductions associated with
these long-term service contracts, Detroit Edison believes they are
strategically advantageous.
Capacity and Energy Purchase - On October 25, 1995, the MPSC issued an
order approving Detroit Edison's long-term capacity and energy purchase from
Ontario Hydro. The purchase is for 300 MW, on a seasonal basis from mid-May
through mid-September for the years 1996 through 2001. This purchase will
offset a concomitant agreement to lease 312 MW of Detroit Edison's 917 MW
Ludington capacity entitlement to The Toledo Edison Company for essentially the
same time period. The net economic effect of the Ludington lease and the
Ontario Hydro purchase will be to provide Detroit Edison's customers with an
estimated reduction in PSCR expense of $74 million which will be passed through
to customers through the PSCR clause.
For further information on regulation, rates and proposed policy changes,
see "Certain Factors Affecting Public Utilities" herein, Notes 1 and 3 and Item
7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations.
19
22
FEDERAL ENERGY REGULATORY COMMISSION. Detroit Edison is subject to the
general jurisdiction of the FERC with respect to accounting, sales for resale
in interstate commerce, certain transmission services, issuances of securities,
the licensing of Ludington and other matters. Detroit Edison'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 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 April 24, 1996, the FERC issued Orders 888 and 889. Order 888 requires
public utilities to file open access transmission tariffs for wholesale
transmission services in accordance with non-discriminatory terms and
conditions established by the FERC. On March 1, 1997 the joint transmission
tariff filed for Detroit Edison became effective. Order 888 also permits the
recovery of stranded costs on a case by case basis.
Order 889 requires public utilities to obtain transmission information for
wholesale transactions through a system on the Internet. Public utilities must
separate transmission operations and reliability functions from wholesale
marketing functions.
Detroit Edison is currently unable to estimate the revenue impact, if any,
of these newly required tariffs and procedures.
For further information on the FERC proceedings, see Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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 June 1996, Detroit Edison paid a fine of $50,000
for failure to take prompt action to identify and correct a potential common
mode failure of water pumps.
On May 8, 1996, the NRC issued the fifteenth SALP report on Fermi 2
operations during the period from April 1994 through March 1996. The NRC
assessment of nuclear activities was good overall. The next SALP period is
expected to end in June 1997.
The NRC, in a September 1996 Draft Policy Statement on the Restructuring
and Economic Deregulation of the Electric Utility Industry, indicated that it
was monitoring legislative and regulatory activities promoting competition and
restructuring for the
20
23
purpose of assuring licensee's financial qualification and ability to fund
decommissioning expenses.
By letter dated October 9, 1996, the NRC requested all reactor licensees,
including Detroit Edison, to submit information concerning the adequacy and
availability of nuclear power plant design basis information. On February 7,
1997, Detroit Edison responded to the NRC indicating that it had reasonable
assurances that its plant design information was adequate.
See Note 2 for further information on matters related to Fermi 2.
ENVIRONMENTAL MATTERS
Detroit Edison, in common with other electric utilities, is subject to
applicable permit, and associated record keeping, 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 1996, Detroit Edison's capital expenditures for environmental
control and protection facilities were approximately $2.9 billion. Detroit
Edison's 1997 capital expenditure budget for environmental protection is
approximately $8 million.
AIR. Detroit Edison'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.
Title III of the Clean Air Act Amendments of 1990, Hazardous Air
Pollutants, requires EPA to conduct two studies specifically related to
emissions from electric utility steam generating units and report the results
to Congress. In the first utility study, EPA must assess the hazards to public
health reasonably anticipated to occur from these emissions. The administrator
can regulate utility emissions if the study results indicate it is appropriate
and necessary to do so. The report to Congress was to be submitted November
15, 1993. It has not yet been completed. EPA's second utility study is
specific for mercury and was to have been completed by November 15, 1994. The
report to Congress for this study has also been delayed. In May 1993, the
Michigan Environmental Science Board recommended that the Governor direct the
MPSC to require utilities to compile an accurate emission inventory. Detroit
Edison has submitted such information to the MPSC. The State of Michigan's
Mercury Pollution Prevention Task Force's final report, released in April 1996,
reviewed sources of mercury and
21
24
recommended action programs for reduction of mercury discharges to the
environment from six main segments of society. The recommendations for the
utility industry focused on encouraging the EPA to finalize its mercury study
reports to Congress and the MPSC and utilities to support additional research
to determine the full environmental costs of mercury emissions. The report
also urged continued Michigan utility support of renewable energy projects and
asked the utilities to develop a plan with timetables and goals to further
reduce mercury usage or emissions. At this time, until the congressional
studies are complete and resulting regulations, if any, are promulgated, the
impact upon Detroit Edison cannot be determined.
WATER. NPDES permits for Detroit Edison's power plants are issued by the
MDEQ pursuant to delegation by the EPA under the Federal Clean Water Act. Two
renewal permit applications will be filed in 1997. The NPDES permit for the
Fermi 2 Power Plant was issued on May 31, 1996. A petition for a contested
case hearing challenging the issuance of the permit was filed in July. In
September, 1996, the MDEQ filed a briefing memo recommending approval of the
hearing request. An October 7, 1996 letter from the ALJ announced the matter
will now be moved to hearing. While it is unknown what the outcome of the
hearing will be, the Fermi 2 permit remains in effect. Permit renewal
applications for six other plants have been submitted (in 1996 and earlier);
those existing expired permits remain effective until new permits are issued or
denied.
Detroit Edison 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." Detroit Edison filed such
demonstrations in July 1976 and the MDEQ Staff accepted all except those
relating to the St. Clair and Monroe Power Plants. The MDEQ Staff rejected the
St. Clair demonstration and requested additional information, which was
submitted. The MDEQ Staff never made a formal initial decision about the
intake at Detroit Edison's Monroe Power Plant but requested additional
information which was submitted on alternative intake technologies. In the
event of a final adverse decision, Detroit Edison may be required to install
additional control technologies to further minimize the impact.
Detroit Edison 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 Detroit Edison will
be.
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, and
CERCLA regulate Detroit Edison's handling, storage and disposal of its waste
materials.
22
25
A nationwide environmental problem is the discovery of improperly disposed
of, hidden or buried hazardous wastes. Detroit Edison has extensive property
holdings, including approximately 400 miles of transmission corridors which are
accessible to the public. Detroit Edison could be responsible for clean-up of
wastes found on its property, despite the fact that the dumping may have
occurred without Detroit Edison's permission.
Detroit Edison's Lulu-Milan transmission corridor in northwestern Monroe
County was used as a dump site for drums of paint sludges, solvents and some
PCB's and a portion of the corridor and adjoining property is listed on the
State's "Priority List of Environmental Contamination Sites." Although not
responsible for placing the drums there, Detroit Edison has spent approximately
$550,000 on clean-up and disposal costs. In June 1993, Detroit Edison and the
MDEQ reached an agreement to hire contractors to perform additional
investigative and remedial work at the site. While the costs will be shared
between Detroit Edison and the state, it is impossible at this time to predict
what impact this will have upon Detroit Edison.
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 Detroit Edison is being surveyed by the MDEQ for possible
contamination. Detroit Edison could be required to contribute toward clean-up
costs, if any occur. It is unknown at this time what impact, if any, this
situation will have upon Detroit Edison.
Detroit Edison 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. Detroit Edison 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 Detroit Edison.
In February 1992, Detroit Edison received formal notice from the MDEQ 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,
Detroit Edison sent a letter to the MDEQ stating its belief that it has never
disposed of hazardous material at the Port of Monroe Landfill Site. On March
14, 1994, the MDEQ sent formal notice to the PRPs (but not to Detroit Edison)
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 Detroit Edison on grounds that they
believe it to be a party despite the MDEQ's decision not to include it. It is
unknown what impact, if any, this situation will have upon Detroit Edison.
On January 10, 1997, Detroit Edison received a letter from the EPA
requesting its presence at a meeting regarding future clean-up activity at the
Ramona Park Landfill Superfund site in Utica, Michigan. Detroit Edison had
previously provided a response to an EPA information request indicating that it
had found no evidence of involvement with
23
26
the site. It is unknown at this time what impact, if any, this situation
will have on Detroit Edison.
On February 6, 1997, Detroit Edison received a letter from Southeastern
Michigan Gas Company regarding a facility in Marysville, Michigan which Detroit
Edison had operated in the past. Southeastern Michigan Gas has requested that
an investigation be conducted to determine if the property is contaminated. It
is unknown at this time what impact, if any, this situation will have on
Detroit Edison.
In March 1989, the EPA served Detroit Edison with an investigative
subpoena requesting extensive information regarding Detroit Edison's PCB
activities. Detroit Edison responded to the investigative subpoena in June
1989. It is unknown at this time what impact, if any, the investigation will
have upon Detroit Edison.
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 clean-up of leaks, corrosion resistance for new and existing
tank systems and spill prevention. Detroit Edison has 61 regulated underground
storage tanks containing petroleum products. All of the tanks have been
upgraded to "new tank standards", in accordance with further review of the
rules, except for two tanks and two piping systems that still need upgrading or
replacement by December 22, 1998, which are estimated to cost Detroit Edison
approximately $500,000 to complete.
On July 1, 1991, the Michigan Environmental Response Act ("Act 307")
became effective. The law is patterned after the CERCLA and gives the MDEQ
authority to list sites of environmental contamination and bring about
environmental clean-ups within the State of Michigan. Several Detroit
Edison-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. In April, 1996,
the MDEQ conducted an Integrated Assessment on Detroit Edison owned property,
formerly known as the Monroe City Landfill, located next to the Monroe Power
Plant. The site was on the State of Michigan's list of contaminated sites and
the CERCLA list. In October, 1996, the Company received a copy of the report
and a letter from the MDEQ indicating that it was recommending that the site be
designated "No Further Remedial Action Planned."
In 1993, Detroit Edison received a letter from the MDEQ requesting
information regarding the Satterlee-Sumpter Township landfill site in Wayne
County. In April 1994, Detroit Edison received a letter formally naming it as
a PRP in the case and requesting Detroit Edison, 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 MDEQ to clarify the extent of the
desired investigation. At this time, it is impossible to predict what the
impact upon Detroit Edison will be.
24
27
Detroit Edison received approval from the MDEQ 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 MDEQ or the EPA.
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.
EMPLOYEES AND EXECUTIVE OFFICERS
EMPLOYEES. The total number of employees of the Company was 8,526 (of
which 8,423 employees were employed by Detroit Edison) with an average length
of service of approximately 18 1/2 years. Of these, 3,710 employees are
represented by unions under two collective bargaining agreements. One
agreement expires in June 1999 for 3,161 employees and the other agreement
expires in August 2000 for 549 employees.
EXECUTIVE OFFICERS.
PRESENT
POSITION
NAME AGE(a) PRESENT POSITION HELD SINCE (b)
---- ----- ---------------- --------------
John E. Lobbia .......... 55 Chairman of the Board and Chief Executive Officer 1-26-95
Anthony F. Earley, Jr. .. 47 President and Chief Operating Officer 1-26-95
Larry G. Garberding ..... 58 Executive Vice President and Chief Financial Officer 1-26-95
Susan M. Beale .......... 48 Vice President and Corporate Secretary 12-11-95
Ronald W. Gresens ....... 63 Vice President and Controller 12-11-95
Leslie L. Loomans ....... 53 Vice President and Treasurer 1-26-95
Christopher C. Nern ..... 52 Vice President and General Counsel 1-26-95
David E. Meador ......... 39 Vice President 2-28-97
(a) As of March 1, 1997
(b) The Company was incorporated in January 1995, and, at that time,
certain officers of Detroit Edison were appointed officers of the Company.
On March 28, 1997, Ronald W. Gresens will retire and David E. Meador
will assume the duties of Controller on March 29, 1997.
The following current Detroit Edison officers were appointed executive
officers of the Company effective April 1, 1997: Gerard M. Anderson -
Executive Vice President, Robert J. Buckler - Executive Vice President and
Michael E. Champley - Senior Vice President.
25
28
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.
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 employee or agent of
the Company or as a director, officer, employee 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 $95 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 at fourteen.
ITEM 3 - LEGAL PROCEEDINGS.
Detroit Edison 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, 1996, Detroit Edison was named as
defendant in 150 lawsuits involving claims for personal injuries and
property damage and had been advised of 26 other potential claims not
evidenced by lawsuits.
From time to time Detroit Edison 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 Detroit Edison's
power plants into navigable waters of the United States. Payment of such
penalties represents full disposition of these matters.
26
29
On May 28, 1996, an order was issued by the Circuit Court for Wayne
County, Michigan certifying a plaintiff class (Gilford, et al v Detroit
Edison) in a lawsuit claiming that Detroit Edison had engaged in age and
racial discrimination. Detroit Edison has requested leave to appeal the
class certification to the Michigan Supreme Court and has requested a stay
of proceedings. A notice has been sent to potential class members,
however, the size of the potential class will not be determinable until
late May 1997 at the earliest. Detroit Edison is of the opinion that the
allegations of discrimination are without merit.
Three Detroit Edison employees have filed a lawsuit in the Circuit
Court for Wayne County, Michigan (Sanchez, et al v Detroit Edison) alleging
age and national origin discrimination. The plaintiffs, two of whom
indicate they are members of the Gilford class and one of whom indicates he
may be a member of the Gilford class, seek to represent a group of
employees alleged to be similarly situated. Detroit Edison is of the
opinion that the allegations of discrimination are without merit.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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
---------------- ---- --- ---------
1995 First 29-5/8 25-3/4 $0.515
Second 30-7/8 27-1/8 0.515
Third 32-5/8 28-1/4 0.515
Fourth 34-7/8 32-1/8 0.515
1996 First 37-1/4 33-1/8 $0.515
Second 34-1/4 28 0.515
Third 31 27-5/8 0.515
Fourth 33-1/8 27-7/8 0.515
27
30
At December 31, 1996, there were 145,119,875 shares of the Company's
Common Stock outstanding. These shares were held by a total of 132,839
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 amount of future dividends will depend on the Company's earnings,
financial condition and other factors, including the effects of utility
restructuring efforts, each of which is periodically reviewed by the Company's
Board of Directors.
ITEM 6 - SELECTED FINANCIAL DATA.
Year Ended December 31
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Thousands, except per share amounts)
Operating Revenues ....................... $ 3,645,400 $ 3,635,544 $ 3,519,341 $ 3,555,211 $ 3,558,143
Net Income ............................... $ 309,296 $ 405,914 $ 390,269 $ 491,066 $ 557,549
Earnings Per Common Share................. $ 2.13 $ 2.80 $ 2.67 $ 3.34 $ 3.79
Dividends Declared Per
Share of Common Stock.................... $ 2.06 $ 2.06 $ 2.06 $ 2.06 $ 1.98
At year end:
Total Assets ............................ $11,014,929 $11,130,591 $10,992,978 $11,134,879 $10,309,061
Long-Term Debt
Obligations (including capital
leases) and Redeemable
Preferred and Preference
Stock Outstanding........................ $ 4,039,813 $ 4,004,247 $ 3,979,763 $ 4,007,622 $ 4,525,504
28
31
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DTE ENERGY COMPANY, THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
This discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and accompanying Notes thereto, contained
herein.
CORPORATE STRUCTURE
Effective January 1, 1996, DTE Energy Company became the parent holding company
of The Detroit Edison Company ("Detroit Edison"). On January 1, 1996, the
holders of Detroit Edison's common stock exchanged such stock on a
share-for-share basis for the common stock of DTE Energy Company ("Company").
In addition, certain non-utility subsidiaries of Detroit Edison were
transferred to the Company. A number of non-utility affiliates have been
established by the Company with the intent of pursuing non-regulated businesses
apart from the regulated operations of Detroit Edison.
Detroit Edison is the principal subsidiary of the Company and, as such,
this discussion explains material changes in results of operations of both the
Company and Detroit Edison and identifies recent trends and events affecting
both the Company and Detroit Edison. For the periods presented, the Company's
operations and those of Detroit Edison are substantially the same. Detroit
Edison represents approximately 98.7% of the Company's assets at December 31,
1996.
RESULTS OF OPERATIONS
For the year ended December 31, 1996, the Company's net income was $309.3
million, or $2.13 per common share, down from the $405.9 million, or $2.80 per
common share earned in 1995. The decrease in net income was due to a $149.2
million ($97 million after-tax), or $0.67 per share, special charge to net
income following completion of Detroit Edison's review of its steam heating
operations. Without the special charge, 1996 earnings per common share would
have equaled the $2.80 reported a year ago.
For the year ended December 31, 1995, the Company's net income was $405.9
million, or $2.80 per common share, up 4% from the $390.3 million, or $2.67 per
common share earned in 1994. The increase in net income was due to higher
sales of electricity in 1995. The sales increase was partially offset by
higher operating expenses, including a non-cash loss of $42 million ($32
million after-tax), or $0.22 per common share, on Detroit Edison's steam
heating business due to the Company's adoption in the fourth quarter of 1995 of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121").
For the year ended December 31, 1994, the Company's net income was $390.3
million, or $2.67 per common share, a decrease of 20.5% from the $491.1
million, or $3.34 per common share earned in 1993. The decrease in net income
was due in part to a January 21, 1994 order by the Michigan Public Service
Commission ("MPSC"), which reduced Detroit Edison's 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, Detroit Edison incurred additional 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
capacity factor performance disallowances during the period 1994-1998. The
decrease in net income 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, 1996, the book value of the Company's common stock was
$23.69 per share, an increase of 0.3% since December 31, 1995. Return on
average total common shareholders' equity was 8.9% in 1996, 11.8% in 1995 and
11.6% in 1994.
The Company's ratio of earnings to fixed charges for 1996, 1995 and 1994
was 2.69, 3.21 and 3.13, respectively. The Company's ratio of earnings to
fixed charges and preferred stock dividends for 1996, 1995 and 1994 was 2.49,
2.82 and 2.73, respectively.
OPERATING REVENUES
Total operating revenues increased (decreased) due to the following factors:
1996 1995
-------------------------
(Millions)
Rate Changes
MPSC rate reduction $ - $ (5)
Long-term service contracts (15) (26)
Power Supply Cost Recovery Clause (14) (6)
-------------------------
(29) (37)
System sales volume and mix 28 149
Interconnection sales (6) 8
Fermi 2 capacity factor performance standard
and reduced turbine efficiency reserves 12 (1)
Other - net 5 (3)
-------------------------
Total $ 10 $ 116
=========================
Rate Changes
The January 21, 1994 MPSC rate order reduced Detroit Edison'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.
Detroit Edison has entered into, and the MPSC has approved, long-term
service contracts with large commercial, automotive and other industrial
customers. While there are revenue reductions associated with these long-term
service contracts, Detroit Edison believes they are strategically advantageous.
The decreases in power supply cost recovery clause revenues have resulted
from lower average unit costs of fuel and purchased power.
29
32
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DTE ENERGY COMPANY, THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
Kilowatthour Sales
Kilowatthour sales increased (decreased) as follows:
1996 1995
-----------------------------
Residential (0.4) % 6.9 %
Commercial 1.3 2.5
Industrial 1.7 3.5
Other (includes primarily sales for resale) 1.2 5.3
Total System 0.9 4.1
Interconnection (31.1) 50.1
Total (1.0) 6.1
1996
Residential sales decreased due to cooler summer weather, partially offset by
increases from growth in the customer base. Commercial and industrial sales
increased due to improved economic conditions. Higher industrial sales reflect
strong demand in the automotive and construction sectors. Sales to other
customers increased due to higher sales to wholesale for resale customers.
1995
Residential and commercial sales increased due to substantially warmer summer
weather increasing air conditioning and cooling-related loads and colder fall
weather increasing heating-related loads in the fourth quarter. Improved
economic conditions spurred higher sales to commercial, automotive and other
industrial customers. Sales to other customers increased due to higher sales to
wholesale for resale customers.
Interconnection Sales
Interconnection sales represent sales between utilities to meet energy needs as
a result of demand and/or generating unit availability.
1996
Interconnection sales decreased due to lower demand for energy.
1995
Interconnection sales increased due to improved availability of energy for sale
and lower dispatch prices in meeting the increased demand for energy during the
warmer summer and colder fall period.
Fermi 2 Capacity Factor Performance Standard and Reduced Turbine Efficiency
Reserves
These reserves are discussed in Note 3 of the Notes to Consolidated Financial
Statements.
OPERATING EXPENSES
- --------------------------------------------------------------------------------
Fuel and Purchased Power
Fuel and purchased power expenses increased (decreased) due to the following
factors:
1996 1995
----------------------------
(Millions)
Net system output $ (6) $ 53
Average unit cost (14) (86)
Fermi 2 business interruption insurance 17 48
Other (1) (2)
----------------------------
Total $ (4) $ 13
============================
Net system output and average unit costs were as follows:
1996 1995 1994
---------------------------------
(Thousands of Megawatthours)
Power plant generation
Fossil 41,829 41,636 42,410
Nuclear 4,750 5,092 -
Purchased power 5,149 5,423 6,599
--------------------------------
Net system output 51,728 52,151 49,009
================================
Average unit cost ($/Megawatthour) $15.03 $15.29 $16.94
================================
1996
The decrease in average unit cost was due to declining fuel prices resulting
from greater use of lower-cost western low-sulfur coal and a decrease in
nuclear fuel costs.
1995
The decrease in average unit cost was due to declining fuel prices resulting
from greater use of lower-cost western low-sulfur coal, lower coal contract
buyout expense and increased lower-cost nuclear generation.
Other Operation
1996
Detroit Edison's other operation expense increased due primarily to operating
expenses related to new computer systems ($12 million), higher nuclear plant
($9.5 million), administrative and general ($8.2 million), employee benefits
($7.9 million) and sales ($7.7 million) expenses, lump sum payments to union
employees ($4.3 million) and higher customer accounts expenses ($3 million).
These increases were partially offset by lower incentive award expenses related
to a shareholder value improvement plan ($14.2 million) and major storm
expenses ($5.7 million) and expenses recorded in the year earlier period for
the write-off of obsolete and excess stock material ($12 million), the
Ludington Pumped Storage Plant fish mortality case ($8.4 million) and Electric
Power Research Institute dues ($4.8 million). In addition, the Company's other
operation expense increased due to non-utility operations ($8.2 million).
1995
Other operation expense increased due primarily to higher incentive award
expenses related to a shareholder value improvement plan ($14.5 million), higher
storm expenses ($13.1 million), an increase in a reserve for the write-off of
obsolete and excess stock material ($9 million), demand-side management expenses
($8.6 million) and a reserve for settlement of the Ludington Pumped Storage
Plant fish mortality case ($8.4 million). These increases were partially offset
by lower nuclear plant expenses ($15.5 million), expenses recorded in the
year-earlier period for service quality claims ($8.7 million) and lower
uncollectible expense ($6.9 million).
30
33
Maintenance
1996
Maintenance expense increased due to higher overhead and underground lines
support ($26.1 million), nuclear plant ($7.1 million) and station equipment ($7
million) expenses, partially offset by lower major storm expenses ($3.1
million).
1995
Maintenance expense decreased due primarily to lower nuclear ($17 million) and
fossil ($4.3 million) plant expenses.
Steam Heating Special Charges
1996
During the third quarter of 1996, following the completion of a review of its
steam heating operations, Detroit Edison recorded a special charge to net
income of $149.2 million ($97 million after-tax). The special charge included
a reserve for steam purchase commitments during the period from 1997 through
2008 under the agreement with the Detroit Resource Recovery Facility, and for
expenditures in 1997 for closure of a portion of the steam heating system and
improvements in service to remaining customers.
1995
As the result of continuing losses in the operation of its steam heating
business, upon adoption of SFAS No. 121 in the fourth quarter of 1995, Detroit
Edison wrote off the remaining net book value of its steam heating plant assets
of $42 million.
Depreciation and Amortization
1996 and 1995
Depreciation and amortization expense increased due to increases in plant in
service, including internally developed software costs, and increased Fermi 2
decommissioning costs authorized by a January 1994 MPSC rate order.
Deferred Fermi 2 Amortization
1996 and 1995
Deferred Fermi 2 amortization, a non-cash item of income, was recorded
beginning with Detroit Edison'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
1996 and 1995
Deferred Fermi 2 depreciation and return, non-cash items of income, were
recorded beginning with the implementation of the Fermi 2 rate phase-in plan in
January 1988. The annual amounts of deferred depreciation and return decreased
each year through 1992. Beginning in 1993 and continuing through 1998, these
deferred amounts will be amortized to operating expense as the cash recovery is
realized through revenues.
Taxes Other Than Income Taxes
1996
Taxes other than income taxes increased due to higher payroll and property
taxes, partially offset by lower Michigan Single Business Taxes.
1995
Taxes other than income taxes decreased due to lower payroll and property
taxes.
Income Taxes
1996
Income taxes decreased due primarily to lower pretax income.
1995
Income taxes increased due primarily to higher pretax income.
Other Income and (Deductions) - net
1996
Other deductions decreased due primarily to lower promotional practices expense
($5.3 million), expenses recorded in the year earlier period for the sale of
accounts receivable and unbilled revenues ($3.1 million) and the formation of a
holding company ($3.1 million) and lower corporate contributions ($2.9 million).
1995
Other deductions increased due to higher promotional practices expense ($8.3
million), expenses incurred in the formation of a holding company ($3.1
million) and joint-use contract costs ($2.7 million), partially offset by lower
expenses related to the sale of accounts receivable and unbilled revenues ($6.1
million) and a decrease in the write-off of premiums and expenses related to
the portion of Detroit Edison's 1989 Series A Mortgage Bonds not refinanced
($3.5 million).
Accretion Income
1996 and 1995
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 for Greenwood Unit No. 1 for the period that
plant was not allowed in rate base (1988-1993) and for $300 million of Fermi 2
plant costs being recovered from 1989 to 1998 with no return. The annual
amount of accretion income recorded decreases each year through 1998.
Long-Term Debt Interest Charges
1996
Long-term debt interest charges decreased due to the early redemption of
Mortgage Bonds, partially offset by the issuance of Quarterly Income Debt
Securities ("QUIDS").
1995
Long-term debt interest charges increased due to the issuance of QUIDS and the
timing of the early redemption and refinancing of securities when economic.
Other Interest Charges
1996 and 1995
Other interest charges decreased due primarily to lower levels of short-term
borrowings.
Preferred Stock Dividends of Detroit Edison
1996
Preferred stock dividends of Detroit Edison decreased due to the redemption of
all of the outstanding Cumulative Preferred Stock, 7.68% Series, 7.45% Series
and 7.36% Series.
1995
Preferred stock dividends of Detroit Edison decreased due to the exchange of a
portion of Cumulative Preferred Stock 7.75% Series for QUIDS and the conversion
and redemption of Cumulative Preferred Stock 5 1/2% Convertible Series.
31
34
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DTE ENERGY COMPANY, THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Private Securities Litigation Reform Act - Forward-Looking Statements
Certain information presented herein is based upon the expectations of the
Company and Detroit Edison, and, as such, is forward-looking. The Private
Securities Litigation Reform Act of 1995 encourages reporting companies to
provide analyses and estimates of future prospects and also permits reporting
companies to point out that actual results may differ from those anticipated.
Actual results for the Company and Detroit Edison may differ from those
expected due to a number of variables including, but not limited to, the impact
of newly-required Federal Energy Regulatory Commission ("FERC") tariffs, actual
sales, the effects of competition, the implementation of utility restructuring
in Michigan (which involves pending regulatory proceedings, pending and
proposed statutory changes and the recovery of stranded costs), environmental
and nuclear requirements and the success of non-utility projects. While the
Company and Detroit Edison believe that estimates given accurately measure the
expected outcome, actual results could vary materially due to the variables
mentioned as well as others.
Competition
Formation of a Holding Company
The business of energy supply is experiencing rapid change as competition,
coupled with statutory reform, is being introduced into the public utility
sector. Competition is viewed by legislators and regulators, at both the
federal and state levels, as a method of reducing utility rates while
stimulating overall economic growth.
In order to position itself for potential changes in the electric utility
industry, Detroit Edison adopted a holding company structure, effective January
1, 1996. The new holding company structure, under which Detroit Edison is a
wholly-owned subsidiary of the Company, is designed to provide financial
flexibility for the development of new energy-related businesses. It is also a
mechanism for separating the regulated utility business of Detroit Edison from
non-regulated businesses thereby protecting the utility business from the
potential risks of non-utility operations.
Detroit Edison continues to review potential energy services as a method
of remaining competitive while diversifying within the scope of its core
business. In addition, the Company anticipates that its affiliates may also
assist in overall customer satisfaction by offering energy-related services.
The Detroit Edison Company
The electric utility industry is facing serious issues as legislators and
regulators consider various proposals designed to reduce rates and promote
economic growth through competition. Municipalization, deregulation,
cogeneration, independent power production, open access to transmission lines,
competitive bulk power supply markets and the unbundling of utility products
and services are issues under consideration. There is also a recognition by
legislators and regulators that the stranded costs of utilities must be
addressed as deregulation proceeds.
Federal Energy Regulatory Commission
On April 24, 1996, the FERC issued Orders 888 and 889. Order 888 requires
public utilities to file open access transmission tariffs for wholesale
transmission services in accordance with non-discriminatory terms and
conditions established by the FERC. On July 9, 1996, Detroit Edison filed its
Pro-Forma Open Access Transmission Tariff in compliance with FERC Order 888.
The tariff sets forth the terms and conditions under which Detroit Edison will
supply wholesale Firm and Non-Firm Point-to-Point Transmission Service as well
as Network Integration Transmission Service (a service which allows the network
customer to integrate, economically dispatch and regulate its network resources
to serve its network load in a manner comparable to that in which the
transmission provider utilizes its transmission system to serve its native load
customers). Detroit Edison's filing also included the development and cost
support for the rates to be charged for transmission service and the various
ancillary services that are required to be offered. Order 888 permits the
recovery of stranded costs on a case by case basis. The FERC has initiated
proceedings to review Detroit Edison's tariff filing.
Order 888 also required that, on or before December 31, 1996, utilities
engaged in power pooling operations develop and submit to the FERC a joint
pro-forma open access transmission tariff applicable to power transactions
involving the facilities of both pool utilities, and reform underlying power
pool agreements to remove any unduly discriminatory provisions and permit open
membership for any interested bulk power market participants.
Detroit Edison is a party to a power pooling agreement with Consumers
Energy Company. In compliance with Order 888, on December 31, 1996, Detroit
Edison and Consumers Energy Company filed a joint pro-forma open access
transmission tariff and a joint transmission agreement that canceled prior
transmission sharing arrangements that were developed under the pooling
agreement. Neither Detroit Edison nor Consumers Energy Company were able to
agree as to what other modifications should be made to the pooling agreement.
Therefore, on December 31, 1996, Detroit Edison unilaterally submitted a
proposed amendment requesting that the FERC approve termination of the pooling
agreement as of April 30, 1997. On the same day, Consumers Energy Company
unilaterally submitted a proposed amendment that would delete current membership
requirements and permit the current parties to consider membership requests
submitted by any creditworthy bulk power market participant.
Since January 3, 1997, public utilities have been required by Order 889 to
obtain transmission information for wholesale transactions through a system on
the Internet. Public utilities must separate transmission operations and
reliability functions from wholesale marketing functions.
FERC has also issued a Notice of Proposed Rulemaking ("NOPR") on Capacity
Reservation Transmission Tariffs ("CRT"). The NOPR requested comment by
October 21, 1996, on whether there are certain disadvantages inherent in
offering transmission service on both a network and single point-to-point basis
and whether comparability can be better accomplished using a different
methodology. The proposed CRT approach suggests that no later than December
31, 1997, all pro-forma
32
35
point-to-point and network service be replaced with a single point-to-point
tariff that provides for reservation-based transmission service for all
jurisdictional (wholesale sales and wholesale and retail transmission) service.
Detroit Edison is currently unable to estimate the revenue impact, if any,
of these newly required tariffs and procedures.
Michigan Public Service Commission
The MPSC has been considering various proposals to implement a competitive
utility environment as recommended by Michigan Governor John Engler and the
Michigan Jobs Commission ("MJC") in January 1996.
On December 19, 1996, the MPSC Staff Report on Electric Industry
Restructuring was filed with the MPSC. The Staff Report recognized that
Michigan utilities should have the opportunity to prepare for competition and
be able to maintain their financial health and, among other things,
recommended:
1. A phase-in program beginning in 1997 for direct customer access (also
known as customer choice) by 2004, with the phase-in of load at the rate
of approximately 2 1/2% (225 megawatts ("MW")) in 1997, 5% in 1998, 7
1/2% in 1999 and 10% total in 2000 for Detroit Edison. These blocks
would be allocated among customers through a bidding process. In 2001,
all commercial and industrial customers served at primary voltage would
be eligible for direct access and in 2004, all remaining customers would
be eligible for direct access.
2. A freeze on base electric rate increases in conjunction with the
implementation of a direct customer access program and the suspension
of the power supply cost recovery clause during the transition period
(ending 2004) for direct customer access. For generation costs, the
moratorium would remain effective until a customer class has the option
of direct access. A fixed level of fuel and purchased power costs
would be subject to recovery in rates during the transition period.
3. The functional separation of generation, transmission and
distribution service for rate purposes. Generation costs would be
subject to competitive considerations, while transmission and
distribution costs would be regulated, but subject to limited
performance based regulation ("PBR"). A CPI-1% methodology would be
used for regulation of transmission and distribution costs during the
transition period. The PBR process would be subject to review at
five-year intervals, with the first review in 2001.
4. The recovery of transition costs or stranded costs, (costs that
were incurred during the regulated era that would be above prevailing
market prices in a competitive marketplace and costs that were incurred
to facilitate the transition from a regulated monopoly status to
competitive market status), which the Staff Report indicated includes:
(a) regulatory assets, (b) nuclear capital costs, (c) contract capacity
costs in power purchase agreements, (d) employee related restructuring
costs, including retraining and (e) other costs related to implementing
restructuring (establishing an independent system operator, creating
new billing software systems, new metering systems, etc.) would be
recovered primarily through securitization and secondarily through a
transition charge. This transition charge would commence when a
customer takes direct access and would continue through 2007. These
stranded and transition costs are expected to total approximately $2.8
billion for Detroit Edison.
5. Securitization is a method of refinancing debt that lowers electric
cost for all customers. The securitization proposed would be
implemented by the issuance of "rate reduction bonds" by a trust to be
created for such purpose. The proceeds from the sale of such bonds
would be used to reduce the amount of Detroit Edison's outstanding debt
and equity. Securitization would result in a reduction in base rates
that would be partially offset by a charge for bond repayment. The
overall impact would be a reduction in customer rates. In the case of
Detroit Edison, this would amount to a 9% or approximately $300 million
annual rate reduction.
6. Eligible power suppliers would be limited to those able to grant
comparable and reciprocal direct access to the Michigan host utility.
7. A requirement that local utilities provide standby power for two
years, but not after 2001.
8. The collection of nuclear decommissioning and site security costs
by means of a non-by-passable charge.
On December 20, 1996, the MPSC issued an order which provided for three
public hearings and a written comment period on the Staff Report during January
1997. Further, on February 5, 1997, the MPSC requested that Detroit Edison and
Consumers Energy Company make informational filings with the MPSC to disclose
how they would propose to implement the Staff Report. These filings are due
March 7, 1997, and would include: detailed calculations of anticipated
stranded costs and transition charges, items that the utility would expect to
securitize if authorized, allocation of direct access capacity and alternatives
to the proposed phase-in program, proposed direct access service charges and
conditions of service, standby service options for direct access customers,
transmission constraints or limitations, development of an independent system
operator, and methods to alleviate concerns regarding market power in a
competitive environment. Other Michigan electric utility companies may also
make informational filings by March 7, 1997. The MPSC will hold four public
hearings on the informational filings on March 25, March 26, April 2 and April
3, 1997, and will receive additional written comments by April 7, 1997.
If the Staff Report recommendations are adopted by the MPSC, a number of
legislative and regulatory changes would be necessary for implementation, and
the regulatory process in Michigan would be altered. The Staff Report provides
for the recovery of regulatory assets, capital costs of Fermi 2, and costs
incurred to implement the transition to competition. Also, if the Staff Report
in its present form is adopted, the non-nuclear generation segment of Detroit
Edison's business would not qualify for SFAS No. 71 accounting following the
transition period. However, Detroit Edison believes that the nuclear
generation and transmission and distribution segments of its business will
continue to be regulated and qualify under the accounting model prescribed by
SFAS No. 71.
33
36
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DTE ENERGY COMPANY, THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
While Detroit Edison is unable to predict the final outcome of the FERC
rulemaking and the MPSC Staff Report, substantial changes in regulation and
legislation are anticipated.
Nuclear Regulatory Commission ("NRC")
Detroit Edison has established external trust funds for its nuclear
decommissioning costs and believes that current provisions are adequate for
decommissioning. The NRC, in a September 1996 Draft Policy Statement on the
Restructuring and Economic Deregulation of the Electric Utility Industry,
indicated that it was monitoring legislative and regulatory activities
promoting competition and restructuring for the purpose of assuring licensee's
financial qualification and ability to fund decommissioning expenses.
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 $1,079
million in 1996, $913 million in 1995 and $923 million in 1994. Net cash from
operating activities increased in 1996 due primarily to changes in current
assets and liabilities, primarily as a result of the 1995 repurchase of
customer accounts receivable and unbilled revenues. Net cash from operating
activities decreased slightly in 1995 as a result of the repurchase of $200
million of customer accounts receivable and unbilled revenues, partially offset
by higher non-cash charges to income and higher net income.
Net cash used for investing activities increased in 1996 and 1995 due
primarily to higher utility and non-utility plant and equipment expenditures.
Net cash used for financing activities increased in 1996 due primarily to
the redemption of preferred stock. Net cash used for financing activities
decreased in 1995 due primarily to a decrease in funds used to reduce
short-term borrowings. In 1994, as a result of plan changes, Detroit Edison
entered into the one-time purchase of common stock from the trustee of the
Detroit Edison Savings & Investment Plans.
Additional Information
On February 13, 1996, Detroit Edison issued $185 million of 7.625% QUIDS.
Also, on March 21, 1996, Detroit Edison redeemed all of the outstanding
Cumulative Preferred Stock, 7.68% Series, 7.45% Series and 7.36% Series,
totaling $185 million, at per share redemption prices of $101 plus accrued
dividends.
During 1996, Detroit Edison purchased a total of $56.5 million of Mortgage
Bonds on the open market, consisting of $29.5 million of 7.74% 1993 Series J,
$26 million of 8.24% 1993 Series C and $1 million of 8.25% 1993 Series C.
These bonds have been canceled.
Detroit Edison's requirements for scheduled long-term debt redemptions are
expected to be $144 million, $169 million, $219 million, $194 million and $119
million for 1997, 1998, 1999, 2000 and 2001, respectively.
Detroit Edison's cash requirements for capital expenditures are expected
to be approximately $2.2 billion for the period 1997 through 2001. In 1997,
cash requirements for capital expenditures are estimated at $448 million.
Environmental expenditures are expected to approximate $114 million for the
period 1997 through 2001, including expenditures for Clean Air Act compliance
requirements. See "Environmental Matters" herein.
Detroit Edison'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.
Detroit Edison had total short-term credit arrangements of approximately
$464 million at December 31, 1996, under which $10 million of borrowings were
outstanding.
Non-Regulated Investments
Cash requirements for 1996 non-regulated investments and capital expenditures
were $60 million and are estimated to range from $300 million to $350 million
in 1997. Non-regulated investments are expected to be externally financed.
A non-recourse project financing arrangement is in place for PCI
Enterprises borrowings of up to $50 million, of which $39 million was
outstanding at December 31, 1996. This arrangement is collateralized by
specific project assets.
At December 31, 1996, DTE Capital Corporation had a $200 million Revolving
Credit Agreement, backed by a Support Agreement from the Company, under which
no borrowings were outstanding.
Capitalization
The Company's capital structure ratios (excluding long-term debt due within one
year) were as follows:
December 31
---------------------------------
1996 1995 1994
---------------------------------
Common Shareholders' Equity 46.7% 45.7% 44.2%
Cumulative Preferred Stock of Subsidiary 2.0 4.3 5.0
Long-Term Debt * 51.3 50.0 50.8
---------------------------------
100.0% 100.0% 100.0%
=================================
* Includes 3.2% and 0.7% of QUIDS for the years 1996 and 1995.
Fermi 2
Fermi 2 is a nuclear generating unit of Detroit Edison comprising 25% of its
total assets and 9% of its summer net rated capability.
The commercial operation of Fermi 2, which began in 1988, completed Detroit
Edison's power plant construction program. Detroit Edison has no current plans
for building any additional generating plants. Ownership of an operating
nuclear generating unit subjects Detroit Edison to significant additional risks.
The nuclear plant is regulated by a number of different governmental agencies
concerned with public health, safety and environmental protection.
Consequently, Fermi 2 is subjected to greater scrutiny than a conventional
fossil-fueled plant.
Fermi 2 was out of service in 1994 and part of 1995, and the unit operated
at a reduced power output through September 26, 1996, due to a December 1993
turbine-generator failure. Major
34
37
repairs were completed in 1994 and early 1995. These repair costs were
approximately $80 million for which to date Detroit Edison has received partial
insurance payments of $70 million for property damage. In addition, Detroit
Edison has received partial insurance payments of $74.2 million for replacement
power costs through December 31, 1996.
Fermi 2 was shut down from September 27, 1996 to January 3, 1997, to
replace one-third of its nuclear fuel and install three new low pressure
turbines. With the installation of these new turbines the unit is expected to
initially operate at 1,085 MW, up from 876 MW prior to this shutdown. The $49
million cost of replacing the major turbine components was not covered by
insurance. This cost was capitalized and is expected to be recovered in rates
because it is less than the cumulative amount available under the cap on Fermi
2 capital expenditures, a provision of the MPSC's December 1988 order.
On January 17, 1997, there was an electrical component failure in the
switchyard outside the plant which resulted in the "motorizing" of the main
generator caused by incoming electricity from the Detroit Edison electrical
system. As a result, the Fermi 2 plant was shut down to allow for inspection
of the internal components of the plant's generator and required repairs and
testing. Detroit Edison expects that the unit will be back in service during
the second quarter of 1997. Operation of the reactor was not affected by this
incident. Although the costs of repairs are expected to be covered by
insurance (subject to a $1 million deductible), this incident will require an
increase in the Fermi 2 capacity factor performance standard reserve for the
period 1997-1999 which will have an adverse effect on earnings in the first
quarter of 1997. See Note 3 of the Notes to Consolidated Financial Statements.
At December 31, 1996, Fermi 2 was insured for property damage and public
liability as discussed in Note 2 of the Notes to Consolidated Financial
Statements. 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, Detroit Edison will retain the risk of loss.
The Financial Accounting Standards Board is reviewing the accounting for
removal costs, including decommissioning of nuclear power plants. If current
electric utility industry accounting practices for such decommissioning are
changed: (1) annual provisions for decommissioning could increase, and (2) the
estimated cost for decommissioning could be recorded as a liability rather than
as accumulated depreciation.
Future Sales Growth
Since 1986, Detroit Edison's compounded annual electric power sales growth was
2% and peak demand growth was 2.6% (after adjusting for the effects of unusual
weather). Electric power sales and system demand are expected to grow at
compounded annual rates of about 1.6% per year for the next 5 years.
Meeting Energy Demands
In 1996, Detroit Edison met peak demand through a combination of installed
generation, long-term purchases and seasonal capacity purchases. It is
expected that peak demand in 1997 and later years will be met using the same
combination of resources. Detroit Edison anticipates sufficient power will be
available for purchase as needed.
Inflation
Inflation is a measure of the purchasing power of the dollar. Although the
current inflation rate is relatively low, its compound effect through time can
be significant, primarily in its effect on Detroit Edison's ability to replace
its investment in utility plants.
The regulatory process limits the amount of depreciation expense
recoverable through revenues to the historical cost of Detroit Edison's
investment in utility plants. Such amount produces cash flows which are
inadequate to replace such property in future years. However, Detroit Edison
believes that it will be able to recover the increased cost of replacement
facilities when, and if, replacement occurs.
Environmental Matters
Protecting the environment from damage, as well as correcting past environmental
damage, continues to be a 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 on the environment, as well as the
possibility of global warming resulting from carbon dioxide emissions.
Legislation and/or rulemaking resulting from these and any future studies could
further impact the electric utility industry including Detroit Edison.
The Environmental Protection Agency ("EPA") and the Michigan Department of
Environmental Quality have aggressive programs regarding the clean-up of
contaminated property. Detroit Edison 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
Detroit Edison prepares to comply with the phase-in of the 1990 Amendments to
the Federal Clean Air Act. Detroit Edison currently meets the first phase of
sulfur dioxide emissions and nitrogen oxides emissions requirements. The second
phase begins in the year 2000. Detroit Edison currently burns some level of
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 by either
increasing the amount of low-sulfur coal used at certain units, by purchasing
sulfur dioxide emission allowances, or by doing some combination of both,
depending upon which strategy proves to be the best economic choice. Current
projections indicate that annual fuel costs may increase by $13 million to $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.
In November 1996, the EPA proposed new air-quality standards relating to
ozone and particulate air pollution. The proposed new rules could lead to
additional controls on fossil-fueled power plants to reduce nitrogen oxides and
particulate emissions. The Company is unable to predict at this time what
impact, if any, the proposed standards may have.
35
38
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements and schedules are included
herein.
Page
----
Independent Auditors' Report........................................ 37
Report of Independent Accountants................................... 38
DTE Energy Company and Subsidiary Companies:
Consolidated Statement of Income.................................. 39
Consolidated Balance Sheet........................................ 40
Consolidated Statement of Cash Flows.............................. 42
Consolidated Statement of Common Shareholders' Equity............. 43
The Detroit Edison Company and Subsidiary Companies:
Consolidated Statement of Income.................................. 44
Consolidated Statement of Cash Flows.............................. 45
Consolidated Balance Sheet........................................ 46
Consolidated Statement of Common Shareholders' Equity............. 48
Notes to Consolidated Financial Statements.......................... 49
Schedule II - Valuation and Qualifying Accounts..................... 78
Note: Detroit Edison's financial statements are presented here for ease of
reference and are not considered to be part of Part II - Item 8 of
the Company's report.
36
39
INDEPENDENT AUDITORS' REPORT
To the Boards of Directors and Shareholders of
DTE Energy Company and
The Detroit Edison Company
We have audited the consolidated balance sheets of DTE Energy Company and
subsidiary companies and of The Detroit Edison Company and subsidiary companies
(together, the "Companies") as of December 31, 1996 and 1995, and the related
consolidated statements of income, cash flows, and common shareholders' equity
for the years then ended. Our audits also included the financial statement
schedule listed in the Index at Item 8. These financial statements and
financial statement schedule are the responsibility of the Companies'
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DTE Energy
Company and subsidiary companies and of The Detroit Edison Company and
subsidiary companies at December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements of the Companies taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
January 27, 1997
37
40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
DTE Energy Company and
The Detroit Edison Company
In our opinion, the consolidated statements of income, of cash flows and
of common shareholders' equity for the year ended December 31, 1994 present
fairly, in all material respects, the results of operations and cash flows of
DTE Energy Company and subsidiary companies and of The Detroit Edison Company
and subsidiary companies for the year 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 audit. We
conducted our audit 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 audit provides a reasonable basis for the opinion expressed above. We have
not audited the consolidated financial statements of DTE Energy Company and
subsidiary companies and of The Detroit Edison Company and subsidiary companies
for any period subsequent to December 31, 1994.
PRICE WATERHOUSE LLP
Detroit, Michigan
January 23, 1995 except for
Note 1, paragraph one and three,
which is as of January 1, 1996.
38
41
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands)
DTE Energy Company and Subsidiary Companies
Year Ended December 31
---------------------------------------------
1996 1995 1994
---------------------------------------------
OPERATING REVENUES
Electric - System $ 3,571,332 $ 3,560,470 $ 3,448,351
Electric - Interconnection 45,124 50,979 43,141
Steam and other 28,944 24,095 27,849
- --------------------------------------------------------------------------------------------------------------
Total Operating Revenues $ 3,645,400 $ 3,635,544 $ 3,519,341
- --------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel $ 695,538 $ 715,967 $ 719,215
Purchased power 150,232 133,557 116,947
Other operation 652,179 635,297 621,066
Maintenance 277,785 240,115 262,409
Steam heating special charges 149,231 42,029 -
Depreciation and amortization 526,625 500,611 476,415
Deferred Fermi 2 amortization (4,479) (5,972) (7,465)
Amortization of deferred Fermi 2 depreciation and return 102,081 92,990 84,828
Taxes other than income 259,694 251,941 255,874
Income taxes 222,606 289,687 270,657
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses $ 3,031,492 $ 2,896,222 $ 2,799,946
- --------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 613,908 $ 739,322 $ 719,395
- --------------------------------------------------------------------------------------------------------------
OTHER INCOME AND (DEDUCTIONS)
Allowance for other funds used during construction $ 2,330 $ 1,408 $ 1,684
Other income and (deductions) - net (12,486) (30,246) (24,973)
Income taxes 3,931 9,789 8,111
Accretion income 8,225 11,041 13,644
Income taxes - disallowed plant costs and accretion income (2,363) (3,355) (4,252)
- --------------------------------------------------------------------------------------------------------------
Net Other Income and (Deductions) $ (363) $ (11,363) $ (5,786)
- --------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Long-term debt $ 275,166 $ 275,599 $ 273,763
Amortization of debt discount and expense 11,883 11,312 10,832
Other 4,218 9,666 11,170
Allowance for borrowed funds used during construction (credit) (3,033) (2,269) (2,065)
- --------------------------------------------------------------------------------------------------------------
Net Interest Charges $ 288,234 $ 294,308 $ 293,700
- --------------------------------------------------------------------------------------------------------------
PREFERRED STOCK DIVIDENDS OF SUBSIDIARY $ 16,015 $ 27,737 $ 29,640
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 309,296 $ 405,914 $ 390,269
==============================================================================================================
COMMON SHARES OUTSTANDING - AVERAGE 145,119,875 144,939,875 146,151,505
- --------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE $ 2.13 $ 2.80 $ 2.67
==============================================================================================================
(See accompanying Notes to Consolidated Financial Statements.)
39
42
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
DTE Energy Company and Subsidiary Companies
December 31
-------------------------------
ASSETS 1996 1995
-------------------------------
UTILITY PROPERTIES
Electric plant in service $13,776,535 $13,303,992
Less: Accumulated depreciation and amortization (5,367,110) (4,928,316)
- ---------------------------------------------------------------------------------------------------
$ 8,409,425 $ 8,375,676
Construction work in progress 91,242 142,726
- ---------------------------------------------------------------------------------------------------
Net utility properties $ 8,500,667 $ 8,518,402
- ---------------------------------------------------------------------------------------------------
Property under capital leases (less accumulated amortization
of $102,346 and $99,633, respectively) $ 126,137 $ 137,206
Nuclear fuel under capital lease (less accumulated amortization
of $473,788 and $427,831, respectively) 134,104 145,463
- ---------------------------------------------------------------------------------------------------
Net property under capital leases $ 260,241 $ 282,669
- ---------------------------------------------------------------------------------------------------
Total owned and leased properties $ 8,760,908 $ 8,801,071
- ---------------------------------------------------------------------------------------------------
OTHER PROPERTY AND INVESTMENTS
Non-utility property $ 72,152 $ 21,576
Investments and special funds 47,543 29,058
Nuclear decommissioning trust funds 171,514 119,843
- ---------------------------------------------------------------------------------------------------
$ 291,209 $ 170,477
- ---------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments $ 53,034 $ 64,948
Customer accounts receivable and unbilled revenues (less allowance
for uncollectible accounts of $20,000 and $22,000, respectively) 440,476 414,403
Other accounts receivable 44,005 37,664
Inventories (at average cost)
Fuel 119,631 162,796
Materials and supplies 144,316 142,782
Prepayments 8,913 12,910
- ---------------------------------------------------------------------------------------------------
$ 810,375 $ 835,503
- ---------------------------------------------------------------------------------------------------
DEFERRED DEBITS
Regulatory assets $ 975,351 $ 1,155,482
Prepaid pensions 91,579 81,865
Unamortized debt expense 45,357 40,936
Other 40,150 45,257
- ---------------------------------------------------------------------------------------------------
$ 1,152,437 $ 1,323,540
- ---------------------------------------------------------------------------------------------------
TOTAL $11,014,929 $11,130,591
===================================================================================================
(See accompanying Notes to Consolidated Financial Statements.)
40
43
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
DTE Energy Company and Subsidiary Companies
December 31
-------------------------------------
LIABILITIES 1996 1995
-------------------------------------
CAPITALIZATION
Common stock - without par value, 400,000,000 shares
authorized; 145,119,875 shares outstanding $ 1,951,437 $ 1,951,437
Retained earnings used in the business 1,492,417 1,484,871
- --------------------------------------------------------------------------------------------------
Total common shareholders' equity $ 3,443,854 $ 3,436,308
Cumulative preferred stock of subsidiary 144,405 326,604
Long-term debt 3,779,334 3,756,094
- --------------------------------------------------------------------------------------------------
Total Capitalization $ 7,367,593 $ 7,519,006
- --------------------------------------------------------------------------------------------------
OTHER NON-CURRENT LIABILITIES
Obligations under capital leases $ 115,742 $ 128,362
Other postretirement benefits 5,516 24,381
Other 67,078 58,424
- --------------------------------------------------------------------------------------------------
$ 188,336 $ 211,167
- --------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term borrowings $ 10,001 $ 36,990
Amounts due within one year
Long-term debt 144,214 119,214
Obligations under capital leases 144,499 154,307
Accounts payable 160,786 165,148
Property and general taxes 29,475 34,416
Income taxes 14,334 -
Accumulated deferred income taxes 44,418 51,697
Interest payable 60,405 62,128
Dividends payable 77,644 81,102
Payrolls 81,448 72,164
Fermi 2 refueling outage 1,349 14,342
Other 133,409 130,689
- --------------------------------------------------------------------------------------------------
$ 901,982 $ 922,197
- --------------------------------------------------------------------------------------------------
DEFERRED CREDITS
Accumulated deferred income taxes $ 2,023,691 $ 2,052,875
Accumulated deferred investment tax credits 315,030 330,085
Other 218,297 95,261
- --------------------------------------------------------------------------------------------------
$ 2,557,018 $ 2,478,221
- --------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 3, 10, 12 and 13)
- --------------------------------------------------------------------------------------------------
Total $11,014,929 $11,130,591
==================================================================================================
(See accompanying Notes to Consolidated Financial Statements.)
41
44
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
DTE Energy Company and Subsidiary Companies
Year Ended December 31
-----------------------------------------
1996 1995 1994
-----------------------------------------
OPERATING ACTIVITIES
Net Income $ 309,296 $ 405,914 $ 390,269
Adjustments to reconcile net income to net cash from operating activities:
Accretion income (8,225) (11,041) (13,644)
Depreciation and amortization 526,625 500,611 476,415
Deferred Fermi 2 depreciation, amortization and return - net 97,602 87,018 77,363
Deferred income taxes and investment tax credit - net 1,895 62,523 97,417
Fermi 2 refueling outage - net (12,993) 13,075 (19,507)
Steam heating special charges 149,231 42,029 -
Other (10,544) 5,113 (35,221)
Changes in current assets and liabilities:
Customer accounts receivable and unbilled revenues (26,073) (218,579) (505)
Other accounts receivable (6,341) (3,452) (7,593)
Inventories 41,843 (18,837) (1,774)
Accounts payable (5,711) 18,049 (13,858)
Taxes payable 9,439 (2,649) (18,031)
Interest payable (1,723) 1,914 (6,174)
Other 14,315 31,255 (2,189)
- ------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities $ 1,078,636 $ 912,943 $ 922,968
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Plant and equipment expenditures - utility $ (478,587) $ (443,941) $ (364,639)
Plant and equipment expenditures - non-utility (51,925) (9,903) (1,753)
Purchase of leased equipment - - (11,500)
Nuclear decommissioning trust funds (51,671) (43,351) (46,563)
Non-utility investments (8,169) 1,865 (12,843)
Other changes in current assets and liabilities 2,777 5,774 5,042
Other (29,268) (32,845) (11,537)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities $ (616,843) $ (522,401) $ (443,793)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of long-term debt $ 223,900 $ - $ 200,000
Funds received from Trustees: Installment sales contracts
and loan agreements - 201,525 50,470
Decrease in short-term borrowings (26,989) (2,499) (98,715)
Redemption of long-term debt (175,714) (220,739) (258,034)
Redemption of preferred stock (185,000) (955) -
Premiums on reacquired long-term debt - (5,946) (11,563)
Purchase of common stock - - (59,855)
Dividends on common stock (298,949) (298,502) (301,801)
Other (10,955) (6,600) (2,626)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities $ (473,707) $ (333,716) $ (482,124)
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS $ (11,914) $ 56,826 $ (2,949)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF THE PERIOD $ 64,948 $ 8,122 $ 11,071
- ------------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF THE PERIOD $ 53,034 $ 64,948 $ 8,122
========================================================================================================================
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid (excluding interest capitalized) $ 277,280 $ 274,413 $ 289,375
Income taxes paid 206,649 230,537 183,172
New capital lease obligations 34,599 26,850 9,328
Exchange of preferred stock of subsidiary for long-term debt - 49,878 -
(See accompanying Notes to Consolidated Financial Statements.)
42
45
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
(Dollars in Thousands)
DTE Energy Company and Subsidiary Companies
Retained Total
Common Stock Earnings Common
------------------- Used in the Shareholders'
Shares Amount Business Equity
---------------------------------------------------
BALANCE AT DECEMBER 31, 1993 147,047,918 $1,976,270 $1,319,685 $3,295,955
Issuance of common stock on conversion of
convertible cumulative preferred stock of
subsidiary, 5-1/2% series 22,164 386 386
Common stock reacquired from Detroit Edison
Savings & Investment Plans, August 4, 1994 (2,206,635) (29,657) (30,198) (59,855)
Net income 390,269 390,269
Cash dividends declared on
Common stock - $2.06 per share (300,676) (300,676)
Other 1 1
- -----------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 144,863,447 $1,946,999 $1,379,081 $3,326,080
Issuance of common stock on conversion of
convertible cumulative preferred stock of
subsidiary, 5-1/2% series 256,428 4,438 4,438
Expense associated with subsidiary preferred
stock redeemed (1,645) (1,645)
Net income 405,914 405,914
Cash dividends declared on
Common stock - $2.06 per share (298,635) (298,635)
Other 156 156
- -----------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 145,119,875 $1,951,437 $1,484,871 $3,436,308
Expense associated with subsidiary preferred
stock redeemed (2,801) (2,801)
Net income 309,296 309,296
Cash dividends declared on
Common stock - $2.06 per share (298,949) (298,949)
- -----------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 145,119,875 $1,951,437 $1,492,417 $3,443,854
=====================================================================================================
(See accompanying Notes to Consolidated Financial Statements.)
43
46
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands)
THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
YEAR ENDED DECEMBER 31
---------------------------------------
1996 1995 1994
---------------------------------------
OPERATING REVENUES
Electric - System $ 3,571,332 $ 3,560,470 $ 3,448,351
Electric - Interconnection 45,124 50,979 43,141
Steam 25,587 24,095 27,849
- -----------------------------------------------------------------------------------------------------------
Total Operating Revenues $ 3,642,043 $ 3,635,544 $ 3,519,341
- -----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
- -----------------------------------------------------------------------------------------------------------
Operation
Fuel $ 695,538 $ 715,967 $ 719,215
Purchased power 150,232 133,557 116,947
Other operation 640,899 635,297 621,066
Maintenance 277,785 240,115 262,409
Steam heating special charges 149,231 42,029 -
Depreciation and amortization 526,099 500,611 476,415
Deferred Fermi 2 amortization (4,479) (5,972) (7,465)
Amortization of deferred Fermi 2 depreciation and return 102,081 92,990 84,828
Taxes other than income 259,403 251,941 255,874
Income taxes 226,567 289,687 270,657
- -----------------------------------------------------------------------------------------------------------
Total Operating Expenses $ 3,023,356 $ 2,896,222 $ 2,799,946
- -----------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 618,687 $ 739,322 $ 719,395
- -----------------------------------------------------------------------------------------------------------
OTHER INCOME AND (DEDUCTIONS)
Allowance for other funds used during construction $ 2,330 $ 1,408 $ 1,684
Other income and (deductions) - net (15,360) (30,246) (24,973)
Income taxes 3,931 9,789 8,111
Accretion income 8,225 11,041 13,644
Income taxes - disallowed plant costs and accretion income (2,363) (3,355) (4,252)
- -----------------------------------------------------------------------------------------------------------
Net Other Income and (Deductions) $ (3,237) $ (11,363) $ (5,786)
- -----------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Long-term debt $ 275,166 $ 275,599 $ 273,763
Amortization of debt discount and expense 11,843 11,312 10,832
Other 3,936 9,666 11,170
Allowance for borrowed funds used during construction (credit) (3,033) (2,269) (2,065)
- -----------------------------------------------------------------------------------------------------------
Net Interest Charges $ 287,912 $ 294,308 $ 293,700
- -----------------------------------------------------------------------------------------------------------
NET INCOME $ 327,538 $ 433,651 $ 419,909
PREFERRED STOCK DIVIDENDS $ 16,015 $ 27,737 $ 29,640
- -----------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE FOR COMMON STOCK $ 311,523 $ 405,914 $ 390,269
===========================================================================================================
(See accompanying Notes to Consolidated Financial Statements.)
44
47
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
YEAR ENDED DECEMBER 31
-------------------------------------------
1996 1995 1994
-------------------------------------------
OPERATING ACTIVITIES
Net Income $ 327,538 $ 433,651 $ 419,909
Adjustments to reconcile net income to net cash from operating activities:
Accretion income (8,225) (11,041) (13,644)
Depreciation and amortization 526,099 500,611 476,415
Deferred Fermi 2 depreciation, amortization and return - net 97,602 87,018 77,363
Deferred income taxes and investment tax credit - net 1,383 62,523 93,287
Fermi 2 refueling outage - net (12,993) 13,075 (19,507)
Steam heating special charges 149,231 42,029 -
Other (10,085) 5,113 (31,091)
Changes in current assets and liabilities:
Customer accounts receivable and unbilled revenues (26,073) (218,579) (505)
Other accounts receivable (3,703) (3,452) (7,593)
Inventories 41,843 (18,837) (1,774)
Accounts payable (7,903) 18,049 (13,858)
Taxes payable 11,044 (2,649) (18,031)
Interest payable (1,725) 1,914 (6,174)
Other 2,016 31,255 (2,189)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities $ 1,086,049 $ 940,680 $ 952,608
- --------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Plant and equipment expenditures - utility $ (478,587) $ (443,941) $ (364,639)
Plant and equipment expenditures - non-utility - (9,903) (1,753)
Purchase of leased equipment - - (11,500)
Nuclear decommissioning trust funds (51,671) (43,351) (46,563)
Non-utility investments - 1,865 (12,843)
Other changes in current assets and liabilities 2,777 5,774 5,042
Other (20,707) (32,845) (11,537)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities $ (548,188) $ (522,401) $ (443,793)
- --------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of long-term debt $ 185,000 $ - $ 200,000
Funds received from Trustees: Installment sales contracts
and loan agreements - 201,525 50,470
Decrease in short-term borrowings (26,989) (2,499) (98,715)
Redemption of long-term debt (175,714) (220,739) (258,034)
Redemption of preferred stock (185,000) (955) -
Premiums on reacquired long-term debt and preferred stock (1,850) (5,946) (11,563)
Purchase of common stock - - (59,855)
Dividends on common and preferred stock (331,808) (326,239) (331,441)
Cash portion of restructuring dividend to parent (56,510) - -
Other (7,473) (6,600) (2,626)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities $ (600,344) $ (361,453) $ (511,764)
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS $ (62,483) $ 56,826 $ (2,949)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF THE PERIOD $ 64,948 $ 8,122 $ 11,071
- --------------------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF THE PERIOD $ 2,465 $ 64,948 $ 8,122
================================================================================================================================
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid (excluding interest capitalized) $ 277,018 $ 274,413 $ 289,375
Income taxes paid 209,312 230,537 183,172
New capital lease obligations 34,599 26,850 9,328
Exchange of preferred stock for long-term debt - 49,878 -
Non-cash portion of restructuring dividend to parent 26,716 - -
(See accompanying Notes to Consolidated Financial Statements.)
45
48
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
December 31
------------------------------
ASSETS 1996 1995
------------------------------
UTILITY PROPERTIES
Electric plant in service $ 13,776,535 $ 13,303,992
Less: Accumulated depreciation and amortization (5,367,110) (4,928,316)
- ---------------------------------------------------------------------------------------------------------
$ 8,409,425 $ 8,375,676
Construction work in progress 91,242 142,726
- ---------------------------------------------------------------------------------------------------------
Net utility properties $ 8,500,667 $ 8,518,402
- ---------------------------------------------------------------------------------------------------------
Property under capital leases (less accumulated amortization
of $102,346 and $99,633, respectively) $ 126,137 $ 137,206
Nuclear fuel under capital lease (less accumulated amortization
of $473,788 and $427,831, respectively) 134,104 145,463
- ---------------------------------------------------------------------------------------------------------
Net property under capital leases $ 260,241 $ 282,669
- ---------------------------------------------------------------------------------------------------------
Total owned and leased properties $ 8,760,908 $ 8,801,071
- ---------------------------------------------------------------------------------------------------------
OTHER PROPERTY AND INVESTMENTS
Non-utility property $ 7,423 $ 21,576
Investments and special funds 31,145 29,058
Nuclear decommissioning trust funds 171,514 119,843
- ---------------------------------------------------------------------------------------------------------
$ 210,082 $ 170,477
- ---------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments $ 2,465 $ 64,948
Customer accounts receivable and unbilled revenues (less allowance
for uncollectible accounts of $20,000 and $22,000, respectively) 440,476 414,403
Other accounts receivable 41,367 37,664
Inventories (at average cost)
Fuel 119,631 162,796
Materials and supplies 144,316 142,782
Prepayments 8,394 12,910
- ---------------------------------------------------------------------------------------------------------
$ 756,649 $ 835,503
- ---------------------------------------------------------------------------------------------------------
DEFERRED DEBITS
Regulatory assets $ 975,351 $ 1,155,482
Prepaid pensions 91,579 81,865
Unamortized debt expense 45,247 40,936
Other 34,661 45,257
- ---------------------------------------------------------------------------------------------------------
$ 1,146,838 $ 1,323,540
- ---------------------------------------------------------------------------------------------------------
TOTAL $ 10,874,477 $ 11,130,591
=========================================================================================================
(See accompanying Notes to Consolidated Financial Statements.)
46
49
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
December 31
------------------------------------
LIABILITIES 1996 1995
------------------------------------
CAPITALIZATION
Common stock - $10 par value, 400,000,000 shares authorized;
145,119,875 shares outstanding $ 1,451,199 $ 1,451,199
Premium on common stock 547,799 547,799
Common stock expense (47,561) (47,561)
Retained earnings used in the business 1,391,104 1,484,871
- -----------------------------------------------------------------------------------------------------------
Total common shareholders' equity $ 3,342,541 $ 3,436,308
Cumulative preferred stock 144,405 326,604
Long-term debt 3,740,434 3,756,094
- -----------------------------------------------------------------------------------------------------------
Total Capitalization $ 7,227,380 $ 7,519,006
- -----------------------------------------------------------------------------------------------------------
OTHER NON-CURRENT LIABILITIES
Obligations under capital leases $ 115,742 $ 128,362
Other postretirement benefits 5,516 24,381
Other 67,078 58,424
- -----------------------------------------------------------------------------------------------------------
$ 188,336 $ 211,167
- -----------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term borrowings $ 10,001 $ 36,990
Amounts due within one year
Long-term debt 144,214 119,214
Obligations under capital leases 144,499 154,307
Accounts payable 158,594 165,148
Property and general taxes 29,455 34,416
Income taxes 15,959 -
Accumulated deferred income taxes 44,418 51,697
Interest payable 60,403 62,128
Dividends payable 82,723 81,102
Payrolls 81,181 72,164
Fermi 2 refueling outage 1,349 14,342
Other 131,840 130,689
- -----------------------------------------------------------------------------------------------------------
$ 904,636 $ 922,197
- -----------------------------------------------------------------------------------------------------------
DEFERRED CREDITS
Accumulated deferred income taxes $ 2,022,550 $ 2,052,875
Accumulated deferred investment tax credits 315,030 330,085
Other 216,545 95,261
- -----------------------------------------------------------------------------------------------------------
$ 2,554,125 $ 2,478,221
- -----------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 3, 10, 12 and 13)
- -----------------------------------------------------------------------------------------------------------
Total $ 10,874,477 $ 11,130,591
===========================================================================================================
(See accompanying Notes to Consolidated Financial Statements.)
47
50
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
(Dollars in Thousands)
THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
Common Stock Premium Retained Total
-------------------------- on Common Earnings Common
$10 Par Common Stock Used in the Shareholders'
Shares Value Stock Expense Business Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 147,047,918 $ 1,470,479 $ 553,966 $ (48,175) $ 1,319,685 $ 3,295,955
Issuance of common stock on
conversion of convertible
cumulative preferred stock,
5-1/2% series 22,164 222 173 (9) 386
Common stock reacquired from
Detroit Edison Savings &
Investment Plans, August 4, 1994 (2,206,635) (22,066) (8,314) 723 (30,198) (59,855)
Net income 419,909 419,909
Cash dividends declared
Common stock - $2.06 per share (300,676) (300,676)
Cumulative preferred stock* (29,640) (29,640)
Other 1 1
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 144,863,447 $ 1,448,635 $ 545,825 $ (47,461) $ 1,379,081 $ 3,326,080
Issuance of common stock on
conversion of convertible
cumulative preferred stock,
5-1/2% series 256,428 2,564 1,974 (100) 4,438
Expense associated with preferred
stock redeemed (1,645) (1,645)
Net income 433,651 433,651
Cash dividends declared
Common stock - $2.06 per share (298,635) (298,635)
Cumulative preferred stock* (27,737) (27,737)
Other 156 156
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 145,119,875 $ 1,451,199 $ 547,799 $ (47,561) $ 1,484,871 $ 3,436,308
Expense associated with preferred
stock redeemed (2,801) (2,801)
Net income 327,538 327,538
Cash dividends declared
Common stock - $2.20 per share (319,263) (319,263)
Cumulative preferred stock* (16,015) (16,015)
Restructuring dividend to parent (83,226) (83,226)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 145,119,875 $ 1,451,199 $ 547,799 $ (47,561) $ 1,391,104 $ 3,342,541
====================================================================================================================================
*At established rate for each series.
(See accompanying Notes to Consolidated Financial Statements.)
48
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DTE ENERGY COMPANY, THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
CORPORATE STRUCTURE AND PRINCIPLES OF CONSOLIDATION - DTE Energy Company
("Company") is a Michigan corporation, incorporated in 1995, and an exempt
holding company under the Public Utility Holding Company Act. The Company has
no significant operations of its own, holding instead the stock of an electric
utility and other energy-related businesses. The Detroit Edison Company
("Detroit Edison"), a public utility incorporated in Michigan since 1967, is
the Company's largest operating subsidiary. Detroit Edison represents
approximately 98.7% of the Company's assets at December 31, 1996.
As a regulated public utility, Detroit Edison is 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.
On January 1, 1996, the holders of Detroit Edison's common stock exchanged
such stock on a share-for-share basis for the common stock of the Company. Also
on January 1, 1996, Detroit Edison declared a dividend to the Company in the
form of the stock of five subsidiaries: DE Energy Services, Inc., DTE Capital
Corporation, Edison Development Corporation, Syndeco Realty Corporation and UTS
Systems, Inc. Accordingly, the consolidated financial statements presented
herein include the financial results of operations of the Company and its
wholly-owned subsidiaries as if the Company's current holding company structure
form had existed in all periods shown. For the periods presented, the
Company's operations and those of Detroit Edison are substantially the same.
All significant intercompany balances and transactions have been
eliminated. Investments in limited liability companies, partnerships and joint
ventures are accounted for using the equity method.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
REGULATION AND REGULATORY ASSETS AND LIABILITIES - Detroit Edison 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"), Detroit Edison 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. Detroit Edison has
recorded the regulatory assets listed below. These regulatory assets are
deferred costs, which are normally treated as expenses in non-regulated
businesses, and are being amortized to expense as these costs are included in
rates and recovered from customers. Continued applicability of SFAS No. 71
requires that rates be designed to recover specific costs of providing
regulated services and products, including regulatory assets, and that it be
reasonable to assume that rates are set at levels that will recover a utility's
costs and can be charged and collected from customers. If the criteria of SFAS
No. 71 are no longer met due to various factors, including deregulation of all
or part of the business, a change in the method of regulation or a change in
the competitive environment for the regulated services, the regulatory assets
would have to be written off to expense at that time.
As discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations, the December 19, 1996 MPSC Staff Report on
Electric Industry Restructuring, if adopted by the MPSC and Michigan
legislature as proposed, would alter the regulatory process in Michigan and
provide for a transition to competition for the non-nuclear generation segment
of Detroit Edison's business. The Staff Report being considered provides for
the recovery of regulatory assets, capital costs of Fermi 2 and costs incurred
to implement the transition to competition. Also, if the Staff Report in its
present form is adopted, the non-nuclear generation segment of Detroit Edison's
business would not qualify for SFAS No. 71 accounting following the transition
period. However, Detroit Edison believes that the nuclear generation and
transmission and distribution segments of its business will continue to be
regulated and qualify under the accounting model prescribed by SFAS No. 71.
Detroit Edison has recorded the following regulatory assets at December
31:
1996 1995
-------- --------
(Thousands)
Unamortized loss on reacquired debt $111,869 $124,692
Recoverable income taxes 587,843 641,361
Other postretirement benefits 3,777 23,221
Fermi 2 phase-in plan 195,836 297,774
Fermi 2 deferred amortization 62,710 58,231
United States Department of Energy
decontamination and decommissioning 9,605 10,203
Allowance for funds used during construction 3,711 -
-------- ----------
Total $975,351 $1,155,482
======== ==========
At December 31, 1996 and 1995, Detroit Edison had the following regulatory
liabilities: (1) $315 million and $330 million, respectively, for unamortized
accumulated deferred investment tax credits, (2) $73 million and $53 million,
respectively, for Fermi 2 capacity factor and turbine efficiency disallowances
(see Note 3), and (3) $6 million and $22 million, respectively, for other
liabilities.
UNAMORTIZED LOSS ON REACQUIRED DEBT - In accordance with MPSC regulations
applicable to Detroit Edison, the discount, premium and expense related to debt
redeemed with refunding are amortized over the life of the replacement issue.
RECOVERABLE INCOME TAXES - See Note 6.
OTHER POSTRETIREMENT BENEFITS - See Note 13.
FERMI 2 PHASE-IN PLAN - An MPSC authorized phase-in plan, effective in January
1988, for Fermi 2, a nuclear generating unit, 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,
49
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DTE ENERGY COMPANY, THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
"Regulated Enterprises - Accounting for Phase-in Plans," permits the
capitalization of costs deferred for future recovery under a phase-in plan.
Accordingly, Detroit Edison recorded non-cash income of deferred depreciation
and deferred return totaling $506.5 million through 1992. 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 $102 million, $93 million and $85 million in
1996, 1995 and 1994, respectively.
FERMI 2 DEFERRED AMORTIZATION - The December 1988 MPSC rate order provides for
Detroit Edison's February 1990 purchase of Wolverine Power Supply Cooperative,
Inc.'s ("Cooperative") ownership interest in Fermi 2 for $513 million with a
19-year principal amortization and associated interest of 8%, which is the
composite average of the Cooperative debt assumed by Detroit Edison at the time
of the purchase. Since the straight-line amortization of the asset exceeds the
revenues provided for such amortization during the first 10 years of the
recovery period, Detroit Edison is recording deferred amortization, a non-cash
item of income, totaling $67.2 million through 1999. For 1996, 1995 and 1994,
the amounts deferred were $4.5 million, $6 million and $7.5 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.
UNITED STATES DEPARTMENT OF ENERGY ("DOE") DECONTAMINATION AND DECOMMISSIONING
- - The Energy Act provided for a fund to be established for the decommissioning
and decontamination of existing 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.
Detroit Edison recovers these costs through the Power Supply Cost Recovery
("PSCR") Clause.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION ("AFUDC") - AFUDC, a non-operating
non-cash item, involves a regulatory accounting procedure whereby the
approximate interest expense and the cost of other (common and preferred
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 completed projects are placed in service and related
depreciation is authorized to be recovered through customer rates. Detroit
Edison capitalized AFUDC at 7.66% in 1996, 1995 and 1994. Because the amount
of AFUDC computed for MPSC purposes has exceeded the amount computed using the
FERC formula, the excess was recorded as a regulatory asset and is being
amortized to operating expense over the service life of utility property.
TEMPORARY CASH INVESTMENTS - For purposes of the Consolidated Statement of Cash
Flows, the Company considers investments purchased with a maturity of three
months or less to be cash equivalents.
REVENUES - Detroit Edison 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 and an
impairment loss. 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 utility property 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 1996, 1995 and 1994, 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. Provision for depreciation of all other utility plant, as
a percent of average depreciable property, was 3.2% for 1996, 1995 and 1994.
SOFTWARE COSTS - Detroit Edison capitalizes the cost of software developed for
internal use. These costs are amortized on a straight-line basis over a
five-year period beginning with a project's completion.
PROPERTY TAXES - Property taxes are accrued monthly during the fiscal period of
the applicable taxing authority.
INCOME TAXES - Deferred income taxes are provided for temporary differences
between book and tax bases of assets or liabilities to the extent authorized by
the MPSC. For federal income tax purposes, depreciation is computed 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.
ACCRETION INCOME - In 1988, Detroit Edison adopted SFAS No. 90, "Regulated
Enterprises - Accounting for Abandonments and Disallowances of Plant Costs."
As a result, indirect losses were recorded for Greenwood Unit No. 1 for the
period that plant was not allowed in rate base (1988-1993), and for the
indirect loss related to the $300 million of Fermi 2 plant costs recovered from
1989 to 1998 with no return. The net after-tax losses originally totaled $198
million based on the discounting required by SFAS No. 90. These amounts are
being restored to income over the respective discount periods as Detroit Edison
records a non-cash return (accretion income). The net after-tax income
recorded was $5.3 million, $7.2 million and $8.9 million in 1996, 1995 and
1994, respectively.
CAPITALIZATION - DISCOUNT AND EXPENSE - The discount and expense related to the
issuance of long-term debt are amortized over the life of each issue. In
accordance with MPSC regulations applicable to Detroit Edison, the discount and
expense related to debt redeemed without refunding are written off to other
income and deductions. Capital stock expense related to redeemed preferred
stock of Detroit Edison is written off against retained earnings used in the
business.
FERMI 2 REFUELING OUTAGES - Detroit Edison recognizes the cost of Fermi 2
refueling outages over periods in which related revenues are recognized. Under
this procedure, it records a provision for incremental costs anticipated to be
incurred during the next scheduled Fermi 2 refueling outage. See Note 2.
LEASES - See Note 10.
EMPLOYEE BENEFITS - See Note 13.
STOCK-BASED COMPENSATION - In October 1995, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
effective for 1996. This statement establishes a fair-value based method of
accounting for stock compensation plans. As permitted, the Company accounts
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." See Note 13 for discussion of stock-based compensation as part of
the Long-Term Incentive Plan.
50
53
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"). This unit represents approximately 25% of total assets, 10% of total
operation and maintenance expenses and 9% of summer net rated capability.
MPSC rate orders issued in April 1986, 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's
original project costs of $4.858 billion.
LICENSING AND OPERATION - The Nuclear Regulatory Commission ("NRC") maintains
jurisdiction over the licensing and operation of Fermi 2.
On December 25, 1993, the Fermi 2 reactor automatically shutdown following
a turbine-generator failure. The turbine suffered mechanical damage, the
exciter and generator incurred mechanical and fire damage, and the condenser
had some internal damage. Therefore, Fermi 2 was out of service in 1994 and
part of 1995. The nuclear part of the plant was not damaged.
Major repairs were completed in 1994 and early 1995 and the unit operated
at a reduced power output through September 26, 1996. These repair costs were
approximately $80 million for which to date Detroit Edison has received partial
insurance payments of $70 million for property damage. In addition, Detroit
Edison has received partial insurance payments of $74.2 million for replacement
power costs through December 31, 1996.
The unit was shut down from September 27, 1996 to January 3, 1997 to
replace one-third of its nuclear fuel and install three new low-pressure
turbines. With the installation of these new turbines the unit is expected to
initially operate at 1,085 MW, up from 876 MW prior to this shut down. The $49
million cost of replacing the major turbine components was not covered by
insurance. This cost was capitalized and is expected to be recovered in rates
because it is 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.
On January 17, 1997, there was an electrical component failure in the
switchyard outside the plant which resulted in the "motorizing" of the main
generator caused by incoming electricity from the Detroit Edison electrical
system. As a result, the Fermi 2 plant was shut down to allow for inspection
of the internal components of the plant's generator and required repairs and
testing. Detroit Edison expects that the unit will be back in service during
the second quarter of 1997. Operation of the reactor was not affected by this
incident. Although the costs of repairs are expected to be covered by
insurance (subject to a $1 million deductible), this incident will require an
increase in the Fermi 2 capacity factor performance standard reserve for the
period 1997-1999 which will have an adverse effect on earnings in the first
quarter of 1997. See Note 3.
INSURANCE - Detroit Edison 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, effective January
22, 1997, a $10 million deductible for the turbine-generator unit) and $2.25
billion of excess coverage, respectively, for stabilization, decontamination
and debris removal costs, repair and/or replacement of property and
decommissioning. Accordingly, the combined limits provide total property
damage insurance of $2.75 billion.
Detroit Edison 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, Detroit Edison 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, Detroit Edison 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, 1996, 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.
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, plus an additional allowance for decommissioning the non-nuclear
portion of the plant, it is estimated that the cost of decommissioning Fermi 2
when its license expires in the year 2025 is $520 million in current 1996
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 and both require the use of external trust funds to
finance the decommissioning of Fermi 2. The MPSC's January 1994 order includes
an increase in rates for the decommissioning of Fermi 2. The FERC has approved
the recovery of decommissioning expense in base rates in its June 1993 order.
Detroit Edison believes that the MPSC and FERC orders will be adequate to fund
the estimated cost of decommissioning using the NRC formula. See Note 3.
Detroit Edison has established external trust funds to hold
decommissioning and low-level radioactive waste disposal funds collected from
customers. During 1996, 1995 and 1994, Detroit Edison collected $33.5 million,
$32.1 million and $26.9 million, respectively, from customers for
decommissioning Fermi 2. Also, in 1996, 1995 and 1994, Detroit Edison
collected $4.2 million, $4.1 million and $3.3 million, respectively, 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 1996, 1995 and 1994 were $4.4 million, $3.3 million and $1.3
million, respectively. Earnings on the external low-level radioactive waste
disposal trust fund assets were $0.7 million, $0.6 million and $0.2 million in
1996, 1995 and 1994, respectively. 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. In accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," net
unrealized gains of $8.7 million, $4.6 million and $0.7 million in 1996, 1995
and 1994,
51
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DTE ENERGY COMPANY, THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
respectively, were recorded as increases to the nuclear
decommissioning trust funds and accumulated depreciation and amortization in
the Consolidated Balance Sheet.
During 1995, shipment of low-level radioactive waste to a permanent
disposal site resumed. Detroit Edison's disposal costs of $3.5 million and
$5.7 million during 1996 and 1995, respectively, were reimbursed by the
external trust funds.
At December 31, 1996, Detroit Edison had a reserve of $138.1 million for
the future decommissioning of Fermi 2 and $11.2 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.
Detroit Edison also had a reserve of $22.2 million at December 31, 1996
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. Detroit Edison estimates that the cost of
decommissioning Fermi 1 in the year 2025 is $21 million in current 1996 dollars
and $114 million in future 2025 dollars.
The FASB is reviewing the accounting for removal costs, including
decommissioning of nuclear power plants. If current electric utility industry
accounting practices for such decommissioning are changed: (1) annual
provisions for decommissioning could increase, and (2) the estimated cost for
decommissioning could be recorded as a liability rather than as accumulated
depreciation.
NUCLEAR FUEL DISPOSAL COSTS - Detroit Edison 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, Detroit Edison 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 Detroit Edison's nuclear fuel expense. The Federal Nuclear Waste
Policy Act of 1982 provides that in return for this fee the DOE is to provide a
permanent repository for spent nuclear fuel by January 31, 1998 which statutory
obligation was upheld in October 1996 by the United States Court of Appeals for
the District of Columbia Circuit. Nevertheless, the DOE has indicated it will
be unable to begin acceptance by the required date and has requested comments
from Detroit Edison and other affected companies. The DOE and utilities with
nuclear units are pursuing other interim storage options. Detroit Edison
estimates that existing temporary storage capacity at Fermi 2 will be
sufficient until the year 2001, or until 2017 with the expansion of such
storage capacity.
NOTE 3 - REGULATORY MATTERS
- --------------------------------------------------------------------------------
Detroit Edison is subject to the primary regulatory jurisdiction of the MPSC,
which, from time to time, issues its orders pertaining to Detroit Edison'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 Detroit Edison's rates and
certain other revenue and operating-related matters.
On January 21, 1994, the MPSC issued an order reducing Detroit Edison'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 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 is the
subject of various appeals before the Michigan Court of Appeals.
COMMERCIAL AND INDUSTRIAL RATES - Detroit Edison is continuing to address its
competitive status by entering into long-term service contracts with certain of
its large commercial and industrial customers. These contracts must be approved
by the MPSC prior to implementation. At December 31, 1996 and 1995 these
contracts accounted for revenues of approximately $299 million and $208 million,
respectively. While there are revenue reductions associated with these
long-term service contracts, Detroit Edison believes they are strategically
advantageous.
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), Detroit Edison must obtain prior MPSC
approval to be included in rate base.
Under the cap on Fermi 2 capital expenditures, the cumulative amount
available totals $47 million (in 1996 dollars) at December 31, 1996. Under the
cap on non-fuel operation and maintenance expenses, the cumulative amount
available totals $69 million (in 1996 dollars) at December 31, 1996.
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 part of
1995, and operated at a reduced power output during 1995 and 1996. Therefore,
the three-year rolling average capacity factor utilized in the Fermi 2
performance standard calculation will be unfavorably affected in the period
1994-1998. The plant's three-year rolling average capacity factor was 53.7% for
1994, 45.4% for 1995 and 33.1% for 1996, utilizing a capacity of 1,093 MW for
1992 and 1993 and 1,139 MW for 1994, 1995 and 1996. The three-year rolling
52
55
average capacity factor for the top 50% of U.S. boiling water reactors was 78.6%
for 1994 and 81.8% for 1995.
Detroit Edison incurred a capacity factor disallowance totaling $19.2
million for 1994. In accordance with an MPSC order, three times this amount was
used to determine the net refund to customers in the 1994 PSCR reconciliation
case, resulting in banked credits of $38.5 million which will reduce future
capacity factor disallowance amounts owing to customers. The capacity factor
disallowance for 1995 has not yet been determined by the MPSC. At December 31,
1996, Detroit Edison had accrued $56.8 million (capacity factor disallowances of
$95.3 million, less banked credits of $38.5 million) for the Fermi 2 capacity
factor performance standard disallowances that are expected to be imposed by the
MPSC during the period 1995-1998, based on the following assumptions:
a. Fermi 2 three-year rolling average capacity factor of 45.4% in
1995, 33.1% in 1996, and an estimated 61.7% in 1997 and 71.1% in 1998;
b. Estimated three-year rolling average capacity factor for the top
50% of U.S. boiling water reactors of 81.8% in 1995 and increasing to
84% in 1998;
c. Estimated incremental cost of replacement power of $7.61 per
megawatthour in 1995 and increasing to $11 per megawatthour in 1998.
See Note 2 for information on the current Fermi 2 shutdown.
Also, Detroit Edison has recorded an additional liability of $16 million at
December 31, 1996 for reduced efficiency of the Fermi 2 turbine in 1995 and 1996
when the unit operated at a reduced power output.
In accordance with the April 1986 and December 1988 MPSC rate orders,
ratemaking treatment of Detroit Edison's Fermi 2 original project costs of
$4.858 billion is as follows: (1) $3.018 billion 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 in 1988.
At December 31, 1996, Detroit Edison's net plant investment in Fermi 2 was
$2.8 billion ($3.9 billion less accumulated depreciation and amortization of
$1.1 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 1994 rate orders do not address the costs of decommissioning if
operations at Fermi 2 prematurely cease.
Detroit Edison 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
- --------------------------------------------------------------------------------
Detroit Edison'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) $1,044 $177
Accumulated depreciation (millions) $ 346 $ 77
* Detroit Edison'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, 1996, 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. Detroit Edison is
obligated to provide MPPA with backup power when either unit is out of service.
Detroit Edison was required to purchase MPPA's capacity and energy
entitlement through 1994. Buyback payments to MPPA were $6 million for 1994.
LUDINGTON PUMPED STORAGE - Operation, maintenance and other expenses of the
Ludington Pumped Storage Plant ("Ludington") are shared by Detroit Edison and
Consumers Energy Company in proportion to their respective ownership interests
in the plant.
NOTE 5 - SALE OF ACCOUNTS RECEIVABLE AND UNBILLED REVENUES
- --------------------------------------------------------------------------------
Detroit Edison has an agreement providing for the sale, assignment and
repurchase, from time to time, of an undivided ownership interest in up to $200
million of its customer accounts receivable and unbilled revenues. At December
31, 1996 and 1995, there were no sales under this agreement. All expenses
associated with the agreement were charged to other income and (deductions) in
the Consolidated Statement of Income.
53
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DTE ENERGY COMPANY, THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
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
--------------------------------------
1996 1995 1994
------ ------ ------
Statutory income tax rate 35.0 % 35.0 % 35.0 %
Deferred Fermi 2 depreciation and return 5.3 3.7 3.5
Investment tax credit (2.8) (2.1) (1.9)
Depreciation 6.0 3.3 5.5
Removal costs (2.2) (1.5) (1.4)
Other-net (0.8) 1.1 (1.8)
---------------------------------------
Effective income tax rate 40.5 %* 39.5 % 38.9 %
=======================================
* The Detroit Edison effective income tax rate for 1996 was 40.7%.
- --------------------------------------------------------------------------------
Components of income tax expense are as follows:
- -------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------
(Thousands)
Included in operating expenses:
Current federal tax expense $242,965 $247,676 $195,848
Deferred federal tax expense - net (5,305) 57,049 87,635
Investment tax credits (15,054) (15,038) (12,826)
-------- -------- --------
Total $222,606 $289,687 $270,657
-------- -------- --------
Included in other income and (deductions):
Current federal tax expense $(23,822) $(26,946) $(26,467)
Deferred federal tax expense - net 22,254 21,768 22,608
Investment tax credits - (1,256) -
-------- -------- --------
Total $ (1,568) $ (6,434) $ (3,859)
-------- -------- --------
Total income tax expense $221,038* $283,253 $266,798
======== ======== ========
* The Detroit Edison income tax expense for 1996 was $224,999.
- --------------------------------------------------------------------------------
The Fermi 2 phase-in plan required Detroit Edison 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.
With the adoption of SFAS 109, "Accounting for Income Taxes" in 1993, an
increase in accumulated deferred income tax liabilities was recorded which
represented the tax effect of temporary differences not previously recognized,
and the recomputation of the tax liability at the current tax rate. The
liability increase was offset by a regulatory asset of equal value, titled
"Recoverable Income Taxes." This regulatory asset represents the future
revenue recovery from customers for these taxes as they become payable, with no
effect on net income. The MPSC issued an order providing assurance that the
effects of previously flowed-through tax benefits will continue to be allowed
rate recovery.
Deferred income tax assets (liabilities) are comprised of the following at
December 31:
- -----------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------
(Thousands)
Property $(2,219,575) $(2,166,152)
Fermi 2 deferred depreciation
and return (85,538) (130,048)
Property taxes (57,996) (57,030)
Investment tax credit 170,000 178,000
Reacquired debt losses (38,935) (43,414)
Contributions in aid of construction 46,965 41,589
Other 116,970 72,483
----------- -----------
$(2,068,109) $(2,104,572)
=========== ===========
Deferred income tax liabilities $(2,594,437) $(2,659,441)
Deferred income tax assets 526,328 554,869
----------- -----------
$(2,068,109) $(2,104,572)
=========== ===========
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, 1996.
NOTE 7 - COMMON STOCK AND CUMULATIVE PREFERRED AND PREFERENCE
STOCK
- --------------------------------------------------------------------------------
At December 31, 1996, the Company had Cumulative Preferred Stock, without par
value, 5,000,000 shares authorized with 5,000,000 shares unissued.
At December 31, 1996, Detroit Edison had Cumulative Preference Stock of $1
par value, 30,000,000 shares authorized with 30,000,000 shares unissued.
At December 31, 1996, Detroit Edison had Cumulative Preferred Stock of
$100 par value, 6,747,484 shares authorized with 1,539,827 shares unissued, and
1,501,223 and 3,351,223 shares outstanding at December 31, 1996 and 1995,
respectively.
Cumulative Preferred Stock outstanding at December 31 was:
- --------------------------------------------------------------------------------
Date of Issuance 1996 1995
- --------------------------------------------------------------------------------
(Thousands)
Cumulative Preferred Stock
7.68% Series, 500,000 shares March 1971 $ - $ 50,000
7.45% Series, 600,000 shares November 1971 - 60,000
7.36% Series, 750,000 shares December 1972 - 75,000
7.75% Series, 1,001,223 shares February 1993 100,122 100,122
7.74% Series, 500,000 shares April 1993 50,000 50,000
Preferred stock expense (5,717) (8,518)
--------- ---------
Total Cumulative Preferred Stock $ 144,405 $ 326,604
========= =========
On March 21, 1996, Detroit Edison redeemed all of the outstanding
Cumulative Preferred Stock, 7.68% Series, 7.45% Series and 7.36% Series,
totaling $185 million, at per share redemption prices of $101 plus accrued
dividends.
54
57
Detroit Edison's 7.75% Series and 7.74% Series Cumulative Preferred Stock
are redeemable solely at the option of Detroit Edison at a per share redemption
price of $100, plus accrued dividends, on and after April 15, 1998 and July 15,
1998, respectively. These series are listed on the New York Stock Exchange as
Depositary Receipts (each representing 1/4 of a preferred share) with a par
value of $25 each.
Apart from MPSC or FERC 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 stock by
Detroit Edison.
There are no legal restrictions on the issuance of additional authorized
shares of the Company's common and preferred stock.
NOTE 8 - LONG-TERM DEBT
Detroit Edison's 1924 Mortgage and Deed of Trust ("Mortgage"), the lien of
which covers substantially all of Detroit Edison's properties, provides for
the issuance of additional bonds. At December 31, 1996, approximately $3.4
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% 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 1996 1995
- -------------------------------------------------------------------------------------
(Thousands)
DETROIT EDISON
GENERAL AND REFUNDING MORTGAGE BONDS
Series R, due 12/1/96 6 % $ - $ 100,000
Series S, due 10/1/98 6.4 150,000 150,000
1990 Series A, due 3/31/20 7.904 150,696 156,975
1990 Series B, due 3/31/16 7.904 190,320 199,836
1990 Series C, due 3/31/14 8.357 61,542 64,961
1992 Series D, due 8/1/02 and 8/1/22 7.605 * 290,000 290,000
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 7.898 * 198,000 225,000
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 * 390,000 390,000
1993 Series G, due 5/1/97 and 5/1/01 5.921 * 225,000 225,000
1993 Series J, due 6/1/18 7.74 240,500 270,000
Less: Unamortized net discount (102) (143)
Amount due within one year (144,214) (119,214)
---------- ----------
$1,951,742 $2,152,415
---------- ----------
REMARKETED NOTES
Secured by corresponding amounts of
General and Refunding Mortgage Bonds
1993 Series H, due 7/15/28 6.4 ** $ 50,000 $ 50,000
1993 Series K, due 8/15/33 5.691 ** 160,000 160,000
1994 Series C, due 8/15/34 6.573 ** 200,000 200,000
Less: Unamortized net discount (168) (172)
---------- ----------
$ 409,832 $ 409,828
---------- ----------
Interest Rate 1996 1995
- ------------------------------------------------------------------------------
(Thousands)
TAX EXEMPT REVENUE BOND OBLIGATIONS
Secured by corresponding amounts of
General and Refunding Mortgage Bonds
Installment Sales Contracts, due
9/1/04 - 9/1/24 7.12% * $ 282,155 $ 282,155
Less: Unamortized net discount (184) (191)
---------- ----------
$ 281,971 $ 281,964
---------- ----------
Loan Agreements, due 7/15/08 - 9/1/25 6.657 * $ 606,670 $ 606,670
Less: Unamortized net discount (69) (71)
---------- ----------
$ 606,601 $ 606,599
---------- ----------
Unsecured
Installment Sales Contracts, due
12/1/04 - 12/1/19 7.53 * $ 142,060 $ 142,060
---------- ----------
Loan Agreements, due 10/1/24 - 9/1/30 5.027 ** $ 113,350 $ 113,350
---------- ----------
$1,143,982 $1,143,973
---------- ----------
DEEPLY SUBORDINATED DEBT
QUARTERLY INCOME DEBT SECURITIES (QUIDS)
1995 QUIDS, due 9/30/25 8.50 $ 49,878 $ 49,878
1996 QUIDS, due 3/31/26 7.625 185,000 -
---------- ----------
$ 234,878 $ 49,878
---------- ----------
Total Detroit Edison Long-Term Debt $3,740,434 $3,756,094
---------- ----------
PCI ENTERPRISES
Non-recourse project financing 7.327 $ 38,900 $ -
---------- ----------
Total Company Long-Term Debt $3,779,334 $3,756,094
========== ==========
* Weighted average interest rate at December 31, 1996.
** Variable rate at December 31, 1996.
Each series of QUIDS provides that interest will be payable quarterly
provided that, so long as an event of default has not occurred and is not
continuing with respect to such series of QUIDS, Detroit Edison will have the
right, upon prior notice by public announcement given in accordance with New
York Stock Exchange rules, to extend the interest payment period at any time
and from time to time on the QUIDS for up to 20 consecutive quarterly interest
payment periods. As a consequence, quarterly interest payments on the
applicable series of QUIDS would be deferred but would continue to accrue
interest during any deferral period. In the event that Detroit Edison
exercises this right, Detroit Edison may not declare or pay dividends on,
or redeem, purchase or acquire, any of its capital stock during such deferral
period, other than redemptions of any series of capital stock of Detroit Edison
pursuant to the terms of any sinking fund provisions with respect thereto. In
addition, during any deferral period, Detroit Edison may not make any advance
or loan to, or purchase any securities of, or make any other investment in, any
affiliate of Detroit Edison, including DTE Energy Company, for the purpose of,
or to enable the payment of, directly or indirectly, dividends on any equity
securities of DTE Energy Company.
A non-recourse project financing arrangement is in place for PCI
Enterprises borrowings of up to $50 million, of which $38.9 million was
outstanding at December 31, 1996. This arrangement is collateralized by
specific project assets. This
55
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DTE ENERGY COMPANY, THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
construction period financing will be converted into a seven-year, variable
rate, term loan at the construction loan maturity date of October 31, 1997.
The expected maturities of this term loan for 1997, 1998, 1999, 2000 and
2001 consist of $1.5 million, $3.3 million, $3.2 million, $2.8 million and $2.5
million, respectively.
In October 1996, Detroit Edison entered into a three-year interest rate
swap agreement based on a notional amount of $25 million. Detroit Edison will
receive a rate equal to the London Interbank Offered Rate and pay a rate equal
to the quarterly weighted average Public Securities Association Municipal Swap
Index divided by 67.3%. The intent of the swap is to shift floating rate
exposure from the taxable markets to the tax-exempt markets. As of December
31, 1996 the average rate received was 5.53% and the average rate paid was
5.08%. The swap is subject to market risk of changes in both interest rates
and tax rates. Detroit Edison does not believe changes in either or both rates
will have a material effect on interest expense.
In 1997, 1998, 1999, 2000 and 2001, Detroit Edison's long-term debt
maturities consist of $144 million, $169 million, $219 million, $194 million
and $119 million, respectively.
NOTE 9 - SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS
- --------------------------------------------------------------------------------
At December 31, 1996, Detroit Edison had total short-term credit arrangements
of approximately $464 million. At December 31, 1996 and December 31, 1995, $10
million and $37 million, respectively, of short-term borrowings were
outstanding. The weighted average interest rates for short-term borrowings
during 1996, 1995 and 1994 were 5.6%, 6.1% and 4.3%.
Detroit Edison had bank lines of credit of $200 million, all of which had
commitment fees in lieu of compensating balances. Commitment fees incurred in
1996 and 1995 for bank lines of credit were approximately $0.3 million.
Detroit Edison 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.
Detroit Edison 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 Detroit
Edison for general corporate purposes pursuant to a separate Loan Agreement.
At December 31, 1996, approximately $264 million was available to Detroit
Edison under such Loan Agreement. See Note 10 for a discussion of Detroit
Edison's heat purchase contract with Renaissance.
At December 31, 1996, DTE Capital Corporation had a $200 million Revolving
Credit Agreement, backed by a Support Agreement from the Company, under which
no borrowings were outstanding. Commitment fees incurred in 1996 for this
credit agreement were approximately $0.3 million.
NOTE 10 - LEASES
Future minimum lease payments under long-term noncancellable leases, consisting
of nuclear fuel ($148 million computed on a projected units of production
basis), lake vessels ($36 million), locomotives and coal cars ($152 million),
office space ($16 million), and computers, vehicles and other equipment ($3
million) at December 31, 1996 are as follows:
(Millions) (Millions)
- -------------------------------------------------------------------------------
1997 $86 2000 $ 31
1998 59 2001 21
1999 49 Remaining years 109
----------
Total $355
==========
Detroit Edison has a heat purchase contract with Renaissance which
provides for the purchase by Renaissance for Detroit Edison 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. Detroit Edison 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 $134 million and
$145 million at December 31, 1996 and 1995, respectively. The decrease in 1996
from 1995 of $11 million includes additions of $35 million (purchases of $33
million and capitalized interest of $2 million) less $46 million for the
amortization of nuclear fuel consumed in 1996.
Under SFAS No. 71, amortization of Detroit Edison's 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 $78 million
(including $53 million for nuclear fuel), $97 million (including $67 million
for nuclear fuel) and $49 million (including $8 million for nuclear fuel) for
1996, 1995 and 1994, respectively.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. The carrying amount
of financial instruments, except for long-term debt, approximates fair value.
The estimated fair value of total long-term debt at December 31, 1996 and 1995
was $4 billion and $4.1 billion, respectively, compared to the carrying amount
of $3.9 billion for each of the two years. For purposes of applying SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
investments in debt and equity securities are classified as "available for
sale."
NOTE 12 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
COMMITMENTS - Detroit Edison has entered into purchase commitments of
approximately $633 million at December 31, 1996, which includes, among other
things, line construction and
56
59
clearance costs. Detroit Edison also has entered into substantial long-term
fuel supply and transportation commitments.
Detroit Edison has an Energy Purchase Agreement ("Agreement") for the
purchase of steam and electricity from the Detroit Resource Recovery Facility.
Under the Agreement, Detroit Edison will purchase steam through the year 2008
and electricity through June 30, 2024. Purchases of steam and electricity were
$30.2 million, $28.2 million and $24.5 million for 1996, 1995 and 1994,
respectively, and annual purchase commitments are approximately $35 million,
$36 million, $37 million, $39 million and $40 million for 1997, 1998, 1999,
2000 and 2001, respectively. See Note 14 relating to steam heating special
charges.
On October 25, 1995, the MPSC issued an order approving Detroit Edison's
long-term capacity and energy purchase agreement from Ontario Hydro. The
purchase is for 300 MW, on a seasonal basis from mid-May through mid-September
for the years 1996 through 2001. This purchase will offset a concomitant
agreement to lease 312 MW of Detroit Edison's 917 MW Ludington capacity
entitlement to the Toledo Edison Company for essentially the same time period.
The net economic effect of the Ludington lease and the Ontario Hydro purchase
will be to provide Detroit Edison's customers with an estimated reduction in
PSCR expense of $74 million which will be passed through to customers through
the PSCR clause.
CONTINGENCIES - LEGAL PROCEEDINGS - On May 28, 1996, an order was issued by the
Circuit Court for Wayne County, Michigan certifying a plaintiff class (Gilford,
et al v Detroit Edison) in a lawsuit claiming that Detroit Edison had engaged
in age and racial discrimination. Detroit Edison has requested leave to appeal
the class certification to the Michigan Supreme Court and has requested a stay
of proceedings. A notice has been sent to potential class members, however,
the size of the potential class will not be determinable until late May 1997 at
the earliest. Detroit Edison is of the opinion that the allegations of
discrimination are without merit.
CARTER INDUSTRIALS - In January 1989, the Environmental Protection Agency
("EPA") issued an administrative order under the Comprehensive Environmental
Response, Compensation and Liability Act ordering Detroit Edison and 23 other
potentially responsible parties 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. Clean-up of the
Carter Industrials site began in 1995 and was completed in the spring of 1996.
An additional clean-up of the sewer and sewer outfall emptying into the Detroit
River began in August 1996 and was completed in November 1996. It is expected
the site will soon be removed from the National Priorities List.
OTHER - In addition to the matters reported herein, the Company and its
subsidiaries are involved in litigation and environmental matters dealing with
the numerous aspects of their business operations. The Company believes that
such litigation and the matters discussed above will not have a material effect
on its financial position, results of operations and cash flows.
See Notes 2 and 3 for a discussion of contingencies related to Fermi 2.
NOTE 13 - EMPLOYEE BENEFITS
- --------------------------------------------------------------------------------
RETIREMENT PLAN - Detroit Edison 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 employees' years of benefit service, average final compensation and age
at retirement. Detroit Edison'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 $16 million, $29.6 million and $45.8 million for
1996, 1995 and 1994, respectively.
Net pension cost included the following components:
- ------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
(Thousands)
Service cost - benefits earned during the period $ 25,461 $ 22,210 $ 25,146
Interest cost on projected benefit obligation 81,758 78,592 75,922
Actual return on Plan assets (120,466) (164,144) (3,272)
Net deferral and amortization:
Deferral of net gain (loss) during current period 19,554 64,461 (90,069)
Amortization of unrecognized prior service cost 4,486 5,188 3,613
Amortization of unrecognized net asset resulting
from initial application (4,507) (4,507) (4,507)
-------- -------- --------
Net pension cost $ $6,286 $ 1,800 $ $6,833
======== ======== ========
- ------------------------------------------------------------------------------------------------------------
Assumptions used in determining net pension cost are as follows:
- ------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Discount rate 7.5 % 8.0 % 7.5 %
Annual increase in future compensation levels 4.5 4.5 4.5
Expected long-term rate of return on Plan assets 9.0 9.5 9.5
- ------------------------------------------------------------------------------------------------------------
The following reconciles the funded status of the Plan to the amount
recorded in the Consolidated Balance Sheet:
- -------------------------------------------------------------------------------------------
December 31
-------------------------------
1996 1995
- -------------------------------------------------------------------------------------------
(Thousands)
Plan assets at fair value, primarily equity
and debt securities $1,231,600 $1,170,000
---------------------------
Less actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested
benefits of $994,434 and $966,765, respectively 1,021,504 991,248
Increase in future compensation levels 154,007 138,127
---------------------------
Projected benefit obligation 1,175,511 1,129,375
---------------------------
Plan assets in excess of projected benefit obligation 56,089 40,625
Unrecognized net asset resulting from initial
application (24,274) (28,781)
Unrecognized net loss 2,151 21,288
Unrecognized prior service cost 57,613 48,733
---------------------------
Asset recorded in the Consolidated Balance Sheet $ 91,579 $ 81,865
===========================
- -------------------------------------------------------------------------------
57
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DTE ENERGY COMPANY, THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
Assumptions used in determining the projected benefit obligation are as
follows:
- -------------------------------------------------------------------------------------------
December 31
-------------------------------
1996 1995
- -------------------------------------------------------------------------------------------
Discount rate 7.5 % 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, there are several supplemental non-qualified,
non-contributory, retirement benefit plans for certain management employees.
LONG-TERM INCENTIVE PLAN - The Company has adopted a long-term incentive plan
("Incentive Plan"). Under the Incentive Plan, certain key employees may be
granted stock options, stock appreciation rights, restricted common stock,
performance shares and performance units. In 1996 and 1995, 56,000 shares and
66,500 shares, respectively, of restricted common stock, valued at
approximately $3.8 million, were conditionally granted to officers of Detroit
Edison. Compensation cost of $1,165,000 and $571,000 in 1996 and 1995,
respectively, was recorded based on the award that was expected to vest and
recognized over the period to which the related employee services were to be
rendered. The shares for officers are restricted for a period not exceeding
four years and all shares are subject to forfeiture if specified performance
measures are not met. There are no exercise prices related to these shares.
During the applicable restriction period, the officer-recipient has all the
voting, dividends and other rights of a record holder except that the shares
are nontransferable, and non-cash distributions paid upon the shares would be
subject to transfer restrictions and risk of forfeiture to the same extent as
the shares themselves. Based upon performance under the 1995 plan 12,192
shares were forfeited. All shares awarded pursuant to this program were
purchased on the open market. Common stock granted under the Incentive Plan
may not exceed 7.2 million shares. Performance units (which have a face amount
of $1) granted under the Incentive Plan may not exceed 25 million in the
aggregate. No stock options, stock appreciation rights, performance shares or
performance units have been granted under this plan. Disclosures required by
SFAS No. 123 have been omitted because such amounts are considered immaterial.
SAVINGS & INVESTMENT PLANS - Detroit Edison has contributory defined
contribution plans qualified under Section 401 (a) and (k) of the Internal
Revenue Code for all eligible employees. Matching contributions were $17.2
million, $13.7 million and $12.5 million for 1996, 1995 and 1994, respectively.
OTHER POSTRETIREMENT BENEFITS - Detroit Edison provides certain postretirement
health care and life insurance benefits for retired employees. Substantially
all of Detroit Edison's employees will become eligible for such benefits if
they reach retirement age while working for Detroit Edison. These benefits are
provided principally through insurance companies and other organizations.
Effective January 1, 1993, Detroit Edison adopted the provisions of SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The standard required Detroit Edison 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. Detroit Edison's incremental cost
upon adoption of the standard was $49 million for 1993 which was 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 four-year period 1994-1997.
Net other postretirement benefits cost included the following components:
- --------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
(Thousands)
Service cost - benefits earned during the period $19,871 $17,295 $16,267
Interest cost on accumulated postretirement
benefit obligation 40,336 40,156 33,459
Actual return on assets (19,238) (17,793) (208)
Deferral of net gain (loss) during current period 5,870 11,368 (833)
Amortization of unrecognized transition
obligation 20,525 20,525 20,633
------------------------------------------------
Net other postretirement benefits cost $67,364 $71,551 $69,318
================================================
- --------------------------------------------------------------------------------------------------------------
Assumptions used in determining net other postretirement benefits costs are as
follows:
- --------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Discount rate 7.5 % 8.0 % 7.5 %
Annual increase in future compensation levels 4.5 4.5 4.5
Expected long-term rate of return on assets 8.5 8.5 9.5
- --------------------------------------------------------------------------------------------------------------
The following reconciles the funded status to the amount recorded in the
Consolidated Balance Sheet:
- ---------------------------------------------------------------------------------------------------
December 31
------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------
(Thousands)
Actuarial present value of benefit obligation:
Retirees $ 312,240 $ 314,311
Fully eligible active participants 74,372 69,281
Other active participants 196,669 168,335
--------- ---------
Accumulated postretirement benefit obligation 583,281 551,927
Less assets at fair value, primarily
equity and debt securities 207,754 133,147
--------- ---------
Benefit obligation in excess of assets 375,527 418,780
Unrecognized transition obligation (328,408) (348,934)
Unrecognized net loss (41,603) (45,465)
--------- ---------
Liability recorded as Other Non-Current
Liabilities in the Consolidated Balance Sheet $ 5,516 $ 24,381
========= =========
Assumptions used in determining the accumulated benefit obligation are as
follows:
- ---------------------------------------------------------------------------------------------------
December 31
------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------
Discount rate 7.5 % 7.5 %
Annual increase in future compensation levels 4.5 4.5
- ---------------------------------------------------------------------------------------------------
58
61
Benefit costs were calculated assuming health care cost trend rates beginning
at 10.5% for 1996 and decreasing to 5.5% in 2008 and thereafter for persons
under age 65 and decreasing from 6.5% to 5.5% 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 $9 million for 1996 and increase the accumulated benefit obligation by $76
million at December 31, 1996.
NOTE 14 - STEAM HEATING SPECIAL CHARGES
- --------------------------------------------------------------------------------
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in the fourth
quarter of 1995. As the result of continuing losses in the operation of its
steam heating business, upon adoption of SFAS No. 121, Detroit Edison wrote off
the remaining net book value of its steam heating plant assets of $42 million
($32 million after-tax) or $0.22 per share in 1995.
During the third quarter of 1996, following the completion of a review of
its steam heating operations, Detroit Edison recorded a special charge to net
income of $149.2 million ($97 million after-tax) or $0.67 per share. The
special charge included a reserve for steam purchase commitments during the
period from 1997 through 2008 under the agreement with the Detroit Resource
Recovery Facility, and for expenditures in 1997 for closure of a portion of the
steam heating system and improvements in service to remaining customers. See
Note 12.
The reserve for steam purchase commitments was recorded at its present
value of $134 million at December 31, 1996, using a risk free discount rate of
6.9%, and is included in Other Deferred Credits in the Consolidated Balance
Sheet. Therefore, Detroit Edison will record non-cash accretion expense during
the period 1997-2008.
NOTE 15 - SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996 Quarter Ended
----------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------
(Thousands, except per share amounts)
Operating Revenues $ 909,579 $ 871,321 $ 977,334 $ 887,166
Operating Income 186,544 154,466 118,640 154,258
Net Income 108,440 78,253 44,933 77,670
Earnings Per Common Share 0.75 0.54 0.31 0.54
- --------------------------------------------------------------------------------
1995 Quarter Ended
----------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------
(Thousands, except per share amounts)
Operating Revenues $ 880,274 $ 855,955 $ 1,032,289 $ 867,026
Operating Income 194,164 165,714 225,114 154,330
Net Income 106,083 84,152 141,412 74,267
Earnings Per Common Share 0.73 0.58 0.98 0.51
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The third quarter of 1996 includes the steam heating special charge to net
income of $149.2 million ($97 million after-tax) or $0.67 per share. See
Note 14.
The fourth quarter of 1996 includes a provision for Fermi 2 capacity
factor disallowances in the period 1996-1998 and for reduced efficiency of the
Fermi 2 turbine in 1995 and 1996 of $20 million ($13 million after-tax) or
$0.09 per share. See Note 3.
The fourth quarter of 1995 includes the write-off of the remaining net
book value of Detroit Edison's steam heating plant assets when the Company
adopted SFAS No. 121. This resulted in a non-cash loss of $42 million ($32
million after-tax) or $0.22 per share. See Note 14.
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.
59
62
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Board of Directors, upon the recommendation of the Board's Audit
Committee, appointed Deloitte & Touche LLP as independent accountants for the
years 1995 and 1996. The appointments were ratified by the Common Stock
Shareholders at the Annual Meetings of Common Stock Shareholders held on April
24, 1995 and April 22, 1996, respectively. Deloitte & Touche LLP's report on
the financial statements for the years ending December 31, 1995 and 1996 did
not contain an adverse opinion or a disclaimer of opinion, nor was it qualified
or modified as to uncertainty, audit scope or accounting principles.
In prior years, Price Waterhouse LLP served as independent accountants of
the Company. During the Company's fiscal year ending December 31, 1994, there
were 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 year. Price Waterhouse LLP's report on the financial
statements for the year ended December 31, 1994 did not contain an adverse
opinion or a disclaimer of opinion, nor was it 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, "Employees and
Executive Officers" on pages 25-26 thereof; 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 21 of the Company's
definitive proxy statement dated March 21, 1997, in connection with its Annual
Meeting of Shareholders to be held on April 28, 1997; and information regarding
directors is incorporated herein by reference to the data under the heading
"The Election of Directors" on pages 2-6 of the Company's definitive proxy
statement dated March 21, 1997, in connection with its Annual Meeting of
Shareholders to be held on April 28, 1997.
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 9-16 of the Company's definitive proxy
statement dated March 21, 1997, in connection with its Annual Meeting of
Shareholders to be held on April 28, 1997.
60
63
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 Certain Beneficial
Owners" on pages 7-8 of the Company's definitive proxy statement dated March
21, 1997, in connection with its Annual Meeting of Shareholders to be held on
April 28, 1997.
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 16 of the Company's definitive
proxy statement dated March 21, 1997, in connection with its Annual Meeting of
Shareholders to be held on April 28, 1997.
61
64
ANNUAL REPORT ON FORM 10-K FOR THE DETROIT EDISON COMPANY
PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES.
See the Company's "Items 1 and 2 - Business and Properties" (other than
the paragraphs under the headings "Non-Regulated Operations" and "Executive
Officers"), which is incorporated herein by this reference.
EXECUTIVE OFFICERS. PRESENT
POSITION
NAME AGE(a) PRESENT POSITION HELD SINCE
- ---------------------------------------------------------------------------------------------------
John E. Lobbia .......... 55 Chairman of the Board and Chief Executive Officer 5- 1-90
Anthony F. Earley, Jr. .. 47 President and Chief Operating Officer 3- 1-94
Larry G. Garberding ..... 58 Executive Vice President and Chief Financial Officer 8- 1-90
Frank E. Agosti ......... 60 Senior Vice President-Power Supply 2- 1-90
Robert J. Buckler ....... 47 Senior Vice President-Energy Marketing and 12- 1-92
Distribution
Douglas R. Gipson ....... 49 Senior Vice President-Nuclear Generation 4- 1-93
Gerard M. Anderson ...... 38 Vice President for Non-Utility Business Ventures 12- 1-93
Susan M. Beale .......... 48 Vice President and Corporate Secretary 3-27-95
Michael E. Champley ..... 48 Vice President-Customer Energy Solutions 2- 1-96
Haven E. Cockerham ...... 49 Vice President-Human Resources 6- 1-94
Ronald W. Gresens ....... 63 Vice President and Controller 5- 1-87
Leslie L. Loomans ....... 53 Vice President and Treasurer 10- 1-89
David E. Meador ......... 39 Vice President 2-28-97
Christopher C. Nern ..... 52 Vice President and General Counsel 6- 1-93
William R. Roller ....... 51 Vice President-Power Generation 4-22-96
S. Martin Taylor ........ 56 Vice President-Corporate and Public Affairs 11-28-94
(a) As of March 1, 1997
Under Detroit Edison By-Laws, the officers of Detroit Edison 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 Meador, all of the
above officers have been employed by Detroit Edison in one or more
management capacities during the past five years.
On March 28, 1997, Ronald W. Gresens will retire.
The following appointments are effective April 1, 1997: Gerard M.
Anderson - Executive Vice President, Robert J. Buckler - Executive Vice
President and Michael E. Champley - Senior Vice President.
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 Detroit Edison.
62
65
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 Detroit Edison.
David E. Meador was Controller, Mopar Parts Division, at Chrysler
Corporation, an international automotive manufacturer, from November 1996
until February 1997. From 1986 to 1996, he held a variety of executive
financial positions at Chrysler. Effective February 28, 1997, he was
elected Vice President and effective March 29, 1997, he will assume the
duties of Controller.
ITEM 3 - LEGAL PROCEEDINGS.
See the Company's "Item 3 - Legal Proceedings," which is incorporated
herein by this reference.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
See the Company's "Item 5 - Market for Registrant's Common Equity and
Related Stockholder Matters," the third paragraph of which is incorporated
herein by this reference. Detroit Edison's By-Laws contain this same provision
with respect to the Michigan Business Corporation Act. All of Detroit Edison's
Common Stock is held by the Company.
The amount of dividends paid by Detroit Edison to the Company will depend
on Detroit Edison's earnings, financial condition and other factors, including
the effects of utility restructuring efforts, each of which is periodically
reviewed by Detroit Edison's Board of Directors.
63
66
ITEM 6 - SELECTED FINANCIAL DATA.
Year Ended December 31
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------------------------
(Thousands)
Operating Revenues.............. $ 3,642,043 $ 3,635,544 $ 3,519,341 $ 3,555,211 $ 3,558,143
Net Income...................... $ 327,538 $ 433,651 $ 419,909 $ 521,903 $ 588,047
Net Income Available
for Common Stock.............. $ 311,523 $ 405,914 $ 390,269 $ 491,066 $ 557,549
At year end:
Total Assets.................. $10,874,477 $11,130,591 $10,992,978 $11,134,879 $10,309,061
Long-Term Debt
Obligations (including
capital leases) and
Redeemable Preferred
and Preference Stock
Outstanding................ $ 4,000,913 $ 4,004,247 $ 3,979,763 $ 4,007,622 $ 4,525,504
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
See the Company's and Detroit Edison's "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations," which is
incorporated herein by this reference to Part II - Item 7 of the Company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See pages 36 through 59.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
See the Company's "Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure," which is incorporated herein by this
reference.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding Detroit Edison's executive officers is incorporated
herein by reference to "Items 1 and 2 - Business and Properties, Executive
Officers." Detroit Edison's directors are the same as the Company's directors.
Information regarding directors is incorporated herein by reference to the
data under the heading "The Election of Directors" on pages 2-6 of the
Company's definitive proxy statement dated March 21, 1997, in connection with
its Annual Meeting of Shareholders to be held on April 28, 1997.
64
67
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 9-16 of the Company's definitive proxy
statement dated March 21, 1997, in connection with its Annual Meeting of
Shareholders to be held on April 28, 1997.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
All of Detroit Edison's Common Stock is owned by the Company.
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 16 of the Company's definitive
proxy statement dated March 21, 1997, in connection with its Annual Meeting of
Shareholders to be held on April 28, 1997.
65
68
ANNUAL REPORTS ON FORM 10-K FOR DTE ENERGY COMPANY
AND THE DETROIT EDISON COMPANY
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 36.
(2) Financial statement schedules. See "Item 8 - Financial
Statements and Supplementary Data" on page 36.
(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
-------
4-177 - Supplemental Indenture establishing the Series KKP No.
12 Mortgage Bonds, dated as of November 1, 1990.
4-178 - Supplemental Indenture establishing the 1991 Series BP
and 1991 Series CP Mortgage Bonds, dated as of May 1,
1991.
4-179 - Supplemental Indenture establishing the 1991 Series
DP Mortgage Bonds, dated as of May 15, 1991.
4-180 - Supplemental Indenture establishing the 1991 Series
EP Mortgage Bonds, dated as of September 1, 1991.
4-181 - Supplemental Indenture establishing the 1991 Series
FP Mortgage Bonds, dated as of November 1, 1991.
4-182 - Supplemental Indenture establishing the 1992 Series
BP Mortgage Bonds, dated as of January 15, 1992.
*10-4 - Amended and Restated Supplemental Long-Term Disability
Plan, dated January 27, 1997.
66
69
Exhibit
Number
-------
*10-5 - Certain arrangements pertaining to the employment of David E.
Meador.
11-6 - DTE Energy Company and Subsidiary Companies Primary and Fully
Diluted Earnings Per Share of Common Stock.
12-4 - DTE Energy Company and Subsidiary Companies Computation of
Ratio of Earnings to Fixed Charges.
12-5 - The Detroit Edison Company and Subsidiary Companies Computation
of Ratio of Earnings to Fixed Charges.
12-6 - DTE Energy Company and Subsidiary Companies Computation of
Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends.
12-7 - The Detroit Edison Company and Subsidiary Companies Computation
of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends.
16-2 - Letter regarding change in certifying accountant.
21-1 - Subsidiaries of the Company and Detroit Edison.
23-9 - Consent of Deloitte & Touche LLP.
23-10 - Consent of Price Waterhouse LLP.
27-9 - Financial Data Schedule for the period ended December 31, 1996
for DTE Energy Company and Subsidiary Companies.
27-10 - Financial Data Schedule for the period ended December 31, 1996
for The Detroit Edison Company and Subsidiary Companies.
(ii) Exhibits incorporated herein by reference.
3(a) - Restated Articles of Incorporation of Detroit Edison, 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).
67
70
Exhibit
Number
-------
3(b) - Certificate containing resolution of the Detroit Edison 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).
3(c) - Certificate containing resolution of the Detroit Edison 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).
3(d) - Amended and Restated Articles of Incorporation of DTE Energy
Company, dated December 13, 1995 (Exhibit 3A (3.1) to DTE
Energy Form 8-B filed January 2, 1996, File No. 1-11607).
3(e) - Agreement and Plan of Exchange (Exhibit 1(2) to DTE Energy Form
8-B filed January 2, 1996, File No. 1-11607).
3(f) - Amended and Restated By-Laws, dated as of February 26, 1996, of
the Company (Exhibit 3-3 to Form 10-K for year ended December
31, 1996).
3(g) - Amended and Restated By-Laws, dated as of February 26, 1996, of
Detroit Edison (Exhibit 3-4 to Form 10-K for year ended
December 31, 1996).
4(a) - Mortgage and Deed of Trust, dated as of October 1, 1924,
between Detroit Edison (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
November 15, 1971 Exhibit 2-B-38 to Registration
No. 2-42160
68
71
Exhibit
Number
-------
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
October 15, 1985 Exhibit 4-170 to Form 10-K for
year ended December 31, 1994
November 30, 1987 Exhibit 4-139 to Form 10-K for
year ended December 31, 1992
July 15, 1989 Exhibit 4-171 to Form 10-K for
year ended December 31, 1994
December 1, 1989 Exhibit 4-172 to Form 10-K for
year ended December 31, 1994
February 15, 1990 Exhibit 4-173 to Form 10-K for
year ended December 31, 1994
April 1, 1991 Exhibit 4-15 to Form 10-K for
year ended December 31, 1996
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
69
72
Exhibit
Number
-------
June 30, 1993 Exhibit 4-149 to Form 10-Q for
quarter ended June 30, 1993
(1993 Series AP)
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.
December 1, 1994 Exhibit 4-169 to Form 10-K for
year ended December 31, 1994.
August 1, 1995 Exhibit 4-174 to Form 10-Q for
quarter ended September 30, 1995.
4(b) - Collateral Trust Indenture (notes), dated as of June 30, 1993
(Exhibit 4-152 to Registration No. 33-50325).
4(c) - First Supplemental Note Indenture, dated as of June 30, 1993
(Exhibit 4-153 to Registration No. 33-50325).
4(d) - Second Supplemental Note Indenture, dated as of September 15,
1993 (Exhibit 4-159 to Form 10-Q for quarter ended September
30, 1993).
4(e) - First Amendment, dated as of August 15, 1996, to Second
Supplemental Note Indenture (Exhibit 4-17 to Form 10-Q for
quarter ended September 30, 1996).
4(f) - Third Supplemental Note Indenture, dated as of August 15, 1994
(Exhibit 4-169 to Form 10-Q for quarter ended September 30,
1994).
4(g) - First Amendment, dated as of December 12, 1995, to Third
Supplemental Note Indenture, dated as of August 15, 1994
(Exhibit 4-12 to Registration No. 333-00023).
4(h) - Fourth Supplemental Note Indenture, dated as of August 15, 1995
(Exhibit 4-175 to Detroit Edison Form 10-Q for quarter ended
September 30, 1995).
70
73
Exhibit
Number
-------
4(i) - Fifth Supplemental Note Indenture, dated as of February 1, 1996
(Exhibit 4-14 to Form 10-K for year ended December 31, 1996).
4(j) - 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).
4(k) - Support Agreement, dated as of March 8, 1996, between the
Company and Detroit Edison (Exhibit 4-176 to Form 10-Q for
quarter ended March 31, 1996).
*10(a) - Form of 1995 Indemnification Agreement between the Company and
its directors and officers (Exhibit 3L (10-1) to DTE Energy
Company Form 8-B dated January 2, 1996).
*10(b) - Form of Indemnification Agreement between Detroit Edison and
its officers other than those identified in *10(l) (Exhibit
10-41 to Detroit Edison's Form 10-Q for quarter ended June 30,
1993).
*10(c) - The Detroit Edison Company Shareholder Value Improvement Plan -
A, as amended and restated effective January 1, 1996 (Exhibit
3L (10-3) to DTE Energy Form 8-B dated January 2, 1996).
*10(d) - The Detroit Edison 1996 Shareholder Value Improvement Plan - A
(Exhibit 10-1 to Form 10-K for year ended December 31, 1996).
*10(e) - Certain arrangements pertaining to the employment of S. Martin
Taylor (Exhibit 10-38 to Detroit Edison's 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 Detroit Edison's Form 10-Q for
quarter ended March 31, 1994).
71
74
Exhibit
Number
--------
*10(g) - Amended and Restated Detroit Edison Company Savings Reparation
Plan (Exhibit 10-4 to Form 10-Q for quarter ended March 31,
1996).
*10(h) - Certain arrangements pertaining to the employment of Haven E.
Cockerham (Exhibit 10-55 to Detroit Edison's Form 10-Q for
quarter ended September 30, 1994).
*10(i) - Third Restatement of the Retirement Reparation Plan for Certain
Employees of Detroit Edison, effective as of January 1, 1996
(Exhibit 3L (10-9) to DTE Energy Form 8-B dated January 2,
1996).
*10(j) - Third Restatement of the Benefit Equalization Plan for Certain
Employees of Detroit Edison, effective as of January 1, 1996
(Exhibit 3L (10-10) to DTE Energy Form 8-B dated January 2,
1996).
*10(k) - Certain arrangements pertaining to the employment of Larry G.
Garberding (Exhibit 28-52 to Detroit Edison's Form 10-Q for
quarter ended June 30, 1990).
*10(l) - Form of Indemnification Agreement, between Detroit Edison and
(1) John E. Lobbia, (2) Larry G. Garberding and (3) Anthony F.
Earley, Jr. (Exhibit 19-7 to Detroit Edison's Form 10-Q for
quarter ended March 31, 1992).
*10(m) - Form of Indemnification Agreement between Detroit Edison and
its directors (Exhibit 19-8 to Detroit Edison's Form 10-Q for
quarter ended March 31, 1992).
*10(n) - Detroit Edison Key Employee Deferred Compensation Plan
(January, 1990) (Exhibit 10-2 to Form 10-K for year ended
December 31, 1996).
*10(o) - Executive Vehicle Program, dated October 1, 1993 (Exhibit 10-47
to Detroit Edison's Form 10-Q for quarter ended September 30,
1993).
*10(p) - Amendment No. 1 to Executive Vehicle Plan, November 1993
(Exhibit 10-58 to Detroit Edison's Form 10-K for year ended
December 31, 1993).
72
75
Exhibit
Number
--------
*10(q) - Certain arrangements pertaining to the employment of Gerard M.
Anderson (Exhibit 10-40 to Detroit Edison's Form 10-K for year
ended December 31, 1993).
*10(r) - Third Restatement of The Detroit Edison Company Management
Supplemental Benefit Plan, effective as of January 1, 1996
(Exhibit 3L (10-18) to DTE Energy Form 8-B dated January 2,
1996).
*10(s) - Third Restatement of The Detroit Edison Company Plan for
Deferring the Payment of Directors' Fees (January 1, 1996)
(Exhibit 3L (10-19) to DTE Energy Form 8-B dated January 2,
1996).
*10(t) - DTE Energy Company Retirement Plan for Non-Employee Directors
(January 1, 1996) (Exhibit 3L (10-20) to DTE Energy Form 8-B
dated January 2, 1996).
*10(u) - DTE Energy Company Plan for Deferring the Payment of Directors'
Fees (January 1, 1996) (Exhibit 3L (10-21) to DTE Energy Form
8-B dated January 2, 1996).
*10(v) - Long-Term Incentive Plan (Exhibit 10-3 to Form 10-K for year
ended December 31, 1996).
99(a) - Belle River Participation Agreement between Detroit Edison and
Michigan Public Power Agency, dated as of December 1, 1982
(Exhibit 28-5 to Registration No. 2-81501).
99(b) - Belle River Transmission Ownership and Operating Agreement
between Detroit Edison 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 Detroit Edison (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 Detroit Edison and
Renaissance (Exhibit 99-7 to Registration No. 33-50325).
73
76
Exhibit
Number
--------
99(e) - Second Amendment to 1988 Amended and Restated Loan Agreement,
dated as of September 1, 1993, between Detroit Edison and
Renaissance (Exhibit 99-8 to Registration No. 33-50325).
99(f) - $200,000,000 364-Day Credit Agreement, dated as of September 1,
1993, among Detroit Edison, Renaissance and Barclays Bank PLC,
New York Branch, as Agent (Exhibit 99-12 to Registration No.
33-50325).
99(g) - 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(h) - Third Amendment, dated as of March 8, 1996, to $200,000,000
364-Day Credit Agreement, dated September 1, 1993, as amended,
among Detroit Edison, Renaissance, the Banks party thereto and
Barclays Bank, PLC, New York Branch, as Agent (Exhibit 99-11 to
Form 10-Q for quarter ended March 31, 1996).
99(i) - Fourth Amendment, dated as of August 29, 1996, to $200,000,000
364-Day Credit Agreement as of September 1, 1990, as amended,
among Detroit Edison, Renaissance, the Banks party thereto and
Barclays Bank, PLC, New York Branch, as Agent (Exhibit 99-13 to
Form 10-Q for quarter ended September 30, 1996).
99(j) - $200,000,000 Three-Year Credit Agreement, dated September 1,
1993, among Detroit Edison, Renaissance and Barclays Bank PLC,
New York Branch, as Agent (Exhibit 99-13 to Registration No.
33-50325).
99(k) - 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).
74
77
Exhibit
Number
--------
99(l) - Third Amendment, dated as of March 8, 1996, to $200,000,000
Three-Year Credit Agreement, dated September 1, 1993, as
amended among Detroit Edison, Renaissance, the Banks party
thereto and Barclays Bank, PLC, New York Branch, as Agent
(Exhibit 99-12 to Form 10-Q for quarter ended March 31, 1996).
99(m) - Fourth Amendment, dated as of September 1, 1996, to
$200,000,000 Multi-Year (formerly Three-Year) Credit Agreement,
dated as of September 1, 1993, as amended among Detroit Edison,
Renaissance, the Banks party thereto and Barclays Bank, PLC,
New York Branch, as Agent (Exhibit 99-14 to Form 10-Q for
quarter ended September 30, 1996).
99(n) - 1988 Amended and Restated Nuclear Fuel Heat Purchase Contract,
dated October 4, 1988, between Detroit Edison and Renaissance
(Exhibit 99-9 to Registration No. 33-50325).
99(o) - First Amendment to 1988 Amended and Restated Nuclear Fuel Heat
Purchase Contract, dated as of February 1, 1990, between
Detroit Edison and Renaissance (Exhibit 99-10 to Registration
No. 33-50325).
99(p) - Second Amendment, dated as of September 1, 1993, to 1988
Amended and Restated Nuclear Fuel Heat Purchase Contract
between Detroit Edison and Renaissance (Exhibit 99-11 to
Registration No. 33-50325).
99(q) - 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(r) - Fourth Amendment, dated as of March 8, 1996, to 1988 Amended
and Restated Nuclear Fuel Heat Purchase Contract Agreement,
dated as of October 4, 1988, between Detroit Edison and
Renaissance (Exhibit 99-10 to Form 10-Q for quarter ended March
31, 1996).
75
78
Exhibit
Number
--------
99(s) - Master Trust Agreement ("Master Trust"), dated as of June 30,
1994, between Detroit Edison and Fidelity Management Trust
Company relating to the Savings & Investment Plans (Exhibit
4-167 to Form 10-Q for quarter ended June 30, 1994).
99(t) - First Amendment, effective as of February 1, 1995, to Master
Trust (Exhibit 4-10 to Registration No. 333-00023).
99(u) - Second Amendment, effective as of February 1, 1995 to Master
Trust (Exhibit 4-11 to Registration No. 333-00023).
99(v) - Third Amendment, effective January 1, 1996, to Master Trust
(Exhibit 4-12 to Registration No. 333-00023).
99(w) - The Detroit Edison Company Irrevocable Grantor Trust for The
Detroit Edison Company Savings Reparation Plan (Exhibit 99-1 to
Form 10-K for year ended December 31, 1996).
99(x) - The Detroit Edison Company Irrevocable Grantor Trust for The
Detroit Edison Company Retirement Reparation Plan (Exhibit 99-2
to Form 10-K for year ended December 31, 1996).
99(y) - The Detroit Edison Company Irrevocable Grantor Trust for The
Detroit Edison Company Management Supplemental Benefit Plan
(Exhibit 99-3 to Form 10-K for year ended December 31, 1996).
99(z) - The Detroit Edison Company Irrevocable Grantor Trust for The
Detroit Edison Company Benefit Equalization Plan (Exhibit 99-4
to Form 10-K for year ended December 31, 1996).
99(aa) - The Detroit Edison Company Irrevocable Grantor Trust for The
Detroit Edison Company Plan for Deferring the Payment of
Directors' Fees (Exhibit 99-5 to Form 10-K for year ended
December 31, 1996).
99(bb) - The Detroit Edison Company Irrevocable Grantor Trust for The
DTE Energy Company Retirement Plan for Non-Employee Directors
(Exhibit 99-6 to Form 10-K for year ended December 31, 1996).
76
79
Exhibit
Number
--------
99(cc) - DTE Energy Company Irrevocable Grantor Trust for The DTE Energy
Company Plan for Deferring the Payment of Directors' Fees
(Exhibit 99-7 to Form 10-K for year ended December 31, 1996).
99(dd) - DTE Energy Company Irrevocable Grantor Trust for The DTE Energy
Company Retirement Plan for Non-Employee Directors (Exhibit
99-8 to Form 10-K for year ended December 31, 1996).
99(ee) - Credit Agreement, dated as of March 1, 1996 among DTE Capital
Corporation, the Initial Lenders named therein, and Citibank,
N.A., as Agent (Exhibit 99-9 to Form 10-Q for quarter ended
March 31, 1996).
(b) Registrants filed a report on Form 8-K dated December 20, 1996,
disclosing the issuance of the MPSC Staff Report on Electric Industry
Restructuring.
(c) *Denotes management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report.
77
80
DTE ENERGY COMPANY, THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance ----------------------- Balance
at Beginning Charged to Charged to at End
of Costs and Other of
Description Period Expenses Accounts(a) Deductions(b) Period
- ------------------------- ------------ ---------- ----------- ------------- -------
(Thousands)
YEAR 1996
Allowance for
uncollectible accounts
(shown as deduction
from accounts receivable
in balance sheet) ...... $22,000 $12,756 $2,763 $(17,519) $20,000
YEAR 1995
Allowance for
uncollectible accounts
(shown as deduction
from accounts receivable
in balance sheet) ...... $30,000 $4,849 $3,253 $(16,102) $22,000
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
- ---------------------
(a) Collection of accounts previously written off.
(b) Uncollectible accounts written off.
78
81
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.
DTE ENERGY 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 Officer and Director Chief Financial Officer and Director
By /s/ ANTHONY F. EARLEY, JR. By /s/ RONALD W. GRESENS
------------------------------------ ------------------------------------
Anthony F. Earley, Jr. Ronald W. Gresens
President, Vice President and Controller
Chief Operating Officer and Director
By /s/ TERENCE E. ADDERLEY By /s/ PATRICIA S. LONGE
------------------------------------ ------------------------------------
Terence E. Adderley, Director Patricia S. Longe, Director
By /s/ LILLIAN BAUDER By /s/ EUGENE A. MILLER
------------------------------------ ------------------------------------
Lillian Bauder, Director Eugene A. Miller, Director
By /s/ DAVID BING By /s/ DEAN E. RICHARDSON
------------------------------------ ------------------------------------
David Bing, Director Dean E. Richardson, Director
By /s/ ALLAN D. GILMOUR By /s/ ALAN E. SCHWARTZ
------------------------------------ ------------------------------------
Allan D. Gilmour, Director Alan E. Schwartz, Director
By /s/ THEODORE S. LEIPPRANDT By /s/ WILLIAM WEGNER
------------------------------------ ------------------------------------
Theodore S. Leipprandt, Director William Wegner, Director
Date: March 24, 1997
79
82
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 Officer and Director Chief Financial Officer and Director
By /s/ ANTHONY F. EARLEY, JR. By /s/ RONALD W. GRESENS
------------------------------------ ------------------------------------
Anthony F. Earley, Jr. Ronald W. Gresens
President, Vice President and Controller
Chief Operating Officer and Director
By /s/ TERENCE E. ADDERLEY By /s/ PATRICIA S. LONGE
------------------------------------ ------------------------------------
Terence E. Adderley, Director Patricia S. Longe, Director
By /s/ LILLIAN BAUDER By /s/ EUGENE A. MILLER
------------------------------------ ------------------------------------
Lillian Bauder, Director Eugene A. Miller, Director
By /s/ DAVID BING By /s/ DEAN E. RICHARDSON
------------------------------------ ------------------------------------
David Bing, Director Dean E. Richardson, Director
By /s/ ALLAN D. GILMOUR By /s/ ALAN E. SCHWARTZ
------------------------------------ ------------------------------------
Allan D. Gilmour, Director Alan E. Schwartz, Director
By /s/ THEODORE S. LEIPPRANDT By /s/ WILLIAM WEGNER
------------------------------------ ------------------------------------
Theodore S. Leipprandt, Director William Wegner, Director
Date: March 24, 1997
80
83
DTE ENERGY COMPANY
FILE NO. 1-11607
THE DETROIT EDISON COMPANY
FILE NO. 1-2198
ANNUAL REPORTS ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
EXHIBIT INDEX
Exhibits filed herewith.
Exhibit
Number Page No. ____
4-177 - Supplemental Indenture establishing the Series KKP
No. 12 Mortgage Bonds, dated as of November 1, 1990.
4-178 - Supplemental Indenture establishing the 1991 Series
BP and 1991 Series CP Mortgage Bonds, dated as of
May 1, 1991.
4-179 - Supplemental Indenture establishing the 1991 Series
DP Mortgage Bonds, dated as of May 15, 1991.
4-180 - Supplemental Indenture establishing the 1991 Series
EP Mortgage Bonds, dated as of September 1, 1991.
4-181 - Supplemental Indenture establishing the 1991 Series
FP Mortgage Bonds, dated as of November 1, 1991.
4-182 - Supplemental Indenture establishing the 1992 Series
BP Mortgage Bonds, dated as of January 15, 1992.
*10-4 - Amended and Restated Supplemental Long-Term
Disability Plan, dated January 27, 1997.
*10-5 - Certain arrangements pertaining to the employment
of David E. Meador.
11-6 - DTE Energy Company and Subsidiary Companies Primary
and Fully Diluted Earnings Per Share of Common
Stock.
12-4 - DTE Energy Company and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges.
84
Exhibit
Number
12-5 - The Detroit Edison Company and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges.
12-6 - DTE Energy Company and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends.
12-7 - The Detroit Edison Company and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends.
16-2 - Letter regarding change in certifying accountant.
21-1 - Subsidiaries of the Company and Detroit Edison.
23-9 - Consent of Deloitte & Touche LLP.
23-10 - Consent of Price Waterhouse LLP.
27-9 - Financial Data Schedule for the period ended
December 31, 1996 for DTE Energy Company and
Subsidiary Companies.
27-10 - Financial Data Schedule for the period ended
December 31, 1996 for The Detroit Edison Company and
Subsidiary Companies.
Exhibits incorporated herein by reference. See Page Nos.
___ through
___ for location
3(a) - Restated Articles of Incorporation of Detroit
Edison, as filed December 10, 1991 with the State of
Michigan, Department of Commerce - Corporation and
Securities Bureau.
3(b) - Certificate containing resolution of the Detroit
Edison 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.
85
Exhibit
Number
3(c) - Certificate containing resolution of the Detroit
Edison 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.
3(d) - Amended and Restated Articles of Incorporation of
DTE Energy Company, dated December 13, 1995.
3(e) - Agreement and Plan of Exchange.
3(f) - Amended and Restated By-Laws, dated as of February
26, 1996, of the Company.
3(g) - Amended and Restated By-Laws, dated as of February
26, 1996, of Detroit Edison.
4(a) - Mortgage and Deed of Trust, dated as of October 1,
1924, between Detroit Edison and Bankers Trust
Company as Trustee and indentures supplemental
thereto, dated as of dates indicated below.
September 1, 1947
October 1, 1968
November 15, 1971
January 15, 1973
June 1, 1978
June 30, 1982
August 15, 1982
October 15, 1985
November 30, 1987
July 15, 1989
December 1, 1989
86
Exhibit
Number
February 15, 1990
April 1, 1991
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
June 30, 1993
September 15, 1993
March 1, 1994
June 15, 1994
August 15, 1994
December 1, 1994
August 1, 1995
87
Exhibit
Number
4(b) - Collateral Trust Indenture (notes), dated as of
June 30, 1993.
4(c) - First Supplemental Note Indenture, dated as of
June 30, 1993.
4(d) - Second Supplemental Note Indenture, dated as of
September 15, 1993.
4(e) - First Amendment, dated as of August 15, 1996, to
Second Supplemental Note Indenture.
4(f) - Third Supplemental Note Indenture, dated as of
August 15, 1994.
4(g) - First Amendment, dated as of December 12, 1995, to
Third Supplemental Note Indenture, dated as of
August 15, 1994.
4(h) - Fourth Supplemental Note Indenture, dated as of
August 15, 1995.
4(i) - Fifth Supplemental Note Indenture, dated as of
February 1, 1996.
4(j) - 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.
4(k) - Support Agreement, dated as of March 8, 1996,
between the Company and Detroit Edison.
*10(a) - Form of 1995 Indemnification Agreement between the
Company and its directors and officers.
*10(b) - Form of Indemnification Agreement between Detroit
Edison and its officers other than those identified
in *10(l).
*10(c) - The Detroit Edison Company Shareholder Value
Improvement Plan - A, as amended and restated
effective January 1, 1996.
88
Exhibit
Number
*10(d) - The Detroit Edison 1996 Shareholder Value
Improvement Plan - A.
*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 Detroit Edison Company Savings
Reparation Plan.
*10(h) - Certain arrangements pertaining to the employment
of Haven E. Cockerham.
*10(i) - Third Restatement of the Retirement Reparation Plan
for Certain Employees of Detroit Edison, effective
as of January 1, 1996.
*10(j) - Third Restatement of the Benefit Equalization Plan
for Certain Employees of Detroit Edison, effective
as of January 1, 1996.
*10(k) - Certain arrangements pertaining to the employment
of Larry G. Garberding.
*10(l) - Form of Indemnification Agreement, between Detroit
Edison and (1) John E. Lobbia, (2) Larry G.
Garberding and (3) Anthony F. Earley, Jr.
*10(m) - Form of Indemnification Agreement between Detroit
Edison and its directors.
*10(n) - Detroit Edison Key Employee Deferred Compensation
Plan (January, 1990).
*10(o) - Executive Vehicle Program, dated October 1, 1993.
*10(p) - Amendment No. 1 to Executive Vehicle Plan, November
1993.
*10(q) - Certain arrangements pertaining to the employment
of Gerard M. Anderson.
89
Exhibit
Number
*10(r) - Third Restatement of The Detroit Edison Company
Management Supplemental Benefit Plan, effective as
of January 1, 1996.
*10(s) - Third Restatement of The Detroit Edison Company
Plan for Deferring the Payment of Directors' Fees
(January 1, 1996).
*10(t) - DTE Energy Company Retirement Plan for Non-Employee
Directors (January 1, 1996).
*10(u) - DTE Energy Company Plan for Deferring the Payment
of Directors' Fees (January 1, 1996).
*10(v) - Long-Term Incentive Plan.
99(a) - Belle River Participation Agreement between Detroit
Edison and Michigan Public Power Agency, dated as
of December 1, 1982.
99(b) - Belle River Transmission Ownership and Operating
Agreement between Detroit Edison 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 Detroit Edison.
99(d) - First Amendment to 1988 Amended and Restated Loan
Agreement, dated as of February 1, 1990, between
Detroit Edison and Renaissance.
99(e) - Second Amendment to 1988 Amended and Restated Loan
Agreement, dated as of September 1, 1993, between
Detroit Edison and Renaissance.
99(f) - $200,000,000 364-Day Credit Agreement, dated as of
September 1, 1993, among Detroit Edison, Renaissance
and Barclays Bank PLC, New York Branch, as Agent.
99(g) - 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,
90
Exhibit
Number
Renaissance Energy Company, the Banks party thereto
and Barclays Bank, PLC, New York Branch, as Agent.
99(h) - Third Amendment, dated as of March 8, 1996, to
$200,000,000 364-Day Credit Agreement, dated
September 1, 1993, as amended, among Detroit
Edison, Renaissance, the Banks party thereto and
Barclays Bank, PLC, New York Branch, as Agent.
99(i) - Fourth Amendment, dated as of August 29, 1996, to
$200,000,000 364-Day Credit Agreement as of
September 1, 1990, as amended, among Detroit
Edison, Renaissance, the Banks party thereto and
Barclays Bank, PLC, New York Branch, as Agent.
99(j) - $200,000,000 Three-Year Credit Agreement, dated
September 1, 1993, among Detroit Edison, Renaissance
and Barclays Bank PLC, New York Branch, as Agent.
99(k) - 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(l) - Third Amendment, dated as of March 8, 1996, to
$200,000,000 Three-Year Credit Agreement, dated
September 1, 1993, as amended among Detroit Edison,
Renaissance, the Banks party thereto and Barclays
Bank, PLC, New York Branch, as Agent.
99(m) - Fourth Amendment, dated as of September 1, 1996,
to $200,000,000 Multi-Year (formerly Three-Year)
Credit Agreement, dated as of September 1, 1993, as
amended among Detroit Edison, Renaissance, the Banks
party thereto and Barclays Bank, PLC, New York
Branch, as Agent.
99(n) - 1988 Amended and Restated Nuclear Fuel Heat
Purchase Contract, dated October 4, 1988, between
Detroit Edison and Renaissance.
99(o) - First Amendment to 1988 Amended and Restated
Nuclear Fuel Heat Purchase Contract, dated as of
February 1, 1990, between Detroit Edison and
Renaissance.
91
Exhibit
Number
99(p) - Second Amendment, dated as of September 1, 1993,
to 1988 Amended and Restated Nuclear Fuel Heat
Purchase Contract between Detroit Edison and
Renaissance.
99(q) - 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.
99(r) - Fourth Amendment, dated as of March 8, 1996, to
1988 Amended and Restated Nuclear Fuel Heat
Purchase Contract Agreement, dated as of October 4,
1988, between Detroit Edison and Renaissance.
99(s) - Master Trust Agreement ("Master Trust"), dated as
of June 30, 1994, between Detroit Edison and
Fidelity Management Trust Company relating to the
Savings & Investment Plans.
99(t) - First Amendment, effective as of February 1, 1995,
to Master Trust.
99(u) - Second Amendment, effective as of February 1, 1995
to Master Trust.
99(v) - Third Amendment, effective January 1, 1996, to
Master Trust.
99(w) - The Detroit Edison Company Irrevocable Grantor
Trust for The Detroit Edison Company Savings
Reparation Plan.
99(x) - The Detroit Edison Company Irrevocable Grantor
Trust for The Detroit Edison Company Retirement
Reparation Plan.
99(y) - The Detroit Edison Company Irrevocable Grantor
Trust for The Detroit Edison Company Management
Supplemental Benefit Plan.
99(z) - The Detroit Edison Company Irrevocable Grantor
Trust for The Detroit Edison Company Benefit
Equalization Plan.
99(aa) - The Detroit Edison Company Irrevocable Grantor
Trust for The Detroit Edison Company Plan for
Deferring the Payment of Directors' Fees.
92
Exhibit
Number
99(bb) - The Detroit Edison Company Irrevocable Grantor
Trust for The DTE Energy Company Retirement Plan for
Non-Employee Directors.
99(cc) - DTE Energy Company Irrevocable Grantor Trust for
The DTE Energy Company Plan for Deferring the
Payment of Directors' Fees.
99(dd) - DTE Energy Company Irrevocable Grantor Trust for
The DTE Energy Company Retirement Plan for
Non-Employee Directors.
99(ee) - Credit Agreement, dated as of March 1, 1996 among
DTE Capital Corporation, the Initial Lenders named
therein, and Citibank, N.A., as Agent.
*Denotes management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report.