<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: MARCH 1, 1995
THE DETROIT EDISON COMPANY
(Exact name of registrant as specified in its charter)
MICHIGAN 1-2198 38-0478650
- ------------------------ ----------- -------------------
(State of Incorporation) (Commission (IRS Employer
File No.) Identification No.)
2000 SECOND AVENUE
DETROIT, MICHIGAN 48226
---------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (313) 237-8000
<PAGE> 2
Item 5 - Other Events
On January 23, 1995, the Registrant released its audited earnings for
1994. A copy of Registrant's audited Consolidated Financial Statements for
1994, together with the Notes to Consolidated Financial Statements,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Selected Financial Data and the Report of Independent Accountants
are set forth herein.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONTENTS PAGE
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<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7
Consolidated Statement of Common Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . 8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 9-20
Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-26
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
2
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of The Detroit Edison Company
In our opinion, the consolidated financial statements appearing on pages
4 through 20 of this report present fairly, in all material respects, the
financial position of The Detroit Edison Company and its subsidiary companies
at December 31, 1994 and 1993, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1994,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Detroit, Michigan
January 23, 1995
3
<PAGE> 4
The Detroit Edison Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands)
<TABLE>
<CAPTION>
-------------------------------------------
Year Ended December 31
- ---------------------------------------------------------------------------------------------------------------------
1994 1993 1992
-------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Electric - System $3,448,351 $3,467,357 $3,472,583
Electric - Interconnection 43,141 60,363 58,447
Steam 27,849 27,491 27,113
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Revenues $3,519,341 $3,555,211 $3,558,143
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel $ 719,215 $ 750,127 $ 704,371
Purchased power 116,947 91,747 126,101
Other operation 621,066 604,882 548,520
Maintenance 262,409 251,149 262,803
Depreciation and amortization 476,415 432,512 423,407
Deferred Fermi 2 depreciation and amortization (7,465) (8,959) (14,984)
Amortization of deferred Fermi 2 depreciation and return 84,828 30,888 -
Taxes other than income 255,874 261,449 252,011
Income taxes 270,657 297,469 302,758
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Expenses $2,799,946 $2,711,264 $2,604,987
- ---------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 719,395 $ 843,947 $ 953,156
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Allowance for other funds used during construction $ 1,684 $ 2,055 $ 1,363
Deferred Fermi 2 return - - 13,785
Other income and deductions (24,973) (24,961) (21,179)
Income taxes 8,111 8,594 7,108
Accretion income 13,644 44,130 45,695
Income taxes - disallowed plant costs and accretion income (4,252) (14,062) (15,576)
- ---------------------------------------------------------------------------------------------------------------------
Net Other Income and Deductions $ (5,786) $ 15,756 $ 31,196
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES $ 713,609 $ 859,703 $ 984,352
- ---------------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Long-term debt $ 273,763 $ 325,194 $ 388,580
Amortization of debt discount, premium and expense 10,832 9,114 3,952
Other 11,170 4,928 5,169
Allowance for borrowed funds used during construction (credit) (2,065) (1,436) (1,396)
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Charges $ 293,700 $ 337,800 $ 396,305
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 419,909 $ 521,903 $ 588,047
PREFERRED AND PREFERENCE STOCK DIVIDEND REQUIREMENTS 29,640 30,837 30,498
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS FOR COMMON STOCK $ 390,269 $ 491,066 $ 557,549
=====================================================================================================================
COMMON SHARES OUTSTANDING - AVERAGE 146,151,505 147,031,446 146,998,485
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $2.67 $3.34 $3.79
=====================================================================================================================
</TABLE>
(See accompanying Notes to Consolidated Financial Statements.)
4
<PAGE> 5
The Detroit Edison Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
------------------------------------------------
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 419,909 $ 521,903 $ 588,047
Adjustments to reconcile net income to net cash from
operating activities:
Accretion income (13,644) (44,130) (45,695)
Depreciation and amortization 476,415 432,512 423,407
Deferred Fermi 2 depreciation, amortization and return - net 77,363 21,929 (28,769)
Deferred income taxes and investment tax credit - net 93,287 85,574 132,179
Fermi 2 refueling outage - net (19,507) 17,856 (6,084)
Other (31,091) 32,367 6,714
Changes in current assets and liabilities:
Customer accounts receivable and unbilled revenues (505) 10,733 9,068
Other accounts receivable (7,593) (2,247) 17,815
Inventories (1,774) 33,839 5,239
Accounts payable (13,858) 21,364 (24,930)
Taxes payable (18,031) (6,499) (8,109)
Interest payable (6,174) (19,769) (15,199)
Other (2,189) 35,350 9,807
- -----------------------------------------------------------------------------------------------------------------------
Net cash from operating activities $ 952,608 $ 1,140,782 $ 1,063,490
- -----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Plant and equipment expenditures $ (366,392) $ (396,407) $ (415,937)
Purchase of leased equipment (11,500) (2,402) -
Nuclear decommissioning trust funds (46,563) (5,346) (4,482)
Non-utility investments (12,843) 182 (614)
Changes in current assets and liabilities 5,042 10,225 (7,897)
Other (11,537) (19,988) 2,047
- -----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities $ (443,793) $ (413,736) $ (426,883)
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Sale of cumulative preferred stock $ - $ 200,000 $ -
Sale of general and refunding mortgage bonds 200,000 1,510,000 350,000
Funds received from Trustees: Installment sales contracts and
loan agreements 50,470 76,510 348,960
Increase (decrease) in short-term borrowings (98,715) 109,210 (9,000)
Redemption of long-term debt (258,034) (2,024,289) (957,859)
Redemption of preferred and preference stock - (164,158) (22,005)
Premiums on reacquired long-term debt and
preferred and preference stock (11,563) (81,453) (16,556)
Purchase of common stock (59,855) - -
Dividends on common, preferred and preference stock (331,445) (330,792) (318,349)
Other (2,622) (20,417) (9,225)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities $ (511,764) $ (725,389) $ (634,034)
- -----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS $ (2,949) $ 1,657 $ 2,573
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF THE PERIOD 11,071 9,414 6,841
- -----------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF THE PERIOD $ 8,122 $ 11,071 $ 9,414
=======================================================================================================================
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid (excluding interest capitalized) $ 289,375 $ 346,542 $ 406,571
Income taxes paid 183,172 233,542 178,786
New capital lease obligations 9,328 36,606 39,320
</TABLE>
For purposes of the consolidated financial statements, the Company considers
investments purchased with a maturity of three months or less to be temporary
cash investments.
(See accompanying Notes to Consolidated Financial Statements.)
5
<PAGE> 6
The Detroit Edison Company and Subsidiary Companies
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
-----------------------------
December 31
ASSETS
1994 1993
-----------------------------
<S> <C> <C>
UTILITY PROPERTIES
Plant in service
Electric $12,941,414 $12,557,267
Steam 69,813 70,948
- -----------------------------------------------------------------------------------------------------------
$13,011,227 $12,628,215
Less: Accumulated depreciation and amortization (4,529,692) (4,137,881)
- -----------------------------------------------------------------------------------------------------------
$ 8,481,535 $ 8,490,334
Construction work in progress 104,431 160,230
- -----------------------------------------------------------------------------------------------------------
Net utility properties $ 8,585,966 $ 8,650,564
- -----------------------------------------------------------------------------------------------------------
Property under capital leases (less accumulated amortization
of $94,678 and $101,381, respectively) $ 134,542 $ 154,837
Nuclear fuel under capital lease (less accumulated amortization
of $374,405) 193,411 184,083
- -----------------------------------------------------------------------------------------------------------
Net property under capital leases $ 327,953 $ 338,920
- -----------------------------------------------------------------------------------------------------------
Total owned and leased properties $ 8,913,919 $ 8,989,484
- -----------------------------------------------------------------------------------------------------------
OTHER PROPERTY AND INVESTMENTS
Non-utility property $ 11,281 $ 10,053
Investments and special funds 18,722 15,914
Nuclear decommissioning trust funds 76,492 29,929
- -----------------------------------------------------------------------------------------------------------
$ 106,495 $ 55,896
- -----------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments $ 8,122 $ 11,071
Customer accounts receivable and unbilled revenues (less allowance
for uncollectible accounts of $30,000 and $34,000, respectively) 195,824 195,319
Other accounts receivable 34,212 26,619
Inventories (at average cost)
Fuel 136,331 129,024
Materials and supplies 155,921 165,187
Prepayments 10,516 10,914
- -----------------------------------------------------------------------------------------------------------
$ 540,926 $ 538,134
- -----------------------------------------------------------------------------------------------------------
DEFERRED DEBITS
Unamortized debt expense $ 42,876 $ 45,396
Unamortized loss on reacquired debt 123,996 124,567
Recoverable income taxes 663,101 771,277
Other postretirement benefits 36,562 48,568
Fermi 2 phase-in plan 390,764 475,592
Fermi 2 deferred amortization 52,259 44,794
Other 122,080 41,171
- -----------------------------------------------------------------------------------------------------------
$ 1,431,638 $ 1,551,365
- -----------------------------------------------------------------------------------------------------------
TOTAL $10,992,978 $11,134,879
===========================================================================================================
</TABLE>
(See accompanying Notes to Consolidated Financial Statements.)
6
<PAGE> 7
The Detroit Edison Company and Subsidiary Companies
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
-----------------------------
December 31
- --------------------------------------------------------------------------------------------------------------
LIABILITIES
1994 1993
-----------------------------
<S> <C> <C>
CAPITALIZATION
Common stock - $10 par value, 400,000,000 shares authorized;
144,863,447 and 147,047,918 shares outstanding, respectively
(311,804 and 334,002 shares, respectively, reserved for conversion
of preferred stock) $ 1,448,635 $ 1,470,479
Premium on common stock 545,825 553,966
Common stock expense (47,461) (48,175)
Retained earnings used in the business 1,379,081 1,319,685
- -----------------------------------------------------------------------------------------------------------------
Total common shareholders' equity $ 3,326,080 $ 3,295,955
Cumulative preferred stock - $100 par value, 6,747,484 shares
authorized; 3,905,470 and 3,909,419 shares outstanding,
respectively (1,539,827 shares unissued)
Redeemable solely at the option of the Company 380,283 380,683
Long-term debt 3,825,296 3,830,596
- -----------------------------------------------------------------------------------------------------------------
Total Capitalization $ 7,531,659 $ 7,507,234
- -----------------------------------------------------------------------------------------------------------------
OTHER NON-CURRENT LIABILITIES
Obligations under capital leases $ 126,076 $ 141,043
Other postretirement benefits 37,143 48,567
Other 48,707 15,130
- -----------------------------------------------------------------------------------------------------------------
$ 211,926 $ 204,740
- -----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term borrowings $ 39,489 $ 138,204
Amounts due within one year
Long-term debt 19,214 19,649
Obligations under capital leases 201,877 197,877
Accounts payable 147,020 159,870
Property and general taxes 31,608 38,592
Income taxes 5,304 16,839
Accumulated deferred income taxes 32,625 63,046
Interest 60,214 66,388
Dividends payable 82,012 83,143
Payrolls 71,958 67,778
Fermi 2 refueling outage 1,267 20,774
Other 97,215 103,193
- -----------------------------------------------------------------------------------------------------------------
$ 789,803 $ 975,353
- -----------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS
Accumulated deferred income taxes $ 2,014,821 $ 1,986,463
Accumulated deferred investment tax credits 346,379 359,205
Other 98,390 101,884
- -----------------------------------------------------------------------------------------------------------------
$ 2,459,590 $ 2,447,552
- -----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4, 9, 12 and 13)
- -----------------------------------------------------------------------------------------------------------------
TOTAL $10,992,978 $11,134,879
=================================================================================================================
</TABLE>
(See accompanying Notes to Consolidated Financial Statements.)
7
<PAGE> 8
The Detroit Edison Company and Subsidiary Companies
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Common Stock Premium Retained
-------------------------- on Common Earnings
$10 Par Common Stock Used in the
Shares Value Stock Expense Business
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1991 146,983,123 $1,469,831 $553,463 $(48,150) $ 872,428
Issuance of common stock on conversion of
convertible cumulative preferred stock,
5 1/2% series 33,568 336 261 (13)
Expense associated with preferred and
preference stock redeemed (847)
Net income 588,047
Cash dividends declared
Common stock - $1.98 per share (291,066)
Cumulative preferred and
preference stock* (30,403)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 147,016,691 $1,470,167 $553,724 $(48,163) $1,138,159
Issuance of common stock on conversion of
convertible cumulative preferred stock,
5 1/2% series 31,227 312 242 (12)
Expense associated with preferred and
preference stock redeemed (6,634)
Net income 521,903
Cash dividends declared
Common stock - $2.06 per share (302,894)
Cumulative preferred and
preference stock* (30,849)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 147,047,918 $1,470,479 $553,966 $(48,175) $1,319,685
Issuance of common stock on conversion of
convertible cumulative preferred stock,
5 1/2% series 22,164 222 173 (9)
Common stock reacquired from Detroit Edison
Savings & Investment Plans,
August 4, 1994 (2,206,635) (22,066) (8,314) 723 (30,198)
Net income 419,909
Cash dividends declared
Common stock - $2.06 per share (300,676)
Cumulative preferred stock* (29,639)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 144,863,447 $1,448,635 $545,825 $(47,461) $1,379,081
=============================================================================================================================
</TABLE>
*At established rate for each series.
(See accompanying Notes to Consolidated Financial Statements.)
8
<PAGE> 9
THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
INDUSTRY SEGMENT - The Detroit Edison Company ("Company") is a regulated
public utility engaged in the generation, purchase, transmission, distribution
and sale of electric energy.
REGULATION - The Company is subject to regulation by the Michigan Public
Service Commission ("MPSC") and the Federal Energy Regulatory Commission
("FERC") with respect to accounting matters and maintains its accounts in
accordance with Uniform Systems of Accounts prescribed by these agencies. As a
regulated entity, taking into account the cost recovery restrictions contained
in the December 1988 and January 21, 1994 MPSC rate orders and the provisions
of the Energy Policy Act of 1992 ("Energy Act"), the Company meets the criteria
of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for
the Effects of Certain Types of Regulation." This accounting standard
recognizes the ratemaking process which results in differences in the
application of generally accepted accounting principles between regulated and
non-regulated businesses. Such differences concern mainly the time at which
various items enter into the determination of net income in order to follow the
principle of matching costs and revenues.
PRINCIPLES APPLIED IN CONSOLIDATION - The Consolidated Financial Statements
include the accounts of all subsidiary companies, all of which are
wholly-owned.
REVENUES - The Company records unbilled revenues for electric and steam heating
services provided after cycle billings through month-end.
PROPERTY, RETIREMENT AND MAINTENANCE, DEPRECIATION AND AMORTIZATION - Utility
properties are recorded at original cost less regulatory disallowances. In
general, the cost of properties retired in the normal course of business is
charged to accumulated depreciation. Expenditures for maintenance and repairs
are charged to expense, and the cost of new property installed, which replaces
property retired, is charged to property accounts. The annual provision for
depreciation is calculated on the straight-line remaining life method by
applying annual rates approved by the MPSC to the average of year-beginning and
year-ending balances of depreciable property by primary plant accounts.
Provision for depreciation of Fermi 2, excluding decommissioning expense, was
3.26% of average depreciable property for 1994 and 2.63% for 1993 and 1992,
except for $300 million being amortized over 10 years commencing in 1989 and
$513 million being amortized over 19 years commencing in 1990. See Note 3 and
Deferred Fermi 2 Amortization below. Provision for depreciation of all other
utility plant, as a percent of average depreciable property, was 3.2% for 1994,
3.4% for 1993 and 3.3% for 1992.
DEFERRED FERMI 2 DEPRECIATION AND RETURN - An MPSC authorized phase-in plan for
Fermi 2, effective in January 1988, provided for gradual rate increases in the
early years of plant operation rather than a one-time substantial rate increase
which conventional ratemaking would provide. SFAS No. 92, "Regulated
Enterprises - Accounting for Phase-in Plans," permits the capitalization of
costs deferred for future recovery under a phase-in plan. Accordingly, the
Company recorded non-cash income of deferred depreciation and deferred return
totaling $506.5 million through 1992. In 1992, deferred depreciation was $4.5
million and deferred return was $13.8 million. Beginning in 1993 and
continuing through 1998, these deferred amounts will be amortized to operating
expense as the cash recovery is realized through revenues. Amortization of
these deferred amounts totaled $84.8 million in 1994 and $30.9 million in 1993.
DEFERRED FERMI 2 AMORTIZATION - The December 1988 MPSC rate order provides for
the Company's February 1990 purchase of Wolverine Power Supply Cooperative,
Inc.'s ("Cooperative") ownership interest in Fermi 2 for $513 million to be
treated as a regulatory asset with a 19-year principal amortization and
associated interest of 8%, which is the composite average of the Cooperative
debt assumed by the Company at the time of the purchase. Since the
straight-line amortization of the regulatory asset exceeds the revenues
provided for such amortization during the first 10 years of the recovery
period, the Company is recording deferred amortization, a non-cash item of
income, totaling $67.2 million through 1999. For 1994, 1993 and 1992, the
amounts deferred were $7.5 million, $9 million and $10.5 million,
respectively. The deferred amounts will be amortized to operating expense as
the cash recovery is realized through revenues during the years 2000 through
2008.
PROPERTY TAXES - The Company accrues property taxes monthly during the fiscal
period of the applicable taxing authority.
INCOME TAXES - Deferred income taxes are provided for temporary differences
between book and taxable income to the extent authorized by the MPSC. For
federal income tax purposes, the Company computes depreciation using
accelerated methods and shorter depreciable lives. Investment tax credits
utilized which relate to utility property were deferred and are amortized over
the estimated composite service life of the related property. See Note 6.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION ("AFUDC") - AFUDC, a non-operating
non-cash item, is defined in the FERC Uniform System of Accounts to include
"the net cost for the period of construction of borrowed funds used for
construction purposes and a reasonable rate on other funds when so used."
AFUDC involves an accounting procedure whereby the approximate interest expense
and the cost of other (common, preferred and preference shareholders' equity)
funds applicable to the cost of construction are transferred from the income
statement to construction work in progress in the balance sheet. The cash
recovery of AFUDC, as well as other costs of construction, occurs as completed
projects are placed
9
<PAGE> 10
in service and related depreciation is authorized to be recovered through
customer rates. The Company capitalized AFUDC at 7.66% in 1994 and 9.65% in
1993 and 1992.
ACCRETION INCOME - In 1988, the Company adopted SFAS No. 90, "Regulated
Enterprises - Accounting for Abandonments and Disallowances of Plant Costs,"
and recorded indirect losses for Greenwood Unit No. 1, for the abandoned
Greenwood Unit Nos. 2 and 3 and for a portion of Fermi 2 as a discount
(reduction) of the Company's investment in these units. These net after-tax
losses, due to discounting, originally totaled $198 million, which amounts are
being restored to net income over the period 1988-1998 as the Company records a
non-cash return (accretion income) on its investment in these units. The
Company recorded $8.9 million, $29.5 million and $30.2 million of net after-tax
accretion income in 1994, 1993 and 1992, respectively.
CAPITALIZATION - DISCOUNT, PREMIUM AND EXPENSE - The discount, premium and
expense related to the issuance of long-term debt are amortized over the life
of each issue. In accordance with MPSC regulations, the discount, premium and
expense, when related to debt redeemed without refunding, are written off to
other income and deductions, and when related to debt redeemed with refunding,
are amortized over the life of the replacement issue. Capital stock premium
and expense related to redeemed preferred and preference stock are written off
against retained earnings used in the business.
FERMI 2 REFUELING OUTAGES - The Company recognizes the cost of Fermi 2
refueling outages over periods in which related revenues are recognized. Under
this procedure, the Company records a provision for incremental costs
anticipated to be incurred during the next scheduled Fermi 2 refueling outage.
See Note 2.
LEASES - See Note 9.
EMPLOYEES' RETIREMENT PLAN AND OTHER POSTRETIREMENT BENEFITS - See Note 13.
NOTE 2 - FERMI 2
GENERAL - Fermi 2, a nuclear generating unit, began commercial operation in
January 1988. Fermi 2 has a design electrical rating (net) of 1,139 megawatts
("MW"). However, due to certain equipment limitations, Fermi 2 is rated at
1,116 MW until modifications can be made to achieve the design rating. This
unit represents approximately 28% of total assets, 11% of total operation and
maintenance expenses and 11% of summer net rated capability.
MPSC rate orders issued in April 1986, January 1987, December 1988 and
January 1994 contain provisions with respect to the recovery of Fermi 2 costs.
See Note 3 for a discussion of Fermi 2 rate matters and the MPSC's treatment of
Fermi 2 project costs of $4.858 billion.
LICENSING AND OPERATION - The Nuclear Regulatory Commission ("NRC") maintains
jurisdiction over the licensing and operation of Fermi 2.
Fermi 2 was out of service in 1994. On December 25, 1993, the reactor
automatically shut down following a turbine-generator failure. Safety systems
responded within design and regulatory specifications. The turbine suffered
mechanical damage, the exciter and generator incurred mechanical and fire
damage, and the condenser had some internal damage. The fire was contained in
the turbine building, and there was no release of radioactive contaminants
during the event. The nuclear part of the plant was not damaged.
Major repairs have been completed and tests are continuing to balance
and synchronize the unit. The Company expects that most repair costs related
to returning the Fermi 2 turbine-generator to service will be covered by
insurance. These costs are estimated to be in the $70 million to $80 million
range. The Company has received partial insurance payments of $25 million for
property damage. In addition, the Company has received insurance payments of
$66 million for replacement power costs. As a result of an investigation as to
the cause of the December 1993 mechanical failure, the Company will replace
major Fermi 2 turbine components. Installation of new low-pressure turbine
sections is expected to add about 20 MW of generating capacity to the plant,
which would expand the plant's capability by about 2%.
In the interim period the Company will operate Fermi 2 without the
large seventh and eighth stage turbine blades until the next refueling, which
will reduce the Fermi 2 power output to a range of about 800 MW to 900 MW.
During the lower output period, new turbine shafts and blades will be
manufactured for the plant's three low-pressure turbines. These major
components will be installed during the next refueling outage in 1996.
Replacing the major turbine components in 1996 is expected to cost between
$30 million and $40 million. These costs will not be covered by insurance.
These costs will be capitalized and are expected to be recovered in rates
because such costs are less than the cumulative amount available under the cap
on Fermi 2 capital expenditures, a provision of the MPSC's December 1988 order.
See Note 3.
INSURANCE - The Company insures Fermi 2 with property damage insurance provided
by Nuclear Mutual Limited ("NML") and Nuclear Electric Insurance Limited
("NEIL"). The NML and NEIL insurance policies provide $500 million of
composite primary coverage (with a $1 million deductible) and $2.25 billion of
excess coverage, respectively, for stabilization, decontamination and debris
removal costs and repair and/or replacement of property. Accordingly, the
combined limits provide total property damage insurance of $2.75 billion.
10
<PAGE> 11
The Company maintains an insurance policy with NEIL providing for extra
expenses, including certain replacement power costs necessitated by Fermi 2's
unavailability due to an insured event. This policy, which has a 21-week
waiting period, provides for three years of coverage.
Under the NML and NEIL policies, the Company could be liable for maximum
retrospective assessments of up to approximately $28 million per loss if any
one loss should exceed the accumulated funds available to NML or NEIL.
As required by federal law, the Company maintains $200 million of public
liability insurance for a nuclear incident. Further, under the Price-Anderson
Amendments Act of 1988, deferred premium charges of $75.5 million could be
levied against each licensed nuclear facility, but not more than $10 million
per year per facility. On December 31, 1994, there were 110 licensed nuclear
facilities in the United States. Thus, deferred premium charges in the
aggregate amount of approximately $8.3 billion could be levied against all
owners of licensed nuclear facilities in the event of a nuclear incident.
Accordingly, public liability for a single nuclear incident is currently
limited to approximately $8.5 billion.
DECOMMISSIONING - The NRC has jurisdiction over the decommissioning of nuclear
power plants. An NRC rule requires decommissioning funding based upon a
site-specific estimate or a predetermined NRC formula. Using the NRC's
formula, the Company estimates that the cost of decommissioning Fermi 2 when
its license expires in the year 2025 is $489 million in current 1994 dollars
and $3 billion in future 2025 dollars. The assumed annual inflation rate used
to increase the cost to decommission is 6%, compounded annually.
The MPSC and FERC regulate the recovery of costs of decommissioning nuclear
power plants. A January 1994 MPSC order authorized a $500 million external
trust fund in 1994 dollars to finance the decommissioning of Fermi 2. The
MPSC's January 21, 1994 rate order includes an increase in rates for the
decommissioning of Fermi 2, which the Company believes will be adequate to fund
the estimated cost of decommissioning using the NRC formula. See Note 3. The
order approves a decommissioning surcharge on customer bills under which the
Company is currently collecting approximately $31.4 million annually, including
$3.5 million for the recovery of low-level radioactive waste disposal. The
FERC has approved the recovery of decommissioning expense in base rates, most
recently in its June 1993 order.
The Company has established external trust funds to hold decommissioning and
low-level radioactive waste disposal funds collected from customers. During
1994, 1993 and 1992, the Company collected $26.9 million, $3.7 million and $3.4
million, respectively, from customers for decommissioning Fermi 2. Also, in
1994, the Company collected $3.3 million from customers for low-level
radioactive waste disposal. Such amounts were recorded as components of
depreciation and amortization expense in the Consolidated Statement of Income
and accumulated depreciation and amortization in the Consolidated Balance
Sheet. Earnings on the external decommissioning trust fund assets during 1994,
1993 and 1992 were $1.3 million, $1.2 million and $1.0 million, respectively.
Earnings on the external low-level radioactive waste disposal trust fund assets
were $0.2 million in 1994. Trust fund earnings are recorded as an investment
with a corresponding credit to accumulated depreciation and amortization.
Trust fund assets are assumed to earn an after-tax rate of return of 7%,
compounded annually.
The external trust fund for low-level radioactive waste disposal costs was
initially established by charges to other operation expense in the Consolidated
Statement of Income of $1.4 million in 1993 and $5.9 million in 1992.
At December 31, 1994, the Company had a reserve of $51.5 million for the
future decommissioning of Fermi 2 and $10.8 million for low-level radioactive
waste disposal costs. These reserves are included in accumulated depreciation
and amortization in the Consolidated Balance Sheet with a like amount deposited
in external trust funds.
The Company also had a reserve of $14.2 million at December 31, 1994 for the
future decommissioning of Fermi 1, an experimental nuclear unit on the Fermi 2
site that has been shut down since 1972. This reserve is included in other
deferred credits in the Consolidated Balance Sheet with a like amount deposited
in an external trust fund. The Company estimates that the cost of
decommissioning Fermi 1 in the year 2025 is $19 million in current 1994 dollars
and $114 million in future 2025 dollars.
The staff of the Securities and Exchange Commission has questioned certain
of the current accounting practices of the electric utility industry regarding
the recognition, measurement and classification of decommissioning costs for
nuclear generating units in the financial statements of electric utilities. In
response to these questions, the Financial Accounting Standards Board has
agreed to review the accounting for removal costs, including decommissioning.
If current electric utility industry accounting practices for such
decommissioning are changed: (1) annual provisions for decommissioning could
increase, (2) the estimated cost for decommissioning could be recorded as a
liability rather than as accumulated depreciation, and (3) trust fund income
from the external decommissioning trusts could be reported as investment income
rather than as a reduction to decommissioning expense.
The Energy Act provided for a fund to be established for the decommissioning
and decontamination of existing United States Department of Energy ("DOE")
uranium enrichment facilities. Utilities with nuclear units are required to
pay for a portion of the cost by making annual payments into the fund over a 15
year period. The law directs state regulators to treat these payments as a
necessary and reasonable cost of fuel and, accordingly, the Company has
recorded a regulatory asset and liability in the Consolidated Balance Sheet to
reflect these costs.
11
<PAGE> 12
NUCLEAR FUEL DISPOSAL COSTS - The Company has a contract with the DOE for the
future storage and disposal of spent nuclear fuel from Fermi 2. Under the
terms of the contract, the Company makes quarterly payments to the DOE based
upon a fee of 1 mill per kilowatthour applied to the Fermi 2 electricity
generated and sold. The spent nuclear fuel disposal cost is included as a
component of the Company's nuclear fuel expense. The DOE has stated that it
will be unable to store spent nuclear fuel at a permanent repository until
after 2010. However, the DOE and utilities with nuclear units are pursuing
other interim storage options. The Company estimates that existing temporary
storage capacity at Fermi 2 will be sufficient until the year 2000, or until
2015 with the expansion of such storage capacity.
NOTE 3 - RATE MATTERS
The Company is subject to the primary regulatory jurisdiction of the MPSC,
which, from time to time, issues its orders pertaining to the Company's
conditions of service, rates and recovery of certain costs including the costs
of generating facilities. MPSC orders issued in December 1988 and on January
21, 1994 are currently in effect with respect to the Company's rates and
certain other revenue and operating-related matters.
On January 21, 1994, the MPSC issued an order reducing the Company's rates
in the amount of $78 million annually. The rate reduction was determined by
using a 1994 test year and an overall rate of return of 7.66%, incorporating an
11% return on common equity and a capital structure comprised of 40% common
equity, 55.01% long-term debt and 4.99% preferred stock. The MPSC order
includes the recovery of (1) increased Fermi 2 decommissioning costs of $28.1
million annually, which includes the recovery of low-level radioactive waste
disposal costs, (2) full recovery of 1994 other postretirement benefit costs
plus recovery and amortization of the 1993 deferred cost (see Note 13), (3)
costs associated with the return to rate base of Greenwood Unit No. 1, (4)
Fermi 2 phase-in plan revenue requirements of $70.8 million in 1994 and (5)
costs associated with a three-year $41.5 million ($7.6 million in 1994, $14.9
million in 1995 and $19 million in 1996) demand-side management program. In
keeping with the MPSC's recognition of the need for industrial customers to be
competitive, the January 1994 rate reduction was allocated among the various
classes of customers approximately as follows: Industrial-$43 million,
Commercial-$24 million, Residential-$10 million and Governmental-$1 million.
The order was effective for service rendered on and after January 22, 1994 and
is the subject of various appeals before the Michigan Court of Appeals.
INDUSTRIAL RATES - In August 1994, the Company entered into 10-year special
manufacturing contracts which, if approved by the MPSC, will lower costs for
the Company's three largest customers (Chrysler Corporation, Ford Motor Company
and General Motors Corporation) without impacting the rates or service of other
customers. Annual revenue reductions will range in amounts from about $30
million in 1995 to $50 million for 1999 through 2004. The Company expects to
offset these reductions by further reducing operating expenses.
In August 1994, the Company filed an application with the MPSC seeking
approval of the special manufacturing contracts. The Commission scheduled
expedited hearings in this case, which were completed in December 1994. An
order approving these long-term contracts is expected to be issued in March
1995.
FERMI 2 - The December 1988 MPSC order established, for the period
January 1989 through December 2003, (1) a cap on Fermi 2 capital additions of
$25 million per year, in 1988 dollars adjusted by the Consumers Price Index
("CPI"), cumulative, (2) a cap on Fermi 2 non-fuel operation and maintenance
expenses adjusted by the CPI and (3) a capacity factor performance standard
based on a three-year rolling average commencing in 1991. For a capital
investment of $200 million or more (in 1988 dollars adjusted by the CPI), the
Company must obtain prior MPSC approval to be included in rate base. See Note
1 - Regulation.
Under the cap on Fermi 2 capital expenditures, the cumulative amount
available totals $50 million (in 1994 dollars) at December 31, 1994. Under the
cap on non-fuel operation and maintenance expenses, the cumulative amount
available totals $31 million (in 1994 dollars) at December 31, 1994.
Under the capacity factor performance standard, a disallowance of net
incremental replacement power cost will be imposed for the amount by which the
Fermi 2 three-year rolling average capacity factor is less than the greater of
either the average of the top 50% of U.S. boiling water reactors or 50%. For
purposes of the capacity factor performance standard, the capacity for Fermi 2
for the period 1989-1993 shall be 1,093 MW, and 1,139 MW for each year
thereafter until December 31, 2003.
As discussed in Note 2, Fermi 2 was out of service in 1994 and will operate
at a reduced power output until the installation of major turbine components
during the next refueling outage in 1996. As a result, the three-year rolling
average capacity factor will be unfavorably affected in 1994-1997. The plant's
capacity factor was 0%, 86.5% and 76.6% during 1994, 1993 and 1992,
respectively, or a three-year rolling average of 54.4% in 1994. The average
capacity factor for the top 50% of U.S. boiling water reactors for the
36-month period ending September 1994, was 79.2%. The Company has accrued
for the Fermi 2 capacity factor performance standard disallowances that will be
imposed during the period 1994-1997.
In accordance with April 1986 and December 1988 MPSC rate orders, ratemaking
treatment of the Company's Fermi 2 project costs of $4.858 billion is as
follows:
12
<PAGE> 13
(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 by the Company in 1988.
At December 31, 1994, the Company's net plant investment in Fermi 2 was $3.1
billion ($3.9 billion less accumulated depreciation and amortization of $0.8
billion).
Under the December 1988 MPSC order, if nuclear operations at Fermi 2
permanently cease, amortization in rates of the $300 million and $513 million
investments in Fermi 2 would continue and the remaining net rate base
investment amount shall be removed from rate base and amortized in rates,
without return, over 10 years with such amortization not to exceed $290 million
per year. In this event, unamortized amounts of deferred depreciation and
deferred return, recorded in the Consolidated Balance Sheet under the phase-in
plan prior to the removal of Fermi 2 from rate base, will continue to be
amortized, with a full return on such unamortized balances, so that all amounts
deferred are recovered during the period ending no later than December 31,
1998. The December 1988 and January 21, 1994 rate orders do not address the
costs of decommissioning if operations at Fermi 2 prematurely cease.
The Company has and believes it will continue to operate under the terms of
all applicable MPSC orders with no significant adverse effects as a result of
any cost recovery restrictions contained therein.
NOTE 4 - JOINTLY-OWNED UTILITY PLANT
The Company's portion of jointly-owned utility plant is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
LUDINGTON
PUMPED
BELLE RIVER STORAGE
- ------------------------------------------------------------------------------------
<S> <C> <C>
In-service date 1984-1985 1973
Undivided ownership interest * 49%
Investment (millions) $1,026.6 $174.3
Accumulated depreciation
(millions) $ 297.8 $ 67.1
</TABLE>
* The Company's undivided ownership interest is 62.78% in Unit No. 1,
81.39% of the portion of the facilities applicable to Belle River
used jointly by the Belle River and St. Clair Power Plants, 49.59%
in certain transmission lines and, at December 31, 1994, 75% in
facilities used in common with Unit No. 2.
BELLE RIVER - The Michigan Public Power Agency ("MPPA") has an undivided
ownership interest in Belle River Unit No. 1 and certain other related
facilities. MPPA is entitled to 18.61% of the capacity and energy of the
entire plant and is responsible for the same percentage of the plant's
operation and maintenance expenses and capital improvements. The Company is
obligated to provide MPPA with backup power when either unit is out of service.
The Company was required to purchase MPPA's capacity and energy entitlement
through 1994. Such purchases were 80% for 1992, 20% for 1993 and 10% for 1994.
The cost for the buyback of power was based on MPPA's plant-related investment,
interest costs incurred by MPPA on their original project financing plus 2.5%,
and certain other costs such as depreciation and operation and maintenance
expenses. Buyback payments to MPPA were $50.9 million, $12.5 million and $6.0
million for 1992, 1993 and 1994, respectively.
LUDINGTON PUMPED STORAGE - Operation, maintenance and other expenses of the
Ludington Pumped Storage Plant ("Ludington") are shared by the Company and
Consumers Power Company ("Consumers") in proportion to their respective
interests in the plant. See Note 12 for a discussion of litigation related to
Ludington.
NOTE 5 - SALE OF ACCOUNTS RECEIVABLE AND UNBILLED REVENUES
The Company has an agreement providing for the sale and assignment, from time
to time, of an undivided ownership interest in $200 million of the Company's
customer accounts receivable and unbilled revenues.
At December 31, 1994 and 1993, customer accounts receivable and unbilled
revenues in the Consolidated Balance Sheet have been reduced by $200 million
reflecting the sale. All expenses associated with the program are being
charged to other income and deductions in the Consolidated Statement of Income.
NOTE 6 - INCOME TAXES
Total income tax expense as a percent of income before tax varies from the
statutory federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Percent of Income Before Tax
------------------------------------------------------
1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory income tax rate 35.0% 35.0% 34.0%
Deferred Fermi 2 depreciation
and return 3.5 1.1 (0.6)
Investment tax credit (1.9) (1.7) (1.9)
Depreciation 5.5 3.9 3.3
Other-net (3.2) (1.6) (0.2)
------------------------------------------------------
Effective income tax rate 38.9% 36.7% 34.6%
======================================================
</TABLE>
13
<PAGE> 14
Components of income taxes were applicable to the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C> <C>
Operating expenses
Current $195,848 $243,480 $204,346
Deferred-net ---------------------------------------------
Borrowed funds component of AFUDC (1,081) (1,081) (1,081)
Depreciation and amortization 52,873 74,567 70,864
Property taxes (23,640) (9,590) 3,952
Alternative minimum tax - 28,174 50,537
Fermi 2 capitalized labor and
expenses (1,998) (1,692) (1,692)
Nuclear fuel 14,645 (1,543) 6,313
Fermi 2 performance reserve (10,850) - -
Reacquired debt losses 43,162 - -
Indirect construction costs (1,268) (1,268) (1,268)
Uncollectible accounts 1,380 (700) (3,060)
Contributions in aid of construction (6,898) (3,756) (4,877)
Fermi 2 refueling outage 6,798 (6,136) 2,068
Shareholder value improvement plan 2,244 559 (2,256)
Coal contract buyouts (401) (1,411) (1,918)
Injuries and damages (1,071) (5,855) -
Steam purchase reserve - (3,850) -
Employee reorganization expenses 4,200 (4,200) -
Pensions and benefits 10,130 4,925 3,708
Other (590) 1,073 (6,110)
---------------------------------------------
87,635 68,216 115,180
---------------------------------------------
Investment tax credit-net
Utilized 2,612 250 (417)
Amortized (15,438) (14,477) (16,351)
---------------------------------------------
(12,826) (14,227) (16,768)
---------------------------------------------
Total 270,657 297,469 302,758
---------------------------------------------
Other income and deductions
Current (8,083) (7,712) (5,464)
Deferred-net (28) (882) (1,644)
---------------------------------------------
Total (8,111) (8,594) (7,108)
---------------------------------------------
Disallowed plant costs and accretion income
Current (18,384) (18,405) (19,835)
Deferred-net
Disallowed plant costs 17,863 17,863 19,874
Accretion income 4,773 14,604 15,537
---------------------------------------------
Total 4,252 14,062 15,576
---------------------------------------------
Total income taxes $266,798 $302,937 $311,226
=============================================
</TABLE>
The Fermi 2 phase-in plan required the Company to record additional deferred
income tax expense related to deferred depreciation totaling $33.5 million,
with this amount amortized to income over the six-year period ending December
31, 1998.
In January 1993, the Company adopted SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires an asset and liability approach for financial
accounting and reporting for income taxes. At January 1, 1993, the Company
recorded an increase in accumulated deferred income tax liabilities of $740
million representing (a) the tax effect of temporary differences not previously
recognized and (b) the recomputing of its tax liability at the current tax
rate. The liability increase was offset by a regulatory asset of equal value,
titled "Recoverable Income Taxes" in the Consolidated Balance Sheet. This
regulatory asset represents the future revenue recovery from customers for
these taxes as they become payable, with no effect on net income. In August
1993, the Omnibus Budget Reconciliation Act of 1993 increased the federal
corporate income tax rate from 34% to 35% retroactive to January 1, 1993. As a
result, the Company recorded (1) an increase of $88.1 million in accumulated
deferred income tax liabilities, offset by a corresponding increase in
"Recoverable Income Taxes," and (2) an increase of $10.4 million in income tax
expense.
At December 31, 1994, "Recoverable Income Taxes" totaled $663.1 million
(deferrals of $828.1 million in 1993 less amortization of $108.2 million in
1994 and $56.8 million in 1993).
Deferred income tax assets (liabilities) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1994 1993
- ------------------------------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C>
Property $(2,070,943) $(2,023,328)
Fermi 2 deferred depreciation and return (170,668) (207,724)
Property taxes (52,913) (76,553)
Investment tax credit 187,000 195,000
Reacquired debt losses (43,162) -
Other 103,240 63,096
----------- -----------
$(2,047,446) $(2,049,509)
=========== ===========
Deferred income tax liabilities $(2,566,578) $(2,590,064)
Deferred income tax assets 519,132 540,555
----------- -----------
$(2,047,446) $(2,049,509)
=========== ===========
</TABLE>
In 1993, the MPSC issued an order, in a generic proceeding, authorizing
accounting procedures consistent with SFAS No. 109 and providing assurance that
the effects of previously flowed-through tax benefits will continue to be
allowed rate recovery.
The federal income tax returns of the Company are settled through the year
1988. The Company believes that adequate provisions for federal income taxes
have been made through December 31, 1994.
14
<PAGE> 15
NOTE 7 - COMMON STOCK AND CUMULATIVE PREFERRED AND PREFERENCE STOCK
At December 31, the outstanding Cumulative Preferred Stock redeemable solely at
the option of the Company was:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Date of Issuance 1994 1993
- ------------------------------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C> <C>
CUMULATIVE PREFERRED STOCK
5 1/2% Convertible Series, 55,470 and 59,419 shares,
respectively October 1967 $ 5,547 $ 5,942
7.68% Series, 500,000 shares March 1971 50,000 50,000
7.45% Series, 600,000 shares November 1971 60,000 60,000
7.36% Series, 750,000 shares December 1972 75,000 75,000
7.75% Series, 1,500,000 shares February 1993 150,000 150,000
7.74% Series, 500,000 shares April 1993 50,000 50,000
Preferred stock expense (10,264) (10,259)
-----------------------
Total Cumulative Preferred Stock $380,283 $380,683
=======================
</TABLE>
The Convertible Cumulative Preferred Stock, 5 1/2% Series, is convertible by
the holder into Common Stock. The conversion price was $17.79 per share at
December 31, 1994. The number of shares converted during 1994, 1993 and 1992
was 3,949, 5,563 and 5,978, respectively. The number of shares of Common Stock
reserved for issuance upon conversion and the conversion price are subject to
further adjustment in certain events. This Series may be redeemed at any time
in whole or in part at the option of the Company at $100 per share, plus
accrued dividends.
The Company's 7.68% Series, 7.45% Series and 7.36% Series Cumulative
Preferred Stock are redeemable solely at the option of the Company at a per
share redemption price of $101, plus accrued dividends.
The Company's 7.75% Series and 7.74% Series Cumulative Preferred Stock are
redeemable solely at the option of the Company at a per share redemption price
of $100 (equivalent to $25 per Depositary Share), plus accrued dividends, on
and after April 15, 1998 and July 15, 1998, respectively.
Apart from MPSC approval and the requirement that common, preferred and
preference stock be sold for at least par value, there are no legal
restrictions on the issuance of additional authorized shares of such stock.
At December 31, 1994, there was no outstanding Cumulative Preferred Stock
subject to mandatory redemption.
At December 31, 1994, the Company had Cumulative Preference Stock of $1 par
value, 30,000,000 shares authorized with 30,000,000 shares unissued.
On August 4, 1994, the Company purchased 2,206,635 shares of its $10 par
value Common Stock at a price of $27.125 per share, totaling $59.9 million,
from the trustee of the Detroit Edison Savings & Investment Plans. These
shares were canceled and reverted to the status of authorized but unissued
shares.
NOTE 8 - SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS
As described below, at December 31, 1994, the Company had total short-term
credit arrangements of approximately $405 million. At December 31, 1994 and
December 31, 1993, $39.5 million and $138.2 million of short-term borrowings
were outstanding with weighted average interest rates of 6.2% and 3.4%,
respectively.
The Company had bank lines of credit of $200 million, all of which had
commitment fees in lieu of compensating balances. Commitment fees incurred in
1994 for bank lines of credit were approximately $0.3 million. The Company
uses bank lines of credit to support the issuance of commercial paper and bank
loans. All borrowings are at prevailing money market rates which are below the
banks' prime lending rates.
In May 1993, FERC issued its order authorizing the continuation of the
Company's $1 billion of short-term borrowing authority. This authority will be
in effect through May 31, 1995.
The Company has a nuclear fuel financing arrangement (heat purchase
contract) with Renaissance Energy Company ("Renaissance"), an unaffiliated
company. Renaissance may issue commercial paper or borrow from participating
banks on the basis of promissory notes. To the extent the maximum amount of
funds available to Renaissance (currently $400 million) is not needed by
Renaissance to purchase nuclear fuel, such funds may be loaned to the Company
for general corporate purposes pursuant to a separate Loan Agreement. At
December 31, 1994, approximately $205 million was available to the Company
under such Loan Agreement. See Note 9 for a discussion of the Company's heat
purchase contract with Renaissance.
Renaissance entered into five-year interest rate swap agreements, guaranteed
by the Company, in December 1990, with five banks for a nominal amount of $125
million. These agreements are used to reduce the potential impact of increases
in interest rates on the variable rate debt by exchanging the receipt of
variable rate amounts for fixed interest payments at rates ranging from 8.12%
to 8.145% over the life of the agreements. The differential to be paid or
received is recognized as an adjustment to the interest component included as
part of nuclear fuel expense.
15
<PAGE> 16
NOTE 9 - LEASES
Future minimum lease payments under long-term noncancellable leases, consisting
of nuclear fuel ($221 million computed on a projected units of production
basis), lake vessels ($48 million), locomotives and coal cars ($149 million),
office space ($28 million) and computers, vehicles and other equipment ($6
million) at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(MILLIONS) (MILLIONS)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 $103 1998 $ 41
1996 99 1999 23
1997 61 Remaining years 125
----
Total $452
====
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Company has a heat purchase contract with Renaissance which provides for
the purchase by Renaissance for the Company of up to $400 million of nuclear
fuel, subject to the continued availability of funds to Renaissance to purchase
such fuel. Title to the nuclear fuel is held by Renaissance. The Company
makes quarterly payments under the heat purchase contract based on the
consumption of nuclear fuel for the generation of electricity. Renaissance's
investment in nuclear fuel was $193 million and $184 million at December 31,
1994 and 1993, respectively. The increase in 1994 from 1993 of $9 million
includes purchases of $3 million and capitalized interest of $6 million.
Under SFAS No. 71, amortization of leased assets is modified so that the
total of interest on the obligation and amortization of the leased asset is
equal to the rental expense allowed for ratemaking purposes. For ratemaking
purposes, the MPSC has treated all leases as operating leases. Net income is
not affected by capitalization of leases.
Rental expenses for both capital and operating leases were $49 million
(including $8 million for nuclear fuel), $126 million (including $89 million
for nuclear fuel) and $108 million (including $70 million for nuclear fuel) for
1994, 1993 and 1992, respectively.
NOTE 10 - LONG-TERM DEBT
- -----------------------------------------------------------------------------
The Company's 1924 Mortgage and Deed of Trust ("Mortgage"), the lien of which
covers substantially all of the Company's properties, provides for the issuance
of additional bonds. At December 31, 1994, approximately $3.1 billion principal
amount of Mortgage Bonds could have been issued on the basis of property
additions, combined with an earnings test provision, assuming an interest rate
of 8.9% on any such additional Mortgage Bonds. An additional $1.2 billion
principal amount of Mortgage Bonds could have been issued on the basis of bond
retirements.
Long-term debt outstanding at December 31 was:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Interest Rate 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C> <C>
GENERAL AND REFUNDING MORTGAGE BONDS
Series R, due 12/1/96 6 % $ 100,000 $ 100,000
Series S, due 10/1/98 6.4 150,000 150,000
1989 Series A, due 7/1/19 9 7/8 - 168,285
1990 Series A, due 3/31/20 7.904 163,254 169,533
1990 Series B, due 3/31/16 7.904 209,352 218,868
1990 Series C, due 3/31/14 8.357 68,380 71,799
1992 Series D, due 8/1/02 and 8/1/22 7.605 * 290,000 300,000
1992 Series E, due 12/15/99 6.83 50,000 50,000
1993 Series B, due 12/15/99 6.83 50,000 50,000
1993 Series C, due 1/15/03 and 1/13/23 7.939 * 225,000 225,000
1993 Series D, due 4/1/99 6.45 100,000 100,000
1993 Series E, due 3/15/00, 3/17/03 and 3/15/23 6.854 * 390,000 400,000
1993 Series G, due 5/1/97 and 5/1/01 5.921 * 225,000 225,000
1993 Series J, due 6/1/18 7.74 270,000 300,000
Less: Unamortized net discount (182) (1,906)
Amount due within one year (19,214) (19,214)
-------------------------
$2,271,590 $2,507,365
-------------------------
REMARKETED NOTES
Secured by corresponding amounts of General and
Refunding Mortgage Bonds
1993 Series H, due 7/15/28 5.839 ** $ 50,000 $ 50,000
1993 Series K, due 8/15/33 4 5/8 ** 160,000 160,000
1994 Series C, due 8/15/34 6.708 ** 200,000 -
Less: Unamortized net discount (177) (181)
-------------------------
$ 409,823 $ 209,819
-------------------------
</TABLE>
<TABLE>
<CAPTION>
Interest Rate 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C> <C>
TAX EXEMPT REVENUE BOND OBLIGATIONS
Secured by corresponding amounts of General and
Refunding Mortgage Bonds
Installment Sales Contracts, due 9/1/05 - 9/1/24 7.32%* $ 302,155 $ 306,440
Less: Unamortized net discount (279) (293)
Funds on deposit with Trustee - (160)
Amount due within one year - (435)
-----------------------------
$ 301,876 $ 305,552
-----------------------------
Loan Agreements, due 7/15/08 - 8/1/24 6.73 * $ 487,495 $ 467,025
Less: Unamortized net discount (73) -
-----------------------------
$ 487,422 $ 467,025
-----------------------------
Unsecured
Installment Sales Contracts, due 12/15/15 - 12/1/19 8.95 * $ 314,060 $ 290,360
-----------------------------
Loan Agreements, due 4/15/10 - 10/1/24 5.02 * $ 40,525 $ 50,475
-----------------------------
$1,143,883 $1,113,412
-----------------------------
Total Long-Term Debt $3,825,296 $3,830,596
=============================
</TABLE>
* Weighted average interest rate at December 31, 1994.
** Variable rate at December 31, 1994.
16
<PAGE> 17
In 1995, 1996, 1997, 1998 and 1999, long-term debt maturities consist of $19
million, $119 million, $144 million, $169 million and $219 million,
respectively.
In June 1992, the Company entered into a three-year interest rate swap
agreement matched to a $31 million variable rate tax exempt revenue bond. This
agreement is used to reduce the potential impact of increases in interest rates
on the variable rate debt by exchanging the receipt of variable rate amounts
for fixed interest payments at a rate of 4.32% over the life of the agreement.
The differential to be paid or received is recognized as an adjustment to
interest expense related to the debt.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
CASH AND TEMPORARY CASH INVESTMENTS/SHORT-TERM BORROWINGS
The carrying amount approximates fair value because of the short maturity of
those instruments.
OTHER INVESTMENTS
The fair value of the Company's other investments was not estimated since
they are not material and because some are already recorded at fair value.
NUCLEAR DECOMMISSIONING TRUST FUNDS
The fair value of the Company's nuclear decommissioning trust funds is
estimated based on quoted market prices for securities and carrying amount for
the cash equivalents.
SALE OF ACCOUNTS RECEIVABLE AND UNBILLED REVENUES
The carrying amount approximates fair value because of the short maturity of
accounts receivable and unbilled revenues pledged for sale.
CUMULATIVE PREFERRED STOCK
The fair value of the Company's preferred stock outstanding is estimated
based on the quoted market prices for the same or similar issues.
LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
CUSTOMER SURETY DEPOSITS
Surety deposits, including interest as specified by MPSC regulation, are
returned to customers. The carrying amount approximates fair value.
The estimated fair values of the Company's financial instruments at December
31, all of which are held or issued for purposes other than trading, are as
follows:
<TABLE>
<CAPTION>
1994 1993
-------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Thousands)
<S> <C> <C> <C> <C>
Cash and temporary cash investments $ 8,122 $ 8,122 $ 11,071 $ 11,071
Other investments 15,168 15,168 2,809 2,809
Nuclear decommissioning trust funds 76,492 76,492 29,929 31,290
Sale of accounts receivable and
unbilled revenues 200,000 200,000 200,000 200,000
Cumulative preferred stock 390,547 336,249 390,942 396,154
Long-term debt 3,844,510 3,511,459 3,850,405 4,106,216
Short-term borrowings 39,489 39,489 138,204 138,204
Customer surety deposits 10,870 10,870 10,819 10,819
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS - The Company has entered into purchase commitments of
approximately $638 million at December 31, 1994, which includes, among other
things, the costs of major turbine components to be replaced at Fermi 2 and
line construction and clearance costs. The Company also has entered into
substantial long-term fuel supply and transportation commitments.
The Company has an Energy Purchase Agreement ("Agreement") for the purchase
of steam and electricity from the Detroit Resource Recovery Facility. Under
the Agreement, the Company will purchase steam through the year 2008 and
electricity through June 30, 2024. Purchases of steam and electricity were
$21.3 million, $23.6 million and $24.5 million for 1992, 1993 and 1994,
respectively, and annual purchase commitments are approximately $30.0 million,
$33.2 million, $35.8 million, $37.0 million and $38.3 million for 1995, 1996,
1997, 1998 and 1999, respectively.
CONTINGENCIES - In 1986, the Michigan Attorney General and the Michigan Natural
Resources Commission filed a state lawsuit against the Company and Consumers as
co-owners of Ludington for claimed aquatic losses. The Company is a 49%
co-owner of Ludington. The suit, which alleges violations of the Michigan
Environmental Protection Act and the common law for claimed aquatic losses,
seeks past damages (including interest) of approximately $148 million and
future damages (from the time of the filing of the lawsuit) in the amount of
approximately $89,500 per day (of which 49% would be applicable to the
Company).
In 1986, two environmental organizations requested FERC to withdraw the
Ludington license or provide some mitigation for fish mortality. In April
1989, Consumers and the Company were ordered by the FERC to install a temporary
barrier net around the plant to protect fish on an interim basis until
permanent measures
17
<PAGE> 18
could be developed. A net has been in operation for six seasons and the
companies have proposed that it be utilized as part of the permanent solution.
On October 5, 1994, the Company and all other parties to the state action and
the FERC proceeding, except certain Indian tribes, reached a tentative
settlement. The settlement agreement is subject to FERC and MPSC approval.
(The Michigan Supreme Court is holding this matter in abeyance pending approval
of a settlement.) The settlement provides for damages and use of the net as a
permanent solution. The net present value of the Company's portion of the
damages is estimated to be approximately $30 million which will be paid over a
24-year period, including $10 million to enhance recreational opportunities on
Company-owned and donated property. At December 31, 1994, the Company has
recorded a regulatory asset and liability of $7 million for past damages,
pending approval by the FERC and MPSC.
In January 1989, the Environmental Protection Agency ("EPA") issued an
administrative order under the Comprehensive Environmental Response,
Compensation and Liability Act ordering the Company and 23 other potentially
responsible parties ("PRPs") to begin removal activities at the Carter
Industrials superfund site. In June 1993, a Consent Decree was entered by the
U.S. District Court for the Eastern District of Michigan. It included a
provision for the payment of past costs incurred by the EPA of which the
Company's share was approximately $1.3 million, paid in June 1993. The Company
has recorded a liability of $8.4 million, which amount was charged to other
operation expense in the Consolidated Statement of Income in 1989-1992, as its
anticipated cost of the clean-up in 1995-1997. On July 7, 1994, the PRPs in
this matter petitioned the EPA to consider amending the clean-up plan to permit
landfill disposal of certain contaminated soil and on December 12, 1994, the
EPA issued a public notice of its intent to amend the Consent Decree to
incorporate the proposed change in the clean-up plan. Should the procedure be
approved, the Company's portion of the clean-up costs will be reduced by
approximately $3 million. There is, however, the possibility that EPA may,
through subsequent proceedings, require a clean-up of the sewer and sewer
outfall emptying into the Detroit River.
In August 1993, the Company, along with approximately 28 other parties,
received a "Notice of Demand" from the Michigan Department of Natural Resources
("MDNR"), acting pursuant to a Michigan statute, for all past ($142,000) and
future costs incurred by the state in performing response activities related to
the Carter Industrials site. In addition, the notice indicated the need to
conduct a PCB-sediment sampling program at the sewer outfall emptying into the
Detroit River. In response to the "Notice of Demand," the Carter Industrials
Site Group (the group, including the Company, of PRPs formed to jointly
remediate the Carter Industrials site) paid $126,600 of past costs incurred by
the MDNR, of which approximately 45% ($57,000) was paid by the Company. The
group declined to commit to pay future costs which the MDNR may incur and
declined to conduct the program of Detroit River sediment sampling and analysis
requested by the MDNR. At this time, it is impossible to predict what impact,
if any, this matter will have upon the Company.
The Energy Act became effective in October 1992. While the Company is unable
to predict the ultimate impact of this legislation on its operations, the
Company expects that, over time, non-utility generation resources will be
developed which will result in greater competition for power sales.
In addition to the matters reported herein, the Company is involved in
litigation and environmental matters dealing with the numerous aspects of its
business operations. The Company believes that such litigation and the matters
discussed above will not have a material effect on its financial position or
results of operations.
See Notes 2 and 3 for a discussion of contingencies related to Fermi 2.
NOTE 13 - EMPLOYEES' RETIREMENT PLAN AND OTHER POSTRETIREMENT BENEFITS
EMPLOYEES' RETIREMENT PLAN - The Company has a trusteed and non-contributory
defined benefit retirement plan ("Plan") covering all eligible employees who
have completed six months of service. The Plan provides retirement benefits
based on the employee's years of benefit service, average final compensation
and age at retirement. The Company's policy is to fund pension cost calculated
under the projected unit credit actuarial cost method, provided that this
amount is at least equal to the minimum funding requirement of the Employee
Retirement Income Security Act of 1974, as amended, and is not greater than the
maximum amount deductible for federal income tax purposes. Contributions were
made to the Plan totaling $23.7 million in 1992, $29.4 million in 1993 and
$45.8 million in 1994.
Net pension cost included the following components:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C> <C>
Service cost - benefits earned during
the period $ 25,146 $ 22,945 $ 21,644
Interest cost on projected benefit
obligation 75,922 74,490 70,511
Actual return on Plan assets (3,272) (119,037) (56,208)
Net deferral and amortization:
Deferral of net gain (loss) during
current period (90,069) 33,435 (23,528)
Amortization of unrecognized prior
service cost 3,613 3,297 2,776
Amortization of unrecognized net
asset resulting from initial
application (4,507) (4,507) (4,507)
--------------------------------------------
Net pension cost $ 6,833 $ 10,623 $ 10,688
============================================
</TABLE>
18
<PAGE> 19
Assumptions used in determining net pension cost are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 8.0% 8.0%
Annual increase in future compensation
levels 4.5 5.0 5.0
Expected long-term rate of return on
Plan assets 9.5 9.5 9.5
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The following reconciles the funded status of the Plan to the amount
recorded in the Company's Consolidated Balance Sheet:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
December 31
-------------------------------
1994 1993
- ------------------------------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C>
Plan assets at fair value, primarily equity
and debt securities $1,054,048 $1,059,775
-------------------------------
Less actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested
benefits of $852,374 and $872,138, respectively 872,530 892,761
Increase in future compensation levels 138,411 152,279
-------------------------------
Projected benefit obligation 1,010,941 1,045,040
-------------------------------
Plan assets in excess of projected benefit obligation 43,107 14,735
Unrecognized net asset resulting from initial
application (33,288) (37,795)
Unrecognized net loss (gain) 3,856 (7,315)
Unrecognized prior service cost 40,391 45,518
-------------------------------
Asset recorded as Other Deferred Debits
in the Consolidated Balance Sheet $ 54,066 $ 15,143
===============================
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Assumptions used in determining the projected benefit obligation are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
December 31
--------------------------
1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 8.0% 7.5%
Annual increase in future compensation levels 4.5 4.5
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The unrecognized net asset at date of initial application is being amortized
over approximately 15.4 years, which was the average remaining service period
of employees at January 1, 1987.
In addition to the Plan, the Company has several supplemental non-qualified,
non-contributory, unfunded retirement benefit plans for certain management
employees.
OTHER POSTRETIREMENT BENEFITS - The Company provides certain postretirement
health care and life insurance benefits for retired employees. Substantially
all of the Company's employees will become eligible for such benefits if they
reach retirement age while working for the Company. These benefits are
provided principally through insurance companies and other organizations.
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
The standard required the Company to change its accounting for postretirement
benefits from the pay-as-you-go (cash) basis to the accrual of such benefits
during the active service periods of employees to the date they attain full
eligibility for benefits. The transition obligation at the time of adoption is
being amortized over 20 years. The Company's incremental cost upon adoption of
the standard was $49 million for 1993 which is being deferred in accordance
with the January 21, 1994 MPSC rate order. See Note 3. This amount is being
amortized and recovered in rates over the estimated four-year period 1994-1997.
Net other postretirement benefits cost included the following components:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1994 1993
- -----------------------------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C>
Service cost - benefits earned
during the period $16,267 $15,312
Interest cost on accumulated
postretirement benefit obligation 33,459 33,787
Actual return on assets (208) (18)
Deferral of net loss during current period (833) -
Amortization of unrecognized
transition obligation 20,633 21,685
-----------------------------
Net other postretirement benefits cost $69,318 $70,766
=============================
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Assumptions used in determining net other postretirement benefits cost are
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 7.5% 8.0%
Annual increase in future compensation levels 4.5 5.0
Expected long-term rate of return on assets 9.5 9.5
- -----------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
The following reconciles the funded status to the amount recorded in the
Company's Consolidated Balance Sheet:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
December 31
----------------------------
1994 1993
- ----------------------------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C>
Actuarial present value of benefit obligation:
Retirees $(256,370) $(242,787)
Fully eligible active participants (67,581) (65,933)
Other active participants (140,710) (129,075)
----------------------------
Accumulated postretirement benefit obligation (464,661) (437,795)
Less assets at fair value, primarily
equity and debt securities 58,080 599
----------------------------
Benefit obligation in excess of assets (406,581) (437,196)
Unrecognized transition obligation 369,459 392,026
Unrecognized net gain (21) (3,397)
----------------------------
Liability recorded as Other Non-Current
Liabilities in the Consolidated Balance Sheet $ (37,143) $ (48,567)
============================
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Assumptions used in determining the accumulated benefit obligation are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
December 31
-----------------------------
1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 8.0% 7.5%
Annual increase in future compensation levels 4.5 4.5
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Benefit costs were calculated assuming health care cost trend rates beginning
at 12.6% for 1994 and decreasing to 6.0% in 2008 and thereafter for persons
under age 65 and decreasing from 7.4% to 6.0% for persons age 65 and over. A
one-percentage-point increase in health care cost trend rates would increase
the aggregate of the service cost and interest cost components of benefit costs
by $6 million for 1994 and increase the accumulated benefit obligation by $47
million at December 31, 1994.
NOTE 14 - SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1994 Quarter Ended
------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------------------------------------------------------------
(Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating Revenues $899,589 $872,690 $944,389 $802,673
Operating Income 189,319 161,832 200,298 167,946
Net Income 112,870 87,283 124,381 95,375
Earnings for Common Stock 105,458 79,872 116,972 87,967
Earnings Per Share 0.72 0.54 0.80 0.61
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1993 Quarter Ended
-----------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------------------------------------------------------------
(Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating Revenues $874,847 $835,171 $976,248 $868,945
Operating Income 221,732 186,498 228,436 207,281
Net Income 135,203 102,664 153,365 130,671
Earnings for Common Stock 127,060 94,799 145,950 123,257
Earnings Per Share 0.86 0.64 0.99 0.84
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The fourth quarter of 1994 includes a decrease in operating revenues of $59
million, a decrease in operation expense of $65 million and a decrease in
maintenance expense of $1 million related to a settlement agreement, with the
parties intervening in the 1994 PSCR reconciliation case with the MPSC, for
business interruption insurance proceeds associated with the December 25, 1993
outage at Fermi 2. See Note 2.
Earnings per share amounts for each quarter are required to be computed
independently and, therefore, may not equal the amount computed for the total
year.
20
<PAGE> 21
THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and accompanying Notes thereto, contained
herein.
RESULTS OF OPERATIONS
In 1994, the Company's earnings for common stock were $390.3 million, or
$2.67 per share, a decrease of 20.5% from the $491.1 million, or $3.34 per
share earned in 1993. The earnings decrease was due in part to a January 21,
1994 order by the Michigan Public Service Commission ("MPSC"), which reduced
rates by $78 million annually and increased depreciation and operation expenses
by $84 million annually. In addition, accretion income decreased and
amortization of the Fermi 2 nuclear power plant phase-in plan increased
significantly in 1994. Also, the Company incurred additional one-time charges
at the Fermi 2 nuclear power plant, which was out of service in 1994 due to
equipment failure, for maintenance expenses and the establishment of a reserve
for estimated Fermi 2 performance in 1995-1997. The earnings decrease was
limited by higher system sales and lower interest expense due to the early
redemption and refinancing of higher cost debt and the redemption of maturing
debt.
At December 31, 1994, the book value of the Company's common stock was
$22.89 per share, an increase of 2.5% since December 31, 1993. Return on
average total common shareholders' equity was 11.6% in 1994, 15.2% in 1993 and
18.6% in 1992.
The ratio of earnings to fixed charges for 1994, 1993 and 1992 was 3.13,
3.25 and 3.09, respectively. The ratio of earnings to fixed charges and
preferred and preference stock dividend requirements for 1994, 1993 and 1992
was 2.73, 2.88 and 2.79, respectively.
OPERATING REVENUES
Total operating revenues increased (decreased) due to the following factors:
<TABLE>
<CAPTION>
1994 1993
-----------------------------
(Millions)
<S> <C> <C>
Rate Changes
MPSC rate reduction $(81) $ -
Expense stabilization procedure - (63)
Power Supply Cost Recovery Clause (5) (106)
-----------------------------
(86) (169)
System sales volume and mix 103 158
Interconnection sales (17) 2
Fermi 2 capacity factor
performance standard reserve (31) -
Other - net (5) 6
-----------------------------
Total $(36) $ (3)
=============================
</TABLE>
Rate Changes
The January 21, 1994 MPSC rate order reduced the Company's rates by $78
million annually. In keeping with the MPSC's recognition of the need for
industrial customers to be competitive, the January 1994 rate reduction was
allocated among the various classes of customers approximately as follows:
Industrial-$43 million, Commercial-$24 million, Residential-$10 million and
Governmental-$1 million.
A December 1988 MPSC rate order provided for a moratorium on base rate
changes for the five-year period 1989 - 1993, an expense stabilization
procedure ("ESP") surcharge, which provided annual revenues of $63 million in
1992 for the effects of inflation, and a suspension of the Power Supply Cost
Recovery ("PSCR") Clause for the four-year period 1989 - 1992. The ESP
surcharge expired for service rendered on or after January 1, 1993, and the
PSCR Clause was reinstated in 1993. As a result of these two items, 1993
operating revenues were reduced by approximately $169 million.
Kilowatthour Sales
Kilowatthour sales increased (decreased) as follows:
<TABLE>
<CAPTION>
1994 1993
------------------------------
<S> <C> <C>
Residential 1.1% 6.4%
Commercial 3.5 4.0
Industrial 5.9 6.6
Other (includes primarily sales for resale) (14.1) 6.7
Total System 2.8 5.6
Interconnection (45.2) 12.7
Total (1.0) 6.1
</TABLE>
1994
Residential sales increased due to substantially warmer weather in the
second quarter resulting in increased air conditioning and cooling-related
loads, partially offset by lower cooling-related loads in the third quarter.
The increased heating-related loads in the first quarter were offset by
decreased heating-related loads in the fourth quarter. Commercial sales
increased due primarily to improved economic conditions and increased
cooling-related loads. Industrial sales increased as a result of higher sales
to automotive, steel and other manufacturing customers reflecting the
improvement in the economy. The decreased sales to other customers reflect
lower sales to wholesale for resale customers.
1993
Residential and commercial sales increased due primarily to substantially
warmer summer weather resulting in increased air conditioning and
cooling-related loads, partially offset by warmer winter weather reducing
heating-related sales. Industrial sales increased due to higher automotive and
steel production and improved economic conditions. The increased sales to
other customers reflect increased load requirements of wholesale for resale
customers.
21
<PAGE> 22
Interconnection Sales
Interconnection sales represent sales between utilities to meet energy needs as
a result of demand and/or generating unit availability.
1994
Interconnection sales decreased due to the reduced availability of energy
for sale as a result of the Fermi 2 outage and lower sales to Consumers Power
Company.
1993
Interconnection sales increased due primarily to increased sales to
Consumers Power Company, partially offset by a decrease in sales to Ontario
Hydro.
OPERATING EXPENSES
Fuel and Purchased Power
Fuel and purchased power expenses increased (decreased) due to the following
factors:
<TABLE>
<CAPTION>
1994 1993
-------------------------------------
(Millions)
<S> <C> <C>
Net system output $ (6) $ 43
Average unit cost 59 (37)
Fermi 2 business interruption insurance proceeds (65) -
Other 6 5
-------------------------------------
Total $ (6) $ 11
=====================================
</TABLE>
Net system output and average unit costs were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------------------------
(Thousands of Megawatthours)
<S> <C> <C> <C>
Power plant generation
Fossil 42,410 38,882 36,689
Nuclear - 8,274 7,338
Purchased power 6,599 2,211 2,705
-------------------------------------------
Net system output 49,009 49,367 46,732
===========================================
Average unit cost ($/Megawatthour) $16.94 $15.73 $16.49
===========================================
</TABLE>
1994
The increase in average unit cost resulted from replacing lower-cost nuclear
generation with higher-cost fossil generation and purchased power due to the
Fermi 2 outage in 1994 as a result of a turbine-generator failure on December
25, 1993. This increase was offset by the receipt of Fermi 2 business
interruption insurance proceeds.
1993
The decrease in average unit cost was due to declining fuel prices resulting
from greater use of lower-cost Western low-sulfur coal, increases in lower-cost
nuclear generation and decreases in the buyback of Belle River Power Plant
capacity and energy from the Michigan Public Power Agency.
Other Operation
1994
Other operation expense increased due primarily to other postretirement
health care and life insurance benefits expense, service quality claims expense
and higher nuclear plant, transmission and distribution and demand-side
management expenses. These increases were partially offset by lower incentive
award expenses related to a shareholder value improvement plan, expenses
recorded in the year-earlier period for the write-off of obsolete and excess
stock material and a reserve for steam purchases under the agreement with the
Greater Detroit Resource Recovery Authority, lower uncollectible and employee
reorganization expenses and lower injuries and damages expense.
1993
Other operation expense increased due primarily to the write-off of obsolete
and excess stock material, higher injuries and damages expenses, a provision
for employee reorganization expenses, a reserve for steam purchases under the
agreement with the Greater Detroit Resource Recovery Authority, incentive award
expenses related to a shareholder value improvement plan and expenses related
to the new collective bargaining agreement with employees represented by the
Utility Workers Union of America - Local 223. These increases were partially
offset by lower uncollectible expenses and a 1992 accrual for low-level nuclear
waste disposal.
Maintenance
1994
Maintenance expense increased due primarily to higher nuclear plant and
storm expenses, partially offset by lower fossil plant and line clearance
expenses. Since Fermi 2 was down for repair in 1994, the Company elected to
upgrade various plant facilities which resulted in higher nuclear plant
maintenance expense.
1993
Maintenance expense decreased due primarily to lower line clearance and
storm expenses, partially offset by expenses related to the new collective
bargaining agreement with employees represented by the Utility Workers Union of
America - Local 223.
Depreciation and Amortization
1994 and 1993
Depreciation and amortization expense increased due to increases in plant in
service and, for 1994, to increased Fermi 2 decommissioning costs authorized by
the January 21, 1994 MPSC rate order.
Deferred Fermi 2 Depreciation and Amortization
1994 and 1993
Deferred Fermi 2 depreciation, a non-cash item of income, was recorded
beginning with the implementation of the Fermi 2 rate phase-in plan in January
1988. The annual amount deferred decreased each year through 1992. Beginning
in 1993 and continuing through 1998, these deferred amounts are amortized to
operating expense as the cash recovery is realized through revenues. Deferred
22
<PAGE> 23
Fermi 2 amortization, also a non-cash item of income, was recorded beginning
with the Company's purchase of the Wolverine Power Supply Cooperative, Inc.'s
ownership interest in Fermi 2 in February 1990. The annual amount deferred
decreases each year through 1999.
Amortization of Deferred Fermi 2 Depreciation and Return
1994 and 1993
Beginning in 1993, the Company began amortizing to operating expense
deferred Fermi 2 depreciation and return as discussed herein.
Taxes Other Than Income Taxes
1994
Taxes other than income taxes decreased due primarily to lower property
taxes, partially offset by higher Michigan Single Business Tax ("MSBT").
1993
Taxes other than income taxes increased due primarily to higher MSBT expense
and higher property taxes.
Income Taxes
1994
Income taxes decreased due primarily to lower pretax income, partially
offset by higher prior years' federal income tax accrual. In March 1994, the
Company and the Internal Revenue Service ("IRS") reached a settlement of the
Company's income tax returns for the years 1987 and 1988.
1993
Income taxes decreased due primarily to lower pretax income and prior years'
federal income tax accrual, partially offset by an increase in the federal
corporate income tax rate from 34% to 35% retroactive to January 1, 1993 and
higher taxes due to the reduction of deferred Fermi 2 depreciation,
amortization and return.
Deferred Fermi 2 Return
1993
Deferred Fermi 2 return, a non-cash item of income, was recorded beginning
with the implementation of the Fermi 2 rate phase-in plan in January 1988. The
annual amount deferred decreased each year through 1992. Beginning in 1993 and
continuing through 1998, these deferred amounts are amortized to operating
expense as the cash recovery is realized through revenues.
Other Income and Deductions
1994
Other deductions increased slightly due primarily to the write-off of
premiums and expenses related to the $50 million portion of 1989 Series A
Mortgage Bonds not refinanced and an accrual for a contribution to the Detroit
Edison Foundation.
1993
Other deductions increased due primarily to an increase in the accrual for
decommissioning expenses for Fermi 1, an experimental nuclear unit that has
been shut down since 1972.
Accretion Income
1994 and 1993
Accretion income, a non-cash item of income, was recorded beginning in
January 1988 to restore to income, over the period 1988-1998, losses recorded
due to discounting indirect disallowances of plant costs. The annual amount of
accretion income recorded decreases each year through 1998. Also, effective in
January 1994, accretion income decreased due to the return to rate base of
Greenwood Unit No. 1.
Long-Term Debt Interest Charges
1994 and 1993
Long-term debt interest charges decreased due to the early redemption and
refinancing of securities when economic and the redemption of maturing
securities.
Other Interest Charges
1994
Other interest charges increased due to higher levels of short-term
borrowings, accruals for prior years' MSBT audits and the settlement of 1987
and 1988 IRS audits.
Preferred and Preference Stock Dividend Requirements
1994
Preferred and preference stock dividend requirements decreased slightly due
to the optional and mandatory redemption of outstanding shares in 1993.
1993
Preferred and preference stock dividend requirements increased slightly due
to issuance of cumulative preferred stock, partially offset by optional and
mandatory redemption of outstanding shares.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity has improved since the 1988 commercial operation of
Fermi 2, a nuclear generating unit comprising 28% of the Company's total assets
and 11% of the Company's summer net rated capability, and lower levels of
capital expenditures.
Fermi 2
The commercial operation of Fermi 2 completed the Company's power plant
construction program. The Company has no current plans for additional
generating plants. Ownership of an operating nuclear generating unit such as
Fermi 2 subjects the Company to significant additional risks. Nuclear plants
are highly regulated by a number of governmental agencies concerned with public
health and safety as well as the environment, and consequently, are subject to
greater risks and scrutiny than conventional fossil-fueled plants.
Fermi 2 was out of service in 1994. On December 25, 1993, the reactor
automatically shut down following a turbine-generator failure. Safety systems
responded within design and regulatory specifications. The turbine suffered
mechanical damage, the exciter and generator incurred mechanical and fire
damage,
23
<PAGE> 24
and the condenser had some internal damage. The fire was contained in the
turbine building, and there was no release of radioactive contaminants during
the event. The nuclear part of the plant was not damaged.
Major repairs have been completed and tests are continuing to balance
and synchronize the unit. The Company expects that most repair costs related to
returning the Fermi 2 turbine-generator to service will be covered by
insurance. These costs are estimated to be in the $70 million to $80 million
range. The Company has received partial insurance payments of $25 million for
property damage. In addition, the Company has received insurance payments of
$66 million for replacement power costs. As a result of an investigation as to
the cause of the December 1993 mechanical failure, the Company will replace
major Fermi 2 turbine components. Installation of new low-pressure turbine
sections is expected to add about 20 megawatts ("MW") of generating capacity to
the plant, which would expand the plant's capability by about 2%.
In the interim period the Company will operate Fermi 2 without the
large seventh and eighth stage turbine blades until the next refueling, which
will reduce the Fermi 2 power output to a range of about 800 MW to 900 MW.
During the lower output period, new turbine shafts and blades will be
manufactured for the plant's three low-pressure turbines. These major
components will be installed during the next refueling outage in 1996.
Replacing the major turbine components in 1996 is expected to cost between
$30 million and $40 million. These costs will not be covered by insurance.
These costs will be capitalized and are expected to be recovered in rates
because such costs are less than the cumulative amount available under the cap
on Fermi 2 capital expenditures, a provision of the MPSC's December 1988 order.
At December 31, 1994, Fermi 2 was insured for property damage in the amount
of $2.75 billion and the Company had available approximately $8.5 billion in
public liability insurance. To the extent that insurable claims for
replacement power, property damage, decontamination, repair and replacement and
other costs arising from a nuclear incident at Fermi 2 exceed the policy limits
of insurance, or to the extent that such insurance becomes unavailable in the
future, the Company will retain the risk of loss.
Cash Generation and Cash Requirements
Consolidated Statement of Cash Flows
The Company generates substantial cash flows from operating activities as shown
in the Consolidated Statement of Cash Flows. Net cash from operating
activities, which is the Company's primary source of liquidity, was $1,063
million in 1992, $1,141 million in 1993 and $953 million in 1994. Net cash
from operating activities decreased in 1994 due to lower net income and changes
in current assets and liabilities, partially offset by higher non-cash charges
to income for the Fermi 2 phase-in plan and depreciation and amortization. Net
cash from operating activities increased in 1993 due to lower non-cash items of
income for the Fermi 2 phase-in plan, higher depreciation and amortization, and
changes in current assets and liabilities, partially offset by lower net income
and deferred income taxes.
Net cash used for investing activities increased in 1994 due primarily to
increased funding of nuclear decommissioning trust funds, the purchase of
leased equipment and non-utility investments, partially offset by lower plant
and equipment expenditures. Net cash used for investing activities decreased
in 1993 due primarily to lower plant and equipment expenditures.
During the period 1992-1994, the Company has engaged in an extensive debt
refinancing program. Assuming favorable economic conditions, the Company
expects that it will continue to refinance existing higher-cost debt and equity
securities. Also, in 1994, as a result of a plan change, the Company entered
into the one-time purchase of common stock from the trustee of the Detroit
Edison Savings & Investment Plans.
Additional Information
An MPSC order permits the Company to issue approximately $3.5 billion of
securities for the purpose of refinancing debt and preferred and/or preference
stock (issued prior to 1993) prior to maturity (when economic) and at maturity,
and to replace funds used for those purposes. The Company also has MPSC
authority to refinance substantially all non-taxable debt obligations.
Cash requirements for scheduled long-term debt redemptions are expected to
be $19 million, $119 million, $144 million, $169 million and $219 million for
1995, 1996, 1997, 1998 and 1999, respectively.
Cash requirements for capital expenditures were $363 million in 1994 and are
expected to be approximately $1.9 billion for the period 1995 through 1999. In
1995, cash requirements for capital expenditures are estimated at $394 million.
Environmental expenditures are expected to approximate $79 million for the
period 1995 through 1999, including expenditures for Clean Air Act compliance
requirements. See "Environmental Matters" herein.
The Company's internal cash generation is expected to be sufficient to meet
cash requirements for capital expenditures as well as scheduled long-term debt
redemption requirements.
In May 1993, the Federal Energy Regulatory Commission ("FERC") issued its
order authorizing the continuation of the Company's $1 billion of short-term
borrowing authority. This authority will be in effect through May 31, 1995.
The Company had total short-term credit arrangements of approximately $405
million at December 31, 1994, under which $39.5 million of borrowings were
outstanding.
24
<PAGE> 25
Capitalization
The Company's capital structure ratios (excluding amounts of long-term debt and
preferred and preference stock due within one year) were as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Common Shareholders' Equity 44.2% 43.9% 42.0%
Preferred and Preference Stock 5.0 5.1 4.5
Long-Term Debt 50.8 51.0 53.5
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Competition
An electric public utility must compete with other energy suppliers to meet its
customers' energy needs. Serious issues facing the entire electric utility
industry include deregulation, municipalization, cogeneration, independent
power production, open access to transmission lines and a more competitive bulk
power supply market. Utility customers have the option of self-generation or
cogeneration and, depending on the extent of future deregulation, may be able
to enter into contracts with other power suppliers. In the future, electric
utilities may be required to unbundle their products and services to
accommodate emerging competitive alternatives brought about by possible
industry restructuring due to deregulation.
On December 5, 1994, the Company's Board of Directors approved the formation
of a holding company. The Company's shareholders will be asked to approve this
organizational structure at the Company's April 24, 1995 Annual Meeting of
Common Shareholders. This organizational structure will be subject to receipt
of a number of regulatory approvals.
A holding-company structure will provide greater financial flexibility to
develop and operate new non-utility businesses. It also will offer a mechanism
for better defining and separating the Company's regulated and unregulated
businesses, and for protecting the Company's utility business and customers
from any risks that may be involved in non-utility ventures.
When all approvals are in place, the Company's common stock will be
exchanged share-for-share for the common stock of the holding company. The
holding-company structure could be in place before the end of 1995.
As a result of the Energy Policy Act of 1992, the Company expects that, over
time, non-utility generation resources will be developed which will result in
greater competition for power sales. In addition, in April 1994, the MPSC
issued an interim order setting forth a framework for a retail wheeling
experiment. The 90 MW experiment would last five years commencing with the need
for additional capacity, which is expected to be approximately the year 2000,
and would be implemented concurrently with the Company's next Request for
Proposal case under the MPSC's capacity solicitation process. The Company has
appealed the MPSC's interim order with the U.S. District Court for the Western
District of Michigan claiming that the MPSC does not have the authority to
order the Company to participate in retail wheeling, and that the jurisdiction
over transmission rates for wheeling resides with the FERC. The MPSC is
expected to issue a final order by the end of April 1995.
In response to the changing market for electricity, the Company has
developed a number of programs designed to increase its efficiency and
competitive status and address customer needs. An aggressive demand-side
management program has been developed, an integral part of which is an
interruptible rate for large industrial customers. This rate, commonly
referred to as R-10 and approved by the MPSC, permits its customers to achieve
economic benefits while enabling the Company to reduce its peak demand
requirements. The January 21, 1994 MPSC rate order increased the 400 MW
available under the R-10 rate to 525 MW in 1994 and 650 MW in 1995, with the
Company absorbing revenue losses associated with the additional 250 MW made
available under this rate.
As part of a continuing response to the challenge of competition, the
Company has executed 10-year special manufacturing contracts with Chrysler
Corporation, Ford Motor Company and General Motors Corporation, covering 54 of
the Big Three automakers' largest manufacturing locations in Southeastern
Michigan. On August 3, 1994, the Company filed the executed special
manufacturing contracts with the MPSC. The MPSC must approve these contracts
before they can become effective. An order approving these long-term contracts
is expected to be issued in March 1995.
The special manufacturing contracts are available to customers with a total
connected load of 100 MW or more for specific locations of 5 MW and over.
Service under the special manufacturing contracts will include both firm and
interruptible service, which is priced to provide customers with
competitively-based electric rates.
A major feature of the special manufacturing contracts will be the
establishment of a long-term, 10-year relationships with these customers during
which the Company will be the customers' sole supplier of electricity through
the year 2000. The customers may reduce their purchases by 20% annually during
the last four years of the contracts. The special manufacturing contracts
provide that the customers' existing self-generation will only be used for
emergency back-up. It is anticipated that this will result in additional sales
and revenue for the Company. The contracts also provide for a corporate
minimum take-or-pay provision for 1995 through 1999 with specified price
reductions for 1995 through 2000. Through these agreements, the customers will
be assured of both a more competitive and predictable price for electric
energy. Detroit Edison will be assured that the customers will purchase their
electric requirements from the Company.
25
<PAGE> 26
Pursuant to the terms of the special manufacturing contracts, the customers
will be able to designate a percentage of their load at each facility as
interruptible. The customers will also have the ability to designate
interruptions on a corporate basis with the flexibility to shift interruptible
load among separate facilities. In total, approximately 160 MW of
interruptible capacity is expected.
In order to forge an energy partnership with these customers, the Company
will provide service delivery quality guarantees and on-site engineering
expertise to implement better service, identify energy conservation efficiency
improvement opportunities and achieve valuable energy savings for each
customer. The goal of these provisions of the special manufacturing contracts
is to combine the customers' energy conservation efforts with the knowledge and
skills provided by the Company. The Company also may invest in energy saving
projects with these customers.
The Company will serve the special manufacturing contract customers at rates
above its marginal cost. Further, at this time the Company is not requesting a
change in electric rates charged to other customers. As a result, annual
revenue reductions will range in amounts from about $30 million in 1995 to $50
million for 1999 through 2004. The Company expects to offset these reductions
by further reducing operating expenses.
In 1994, the Company completed its accelerated reliability improvement
program which upgraded its transmission and distribution system. This program
has helped reduce interruptions and the duration of outages thus increasing
customer satisfaction.
The Company is reviewing potential energy services as a method of remaining
competitive while diversifying within the scope of its core business.
Meeting Energy Demands
Since 1980, the compound annual sales growth was 1.8% and peak demand growth
was 2.4% (after adjusting for the effects of unusual weather). System sales
and demand are expected to grow at a compound annual rate of about 1.5% per
year for the next 15 years.
Sales to the non-manufacturing segment, which include customers such as
agribusiness, grocery stores, restaurants and government, are projected to grow
at a strong pace in the next 15 years, a compound annual increase of 1.9% per
year. This projected increase indicates the Company's customer base is
becoming more diverse and less dependent on the manufacturing segment.
The Company expects to meet its near-term demand for energy by the return to
service, subject to environmental regulations, of power plant units currently
in economy reserve status when energy demand and consumption requirements
provide economic justification. The return to service of these units is
conditioned upon the outcome of a competitive bidding process which was
established by an MPSC order issued in July 1992. The Company will submit a
new plan to the MPSC detailing its proposed method of meeting energy demands on
or before May 1, 1995.
Inflation
Inflation is a measure of the purchasing power of the dollar. In 1994, the
inflation rate, as defined by the Consumer Price Index, was 2.7%. Although the
current inflation rate is relatively low, its compound effect through time can
be significant, primarily in its effect on the Company's ability to replace its
investment in utility plant.
The regulatory process limits the amount of depreciation expense recoverable
through revenues to the historical cost of the Company's investment in utility
plant. Such amount produces cash flows which are inadequate to replace such
property in future years. However, the Company believes that it will be able
to recover the increased cost of replacement facilities when, and if,
replacement occurs.
Regulation and Rates
The Company has no plans to seek increased rates for electric service from the
MPSC in the near future.
Environmental Matters
Protecting the environment from damage, as well as correcting past
environmental damage, continues to be the focus of state and federal
regulators. Committees at both the state and federal level are studying the
effects of a wide array of chemicals and electromagnetic fields as well as
global warming (as potentially affected by carbon dioxide emissions).
Legislation and/or rulemaking resulting from these and any future studies could
further impact the electric utility industry including the Company.
The Environmental Protection Agency ("EPA") and the Michigan Department of
Natural Resources have aggressive programs regarding the cleanup of
contaminated property. The Company anticipates that it will be periodically
included in these types of environmental proceedings. Further, additional
environmental expenditures, although difficult to quantify, will be necessary
as the Company prepares to comply with the phase-in of the 1990 Amendments to
the federal Clean Air Act. The Company currently meets the first phase of
sulfur dioxide emissions and nitrogen oxides emissions requirements. The
second phase begins in the year 2000. The Company currently burns low-sulfur
coal (less than 1% sulfur) at all its coal-fired units and believes it can meet
the second phase sulfur dioxide emission requirements through additional
blending of coals. Current projections indicate that annual fuel costs may
increase by $13-20 million in the period 2000-2009 in order to comply with new
sulfur dioxide emissions requirements. In addition, approximately $59 million
in capital expenditures may be necessary for nitrogen oxides emissions
requirements.
The Company expects that substantially all of the costs of environmental
compliance will be recovered through the ratemaking process.
26
<PAGE> 27
Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Revenues . . . . $ 3,519,341 $ 3,555,211 $ 3,558,143 $ 3,591,537 $ 3,576,281
Net Income . . . . . . . . $ 419,909 $ 521,903 $ 588,047 $ 568,037 $ 514,459
Earnings for Common Stock . $ 390,269 $ 491,066 $ 557,549 $ 535,205 $ 479,280
Earnings Per Common Share . $ 2.67 $ 3.34 $ 3.79 $ 3.64 $ 3.26
Dividends Declared Per
Share of Common Stock . $ 2.06 $ 2.06 $ 1.98 $ 1.88 $ 1.78
At year-end:
Total Assets . . . . . . $10,992,978 $11,134,879 $10,309,061 $10,463,624 $10,573,325
Long-Term Debt
Obligations (including
capital leases) and
Redeemable Preferred
and Preference Stock
Outstanding . . . . . $ 3,979,763 $ 4,007,622 $ 4,525,504 $ 4,900,020 $ 5,300,962
</TABLE>
27
<PAGE> 28
Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
(1) Exhibits filed herewith
Number
------
23-27 Consent of Price Waterhouse LLP
27-2 Financial Data Schedule for the period ended
December 31, 1994
SIGNATURES
Pursuant to the requirements 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)
/s/ RONALD W. GRESENS
-------------------------------
Ronald W. Gresens
Vice President and Controller
Date: March 1, 1995
28
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
------- ----------- ----
<S> <C> <C>
23-27 Consent of Price Waterhouse LLP
27-2 Financial Data Schedule for the
period ended December 31, 1994
</TABLE>
<PAGE> 1
EXHIBIT 23-27
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Registration Nos.
33-30809, 33-50325, 33-53207, 33-64296 and 33-57095) and Form S-8
(Registration No. 33-32449) of The Detroit Edison Company and in the Prospectus
and Proxy Statement constituting a part of the Registration Statement on
Form S-4 (Registration No. 33-57545) of DTE Holdings, Inc. of our report dated
January 23, 1995 appearing on page 3 of this Form 8-K.
PRICE WATERHOUSE LLP
Detroit, Michigan
March 1, 1995
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
The Schedule contains summary financial information extracted from the
Consolidated Statement of Income, Balance Sheet, Statement of Cash Flows,
Statement of Common Shareholders' Equity and Primary and Fully Diluted Earnings
per Share of Common Stock and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 8,585,966
<OTHER-PROPERTY-AND-INVEST> 434,448
<TOTAL-CURRENT-ASSETS> 540,926
<TOTAL-DEFERRED-CHARGES> 1,431,638
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 10,992,978
<COMMON> 1,448,635
<CAPITAL-SURPLUS-PAID-IN> 498,364
<RETAINED-EARNINGS> 1,379,081
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,326,080
0
380,283
<LONG-TERM-DEBT-NET> 3,825,296
<SHORT-TERM-NOTES> 14,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 25,489
<LONG-TERM-DEBT-CURRENT-PORT> 19,214
0
<CAPITAL-LEASE-OBLIGATIONS> 126,076
<LEASES-CURRENT> 201,877
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,074,663
<TOT-CAPITALIZATION-AND-LIAB> 10,992,978
<GROSS-OPERATING-REVENUE> 3,519,341
<INCOME-TAX-EXPENSE> 270,657
<OTHER-OPERATING-EXPENSES> 2,529,289
<TOTAL-OPERATING-EXPENSES> 2,799,946
<OPERATING-INCOME-LOSS> 719,395
<OTHER-INCOME-NET> (5,786)
<INCOME-BEFORE-INTEREST-EXPEN> 713,609
<TOTAL-INTEREST-EXPENSE> 293,700
<NET-INCOME> 419,909
29,640
<EARNINGS-AVAILABLE-FOR-COMM> 390,269
<COMMON-STOCK-DIVIDENDS> 300,676
<TOTAL-INTEREST-ON-BONDS> 273,763
<CASH-FLOW-OPERATIONS> 952,608
<EPS-PRIMARY> 2.67
<EPS-DILUTED> 2.67
</TABLE>
