ML20209H949

Wolverine Power Supply Cooperative,Inc,1986 Annual Rept

ML20209H949
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Site:	Fermi
Issue date:	12/31/1986
From:	WOLVERINE POWER SUPPLY COOPERATIVE, INC. (FORMERLY
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Download: ML20209H949 (36)

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Wolverine Power Supply Cooperative, Inc. is a many-faceted rural elec-tric generation and transmission cooperative. Like the member-systems

,I that comprise the Cooperative, Wolverine is committed to provide the most reliable services in the most economical manner.

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,(, g'g In order to fulfill these duties, Wolverine

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fronts. But Wolverine's employees, direc-tors, and member-systems are up to the challenge. From the generation spectre to the regulatory and political environment and from transmission, construction and l

.2 maintenance to administrative affairs,

,D Wolverine is meeting those challenges in the best interest of its seven member-systems--and will continue to do so.

@gY(;b:.,x:m c; M i.a~yS The Cooperative has achieved many suc-

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cesses since its formation just more than four years ago. But those successes only M ' @.i,yd7 y.

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came about as a result of the commit-s ment and efforts exhibited by Wolverine's

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employees, directors, and member-systems.

This continuing commitment by the employees, directors, and member-

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Page 1 Contents Page 2 President & General Manager's Report Page 4 Board of Directors Page 6 Member-Systems Page 8 Finance & Administrative Services Page 10 Power Production Page 12 Transmission, Engineering & Operations Page 14 Regulatory Affairs Page 16 System Statistics Page 17 Financial Statements 1986 Financial Highlights increase

% Increase 1986 1985 (Decrease)

(Decrease)

Assets 1920,890,000 5887,266,691 33,623,309 3.79 Operating Revenue 47,982,767 50,042,520 (2,059,753)

(4.12)

Total Expenses 46,460,814 49,291,380 (2,830,566)

(5.74)

Non Operating Margins 627,834 764,927 (137,093)

(17.92)

Net Margins 2,149,787 1,516,067 633,720 41.80 System Peak Demand (MW) 215 207 8

3.86 Energy Sales (MWil) 1,097,983 1,059,853 38,130 3.60 To Member Systems 1,062,820 1,018,294 44,526 4.37 To Others 35,163 41,559 (6,3%)

(15.39)

Members Revenue per KWII Sold (mills /kwh) 43.64 46.38 (2.74)

(5.91)

Purchased Power Costs (mills /kwh) 28.04 30.91 (3.08)

(9.%)

Total Cost of Electric Service per KWII sold 42.31 46.51 (4.20)

(9.03)

Advance Plant Fuel Cost (mills /kwh) 24.69 27.56 (2.87)

(10.41)

Full Time Employees 117 114 3

2.63 The Cooperative Wolverine Power Supply Cooperative, Inc., with headquarters in Boyne City, hiichigan, is a non-profit rural electric genera-tion and transmission cooperative supplying wholesale electric energy to seven rural electric distribution cooperatives serving a total consumer membership exceeding 130,000 in 35 Michigan counties.

Wolverine owns and/or operates 157 megawatts of coal-fired, natural gas, diesel and hydroelectric genceauun. In addi-tion, Wolverine is an approximately 15 percent owner, with the Detroit Edison Company, in the Fermi 2 Nuclear Power Plant near Monroe, Michigan. Fermi 2 is a 1,093 megawatt boiling water reactor which Detroit Edison has scheduled for j.

commercial operation in 1987 Wolverine also maintains an approximate 15 megawatt ownership with Consumers Power i

Company in the 770 megawatt J.H. Campbell Unit 3 coal-fired plant located near Grand Haven, Michigan.

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Page 2 President & General Manager's Report Nineteen Hundred Eighty Six was a landmark year for wblverine Power Supply Cooperative, Inc directors, management, employees and member-systems -- a year that will certainly be looked upon as one that provided the most beneficial long term benefits in our short history. Wholesale power costs were reduced for the fourth consecutise year, energy sales reacned near record lesels and an agreement was reached allowing for %biverine to sell its remaining ownership in the Fermi II Nuclear Power Plant to the Detroit Edison Company.

While the past year was a landmark year for the cooperative in a number of areas, none could be considered as important as the October 23,1986 letter of understanding with Detroit Edison that calls for %blverine to sellits remaining ownership share in the Fermi 11 nuclear power plant back to Detroit Edison. This agreement culminated months ofintensive negotiations and feasibility studies by the two utilities.

While portions of this preliminary agreement are still being discussed by Wolverine, Detroit Edison and the Rural Elec-trification Administration (P EA), the major portions of the transaction have been agreed upon. Wolverine will sellits remain.

ing ownership share in the 1,093 megawatt Fermi 11 nuclear power plant to Detroit Edison on January 1,1990 for approx.

imately $$50 million. In addition, Detroit Edison has agreed to provide funds for Woherine's principal and interest payments from July 1,1986 through December 31, 1989. These payments total approximately $264 million.

In exchange, Woherine agreed to purchase a significant por-tion of its wholesale power needs from Detroit Edison, on both a firm and interruptible power basis, through the year 2025.

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from a minimum of 7.5 megawatts per year in 1988 to a max-d 1

d imum of 135 megawatts per year from 2010-2025. Wolvenne not ce only benefits from this assured source of wholesale power but A

from retaining the flexibility of operating all existing generating

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j facilities and/or purchasing power from other utilities.

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. j But to complete this transaction, Wolverine must still reach Q

further understandings with the REA. These understandings must address Woherine's remaining $200 mi!! ion in Fermi 11 m-

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penalty associated with conversion of Federal Financing Bank short and intermediate term debt into long term debt guaranteed by REA and assumable by Edison. Discussions on these mat-ters are presently ongoing with both REA and Detroit Edison.

We expect these discussions to be completed sometime this spring. A more extensise summary of this very complicated agreement can be found in the departmental sections of this report.

We beliese that this agreement will allow Woherine to con-tinue prosiding wholesale power to the member-systems in a reliable and economical manner. %bherine was again able to reduce the cost of wholesale power to the member systems dur-ing the past year. For the year ended December 31, 1986, wholesale power costs aseraged 43.64 mills per kilowatthour. This yg 4

m compares to an aserage of 46.38 milk per kilowatthour from V--

a year ago. These figures are even more impressive when com-pared to the combined 54.68 mills per kilowatthour average upon the 1982 merger of Wbherine Electric Cooperative and Northern (from left) Mehin Basel-President, Raymond R. Cristeli-Michigan Electric Cooperative. This marks the fourth con.

Executive Vice President and General Manager.

secutise year that Woherine has reduced the cost of wholesale power to its sesen member-systems. Over that period, Wolverine's wholesale power costs base been redeced more than 20%.

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• g Page 3 Stabilization in w holesale power costs generally leads to an increase in energy sold to the member-systems. This trend held true for Woherine during the past year as the member-systems collectively purchased 4.3% more wholesale power than during the same period one year ago. We are pleased to report that each of the member-systems contributed to this healthy increase.

A continuation of this trend will allow Woherine to further stabilize wholesale power costs.

Reduced wholesale power costs result in refunds to the member-systems and for the fourth consecutive year Woherine will return Power Supply Cost Recovery (PSCR) overcollections. PSCR refunds result from Wolverine providing wholesale power to the member-systems at lower than anticipated costs. For the period ended December 31,1986, approximately $4.6 million was osercollected from the member-systems. In addition, PSCR monies are now returned to the member-systems on a monthly basis, which allows overcollected monies to be returned in a more expeditious manner. Wolverine's earnings also exceeded the projected 1.35 Times Interest Earned Ratio (TIER) by approximately.61 mills per kwh or nearly $650,000.

These achiesements, and the others outlined in this report, would not have been possible without the continued coopera-tion and efforts exhibited by each of Wolverine's employees and member-systems. While these achievements are outlined more specifically later in this report, we feel the most significant accomplishments from each of these areas merit further discussion.

In the finance and administratise services department, a number of actions were implemented to ensure a continued high lesel of service to our member-systems. N1any accounting, finance, inventory and payroll functions are now being completed with greater efficiency through use of the new computer system. In addition, all computer sersices personnel have been reassigned to this department in order to more fully use their skills. Department personnel were also invohed in the implementation and administration of a new collective bargaining agreement negotiated between Wolverine and its bargaining unit employees.

Transition was also esident in the power production department. Wolverine said goodbye to James O. Wood, manager of power production, who retired after 45 years of loyal service to Niichigan's rural electric cooperatives. We will miss his knowledge and abilities but we will also look forward to working with his successor; Jim Nickel. Department employees con-tinued with system improvements as installation and operation of the new computerized Energy Control Center dispatching equipment and mobile radio system were completed. In addition, renegotiation of fuel and purchased power contracts will furtner moderate the cost of wholesale power. For example, the negotiation of a new purchased power agreement with Con-sumers Power Company will result in annual savings that exceed $1,000,000. N1aintenance programs and improvements also continue at each of our nine fully-owned generating plants.

New construction and system upgrading and maintenance continue to be the primary responsibilities undertaken by transmis-sion, engineering and operations personnel. Their combined efforts resulted in a host of new transmission lines and substa-tions being designed, constructed and placed in sersice. System maintenance efforts also continue to be a top priority. Wolverine's apprentice lineman training program was aho expanded during the past year. Fully accredited by the U. S. Department of Labor, this highly successful program now includes nearly 40 apprentice linemen from 15 rural electric and municipal utilities throughout Niichigan. Wo%erine also proudly graduated six of its own apprentice linemen from the program this past year.

This past year was indeed a landmark year for the Wolverine system. The many accomplishments outlined in this report were completed through the combined efforts of Wolverine, its directors, employees and member-systems. It is with this sense of accomplishment that we can face the challenges presented in 1987 and beyond with added vigor.

Respect fully, WOtVERINE POWER SUPPLY COOPERATIVE, INC.

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t Siehin Hasel Raymond R. Cristell President Executise Vice President and General Ntanager

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Page 4 Board of Directors I

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Melvin Basel William Chapin lloward Carson Donald Harmon president Sr. %ce President Secretary Treasurer presque Isle Tri-County Top O'Ntichigan Western Niichigan Ideals & Objectives l

WE BELIEVE:

.that an adequate supply of lowest possible cost electricity is one of the most important ingredients for improving the economy and the people's standard of lising.

.that the Rural Electrification Administration program of prosiding long-term, low interest loan funds to the rural electric cooperatives is one of the most valuable programs for the social and economic benefit of people eser undertaken by our Federal government, and that this program should be continued as an important desice to foster the economic deselopment of rural areas and to help improve the standard of lising of its consumer-owners.

.that a clean and healthy ensironment which we all need and enjoy must be maintained and that the energy industry must do all that is feasible to minimize the negatise impacts on the ensironment.

.that the benefits of the development of our national resources should accrue to the people, and the State and Federal governments have a principal responsibility for establishing and maintaining programs and policies to protect the public interest in the maximum multipur-pose deselopment of conservation and utilization of our water, power resources and natural beauty.

.that our Cooperatise was established for all its members and the benefits of its operation should accrue to them on a consistent and uniform basis.

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Robert liasenbank Wallace floffman William Korthase Jr.

Wayne Nordbeck western Ntwhigan Oceana Top O. Stichigan Cherryland

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Fred Foltz. Jr.

Carl f ortelka Thaddeus Gawel Willard Haenke Top O' Ntichigan O&A Presque Isle T i-County TO TilESE ENI)S, WE PLEDGE OURSELVES TO Tile FOLLOWING OBJECTIVES:

.to preside for our members an adequate supply of wholesale electric power and high quality of service at the lowest possible cost to our membership as a whole.

.to maintain a competent staff of dedicated employees, and to establish policies which provide dire: tion to management and staff for the day to day operation of the cooperatise.

.to adopt a one, fise and ten-year plan for implementation by and guidance of the management of the Cooperative.

.to conduct the business affairs of the Cooperatise as the trustee for the interest of the members, and on a basis of honesty ard equity.

.to help promote the area development throughout the Cooperatis c's service area by working with our member systems in the plan-ning and esecution of programs to help develop the natur21 human and economic resources within the region, and to encourage efficient use of electrical energy.

.to conduct a ugorous member sersice program in order to promote the Cooperatise's policies, plans and progress among employees, members and other interested parties.

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E I'dgar Render 11urton Scott Clare Shull Thomas VanPelt Preque ble O&A Oceana Cherryland

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~ wf Seated t f rom left): Philip Cole. Stanager - Cherr> land Rural Electric Cooperative Assn., Robert Frederiksen, Stanager

- Oceana Electnc Cooperative Kenneth Bumstead, Stanager - O & A Electric Cooperatise. Standing (from left):

Jack Stickney, Stanager - Western Stichigan Electric Cooperative, Thomas Hanna, Stanager - Top O' Alichigan Rural Liectric Co., Robert Ntatheny, Ntanager Tri-County Electric Cooperative, A. Barkley Travis, Ntanager -

Presque Isle Electric Cooperatise.

Cherr) land Rural Electric Cooperatise Association serves major portions of four counties and very small portions of two counties in the northwest portion of Michigan's lower peninsula. The service area, which is approximately 65 miles long north to south and from approximately 6 to 30 miles wide east to west, encompasses approximately 783 square miles. Cherryland's offices are located in Grawn, just south of Traverse City.

l The cooperatise is comprised of more than 18,000 member / consumers, who combined to use more than 150,000,000 kwh i

of energy during 1986. The majority of these member / consumers are situated in sparsely located homes and farms and seasonal dwellings concentrated along the shores of the many inland takes. The remainder own and operate small commercial establishments. Approximately 13,000 of these member / consumers would be considered monthly residential accounts.

i Tourism, farming and the oil industry are major contributors to the economic climate of the cooperative's service area.

The asailability of natural and deseloped outdoor recreational resources in the area are nationally-recognized. Farming, especially the cultisation of the region's many cherry orchards, is also a prime source of income for the area's economy. Cherryland also serses 190 oil industry related accounts, although these are expected to remain somewhat subdued oser the next five years.

Ileadgartered in Newa>go, O & A Electric Cooperstise serves more than 29,000 member / consumers in the rural areas of 13 Michigan counties. O & Ns service area lies in the west-central portion of Michigan's lower peninsula and stretches roughly 125 miles north to south and 56 miles east to west. In excess of 3,000 miles of distribution line ties the system together.

Nearly three-quarters of the cooperative's kilowatthou; sales are attributable to re:idential member / consumers. However; the oil and gas industry and tourism are also major contr butors to the well being of O & Ns service area. The oil and gas industry has been well established for many years in port,. 9 of the service territory but no major new construction with deseloping electrical loads at central production facilities or wells is expected at this time. Small commercial accounts have also been increasing throughout the service area.

'Ihe service area with its many lakes, campsites md recreation areas is sery attractive to the tourist industry. This influx is esident from the fact that slightly more thin 3' >creent of the entire membership is categorized as seasonal.

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Residential member / consumers comprise 60 percent of Oceana's annual kilowatthour sales, while seasonal accounts com-prise the majority of the remaining amount. Annual kilowatthour sales are slightly more than 55,000,000 and peak demand is in the 12 megawatt range.

While Oceana's sersice territory is primarily comprised of rural residential and seasonal loads, agriculture and tourism are also prime contributors to the local economy. Fruit and segetable farms and processing plants are scattered throughout the area. The area's semi-marine climate is well suited for all types of general farming with asparagus, apples and cherries as the primary crops. Tourists abound throughout the year at the many parks, forests and beaches along the shores of Lake Michigan.

Presque Isle Electric Cooperative serves 25,000 member / consumers in the northeast portion of Michigan's lower penin-sula. Member / consumers in Alpena, Cheboygan, Montmorency and Presque Isle counties number 23,000 or more than 90 percent of the cooperative's total membership.

Rural residential and seasonal member / consumers comprise around 75 percent of Presque Isle's annual kilowatthour sales.

Annual kilowatthour sales are in the 130,000,000 range. The cooperative maintains in excess of 3,500 miles of overhead distribution line and 188 miles of underground distribution line.

The service area of the cooperative includes much of lower Michigan's very attractive rural environment, consisting of thousands of acres of heavily wooded private and state owned land abundant with lakes, risers and streams. Tourism is of prime importance to the sersice area. However; the area is also home to general farming, the timber industry and a limitcd amount of sery small manufacturing firms and privately owned businesses.

With nearly 35,000 member / consumers located throughout 12 northwest Michigan counties, Top O' Michigan Mural Elec-trie Coripany is Wolserine's largest member-system. Top O' Michigan's service area reaches approximately 90 miles south from the Straits of Mackinac, and inland 55 miles east from bke Michigan. The cooperatise's offices are located in Boyne City.

Monthly residential and seasonal member / consumers account for more than 60 percent of Top O' Michigan's annual kilowat-thour sales. Peak demand for the cooperative is in the 60 megawatt range and annual kilowatthour sales exceed 300,000,000.

The area economy is primarily tied to tourism and small manufacturing plants associated with the auto industry. Six major ski and golf resorts are located within the service territory. These resorts, along with the unique area geography, hase made tourism the major contributor to the area economy. Four of the six resorts are sersed by Top O' Michigan and contribute heasily to seasonal demands due to snowmaking and golf course irrigation. In addition, the discovery of oil throughout the service territory seseral years ago brought about significant changes in load levels. Oil related sales presently account for ap-proximately one-quarter of Top O' Michigan's energy sales.

With headquarters in Portland, Tri-County Electric Cooperstise serves primarily rural areas of 13 central Michigan coun-ties. The cooperative serves approximately 14,000 total members but does not serve more than 25 percent of the population of any single county.

The rural residential class accounts for approximately 85 percent of Tri-County's annual kilowatthour sales, while small commercial consumers comprise an additional 11 percent of total sales. Tri-County's member density has increased from 6.15 members-per mile of line in 1975 to 6.47 members per mile of line in 1985.

The area's land is amenable to cultivation with nearly one fifth of the cooperative's members engaged in agricultural pursuits. There has been a slow but steady population increase in Tri County's service area, primarily attributable to people mosing from urban to rural areas. There are also an increasing amount of recreational resorts developing around the many lakes in the northern portion of the cooperative's service area.

Western Michigan Electric Cooperalise's service area is located in the west central portion of Michigan's lower peninsula.

Western serses more than 9,000 member / consumers in Mason, Lake, Manistee and Oceana counties. The cooperatise's offices are located in Scottsille. Electric energy is distributed through more than I,200 miles of distribution line.

Western Michigan's service territory is predominantly rural in nature and there is no indication that this will chang: in the sery near future. The resident population consists primarily of white and blue collar workers associated with service and tourist industries, educational and governmental institutions, light industry, and the hospital, lumbering and agriculture fields.

The rural nature of the service territory provides for agriculture as a major contributor to the area's economic well.being.

Apple, cherry, pear and peach orchards are scattered throughout the area. In the past few years, the cooperatise has also seen growth in the green bean and asparagus industries. In fact, Scottville is home to one of the largest green bean canneries in the United States.

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jdM%rLx Page 8 Finance & Administrative Services A number of actions were taken this past year to ensure that departmental sersices remain at a continued high level. These actions included close monitoring of Federal Financing Bank interest rates, implementation of several measures with the Michigan Public Sersice Commission and installation and operation of a new computer system.

Department personnel hase been closely monitoring long term interest rates from the Federal Financing Bank -- the primary lending imtitution for rural electric cooperatises. Woherine's loan funds are guaranteed by the Rural Electrification Administra-tion. To benefit from the continued decline in interest rates, Wolverine has been converting all short and intermediate term loan notes to long term notes at interest rates of less than eight percent. Prior to their comersion, several of these loan notes carried interest rates in the 11-12 percent range. Through December,1986, Woherine had comerted approximately $332 million of a total $782 million in Iermi 11 debt. This debt conversion was completed at an average interest rate of 7.56 percent.

In addition, Woherine, Detroit Edison and the Rural Electrification Administration (REA) are examining the feasibility of comerting Wolverine's total outstanding FFB short and intermediate term debt into long term debt. This FFB debt conver-sion is particularly important to the agreement that Woherine has negotiated with Detroit Edison relating to the sale of Fermi

11. The Iermi sale agreement calls for Detroit Edison to assume approximately $550 million of Wolverine's Fermi II debt, at Woherine's interest rates, on January 1,1990. Presently, Wolverine has been converting its FFB notes on a monthly basis as they become due. Woherine could convert all ofits outstanding FFB notes immediately but would face a prepayment penal-ty of approximately $9-10 million. In essence, the prepayment penalty is a type of refinancing charge. Woherine is presently examining sarious methods of paying this prepayment penalty.

Department personnel have also continued to work closely with the Michigan Public Service Commission on a number of important matters in October, Wolverine filed an application to apply a nuclear plant decommissioning surcharge and credit to the member systems' monthly wholesale power bills. Esen though negotiations to finalize the sale of Fermi 11 from Wolverine to Detroit Edison are presently underway, this surcharge and credit is required by the MPSC. Until the commercial operation date of f ermi II, Detroit Edison will reimburse Wolverine's approximately $400,000 annual decommissioning costs.

Decommissioning costs are those costs incurred when a utility retires a nuclear power plant after its power generating life expectancy has been exhausted. If the sale of Wolverine's ow nership interest in Fermi II is successfully completed and approv-ed by all parties, Detroit Edison will assume all decommissioning costs related to the Fermi 11 plant. A nuclear power plant such as t ermi II has a life expectancy of 40 years. Wolverine has also completed a cogeneration filing with the Commission that will more closely define Woherine's "asoided costs" and how those costs will be calculated and allocated to cogenerators in Woherine's service territory.

In addition, the Commission has required Woherine to return Power Supply Cost Recosery (PSCR) oscrcollections to the member-systems for the fourth consecutive year.

PSCR refunds result from Wolverine prosiding wholesale power to its member-systems at lower than anticipated costs. For the period ended December 31,1986, in excess of

$4.5 million was osercollected from the member-systems of Woherine. The board of direc-tors also passed a resolution which provides for Wolverine to return PSCR monies to the member systems on a monthly baiis. Wolverine's earnings also exceeded the projected 1.35 Times Interest Earned Ratio (TIER) by approximately.61 milh or nearly $650,000 during 1986. By definition, TIER rellects the number of times a cooperatise can coser k

its interest payments on long term debt.

These refunds are directly attributable to the continued stabilization in the cost of wholesale power and the steady increase in energy sales to the member systems. During 1986, the seven member-systems which comprise Woherine purchased 4.3 percent more wholesale power than during the same period one year ago. Each of Woherine's sesen member-systems contributed to this increase and this 4.3 percent increase is the highest since the 6.4 percent combined 1976 growth rate of the former Wolverine Electric and Northern Michigan Electrie cooperathes. A continuation of the energy growth lesch ev perienced this past year will help to stabilize future wholesale power costs.

Ray G. Tonne Assistant General Manager. Manager f inance & Adrninistratne Services

Page 9 Departmental computer capabilities and services also continue to progress as employee payroll, cash disbursements records, general ledger, work orders and inventory records are each being entered on the department's new IBM System 36 computer system. Since this new computer system became operational, accounting and finance capabilities and efficiencies have greatly improsed. In addition, all computer services personnel are now maintaining reporting relationships in this department to facilitate more widespread use of their skills.

During the past year, a new three-year collective bargaining agreement with the International Brotherhood of Electrical Workers Local 876 was also reached. This contract was ratified by the cooperative's bargaining unit employees and approved by Wolverine's board of directors. The new three-year pact became effective on July 1. Also in cooperation with IBEW Local 876, a new comprehensive employee safety and work rule manual has been implemented for the benefit of Wolverine and its employees.

Michigan Governor James Blanchard signed legislation in April granting tax abatement status for the proposed new head-quarters in Cadillac. The abatement would reduce property taxes by approximately 58,000 per year for 12 years. The Lake Tow nship Board of Supervisors has since created an industrial development district for the proposed facility - the final govern-mental action required for Wolverine to receive tax abatement status. The Michigan Electric Cooperative Association assisted Wolverine in securing passage of this legislation. In order to qualify for tax abatement under legislation this year, Wolverine constructed a torage facility in Cadillac, adjacent to the Energy Control Center.

The Cooperative's proposed new Cadillac headquarters facility has been delayed pending a final resolution of Wolverine's Fermi 11 matters.

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Page 10 Power Production Negotiations which culminated in the sale of Woherine's remaining ownership in the Fermi 11 nuclear power plant were the most immediate concern affecting department efforts during the past year. Nonetheless, efforts to improse generation ef ficiencies, reduce the cost of fuel, maintenance and operations and to properly maintain all generating facilities were con-Imued during 1986.

Undoubtedly; the f ermi !! sale agreement was the most significant esent affecting department operations. This agreement, reached in October, will proside power supply assurances to Wolserine through the year 2025. In exchange for these power i

supply commitments by %herine, Detroit Edison has agreed to purchase the cooperatise's remaining ownership share in Fer-mi 11 on January I,1990.

This power supply agreement prosides Woherine with a=surances to purchase increasing amounts of firm capacity on a take or pay basis from Detroit Edison. These firm capacity purchases willincrease from 7.5 megawatts in 1987 to 135 megawatts from 2010-2025. Prosisions in this agreement aho allow Woherine to continue purchasing interruptible energy and capacity from Detroit Edison, prosided Woherine has sufficient generating capabilities to back-up such purchases. Floweser; the firm purchase obligations must be taken before interruptible purchases can be scheduled. Purchasing large amounts of wholesale power f rom Detroit Edison wdl not be a new experience for Woherine as the cooperatise purchased more than one-half of its energy needs from Detroit Edison during the past year. Woherine may also continue to purchase power from other utilities once a small commitment fee is paid to Detroit Edison -- and once the firm purchase obligations of the agreement are met.

Purchased power agreements with Consumers Power Company at the Ntilton and Plains Road substations will also be continued. Iloweser; the f ermi Il sale agreement does require %herine to cancelits firm purchase power contract with the City of Grand liasen on Nosember 1,1990 This contract pressntly allows Woherine to purchase up to 20 megawatts of firm capaeny.

Terms outhned in the f ermi sale agreement aho allow Woherine to maintain and operate all existing generating facilities.

Wherine presently has 157.5 megawatts of coal-fired, oil, gas and hydroelectric generation. Iloweser; these faciliti;s may only be replaced in future years with generation of like site, type and fuel. This prosision will neceuitate that Woherine con-tinue to maintain all generating facilities in top operating condition. Finally; the agreement does allow Woherine to maintain us relationship with the N!unicipal and Cooperatise Pool (NtCP), which is comprised of Woherine and municipal electric utihties in Grand 11asen, I owell, Traserse City and Zeeland. This power pool is operated through Woherine's James O. Wood Energy Control Center in Cadillae. The agreement further stipulates that Woherine can expand the NICP or enter into future power poohng arrangements. In fact, the Nfichigan Public Power Agency is presently esamining the feasibility of joining the NICP for its power dispatching needs.

Awurances prosided by this agreement will aho allow Woherine to accurately pro-jett its future power supply resources and to move forward with a comprehensise economie deselopment and load management program. To facilitate these anticipated efforts, a number of measures were implemented this past > car. The board of directors approsed formation of an Energy Nianagement and N1arketing Committee, which is comprised of Woherine directors, management, member system managers and engineering con-l sultants. This committee w di examine the economie de'elopment, load management and marketing concerns of Woherine and its member-systems. In addition, the formulation of incentise dual fuel heating rates and electric hot water heating rates began during the

)

past year. It is anticipated that these rates will be bled with the Niichigan Public Sersice Comminion in 1987.

In particular, load management efforts can be enhanced through Wolverine's Energy Control Center in Cadillae. Named after retiring manager power production James O.

Wood, the Energy Control Center prosides Woherine's iaember-systems and members of the N1CP with state-of-the-art computerited power dispatching capabilities. These capabihties allow Energy Control Center shift supersisors access to a continuously up-dated internal generation and purchase power database, while aho providing increased James O. wood reliability throughout WoherineN 1,500 mile transmission line network.

Nianager Power Produchon

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_ _ _ = = -

Page 11 One of the primary functions of the Energy Control Center is to schedule purchased power transactions and operation of the cooperative's generating units. Since Wolverine purchases approximately 70 percent ofits energy requirements, purchas-ed power costs are a prime indicator of overall wholesale power costs. Purchased power costs averaged 27.83 mills per kwh during 1986, as compared to a 30.91 mills per kwh figure during 1985. The maiority of this wholesale power is purchased under agreements with Detroit Edison, Consumers Power and the City of Grand Haven.

I A large percentage of internal generation costs are attributable to coal purchases and accompanying transportation costs.

Since Wolverine purchases approximately 100,000 tons of low-sulfur coal each year, these costs are very significant and efforts were made again this past year to further reduce these costs. Renegotiation of a coal sales agreement with Winchester Coal Company resulted in more stringent provisions in the quality of low-sulfur coal shipments and a cap on various cost indexes.

A rail transportation contract with the Chessie/ Seaboard System Railroad was also renegotiated, resulting in a contract exten-sion through 1990 in exchange for lower transportation costs. Coal and transportation costs have been reduced mcire than 30 percent since 1982.

This reduction in coal and coal transportation costs is directly responsible for the continued economical operation of the Advance Steam Plant. More importantly, the plant has continued to operate economically even though maintenance efforts at the plant have increased. This plant continues to be one of the state's best run and most efficiently operated coal-fired generating plants. In addition, Wolverine retained Solid Fuel Technology to examine various methods of extending the operating life of the plant. However; this study was temporarily halted pending final resolution of Fermi 11 matters. A 15 megawatt ownership in Consumers Pbwer Company's 770 megawatt J. H. Campbell III plant also continues to prcwe beneficial to Wolverine.

During 1986, this plant was named the fifth most efficient generating unit in the country.

)

Wolverine's hydroelectric, combined cycle and oil-fired plants also continue to operate as system conditions dictate. The two small hydroelectric facilities are operated whenever possible and as water levels provide. Each of the other generating plants are fully staffed, maintained and able to be brought into operation in less than 15 minutes, but are primarily used in system emergencies and under peaking conditions. Maintenance and improvements at each of these plants continues to be a top priority for department personnel. In addition, improvements to the Beaver Island Generating Plant will result in i

added reliability to island residents.

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Page 12 i

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l Transmission, Engineering & Operations Transminion system construction, maintenance and upgrading continued to be the top priority of departmental personnel during the past year. In addition, operation of the new computerized energy control center and mobile communications system will aka enhance operational capabilities.

h bulk of the new construction and system maintenance efforts has been completed by Woherine employees, since it has been determined that they can complete these duties with greater efficiency, a higher degree of workmanship and in a more economical manner than outside contractors. During the past year, department employees completed the design and construction of the Advance, Fife Lake, Ixroy, West Traverse and Wilson substations. Each of these substations was energized to the Woherine transmission network. Initial construction was also begun at the Hagensville, Newaygo and Thompsonville substations and the Chester, Copemish and Rodgers OCB stations.

Engineering, design and construction tasks on seseral transmission line projects were also started during 1986. Work on a sesen mile section of 69kv transmission line, which will tie into the Hagensville substation, neared completion. Initial engineering and design efforts were aho begun on the Scottsille to Victory line and the Fife Lake to South Boardman express feeder con-sersion, while preliminary work was also started on the Pierson to floward City and Casnovia to Grand Haven transmission lines.

These construction and system maintenance and upgrading efforts were tided by a departmental reorganization which resulted in Ice Reibel and Ted Underwood being named as assistant department managers under Richard Chappell, manager of transmission, engineering and operations. Reibel will sene as assistant in the northern service area and Underwood will sene in a like capacity in the southern senice area. As a result of this reorganization, Wolverine will be able to maintain esen greater efficiency in its system construction, maintenance and upgrading efforts.

Operational capabihties will also be improsed as a result of the installation and operation of a new mobile radio system.

Twehe repeater towers located throughout the cooperathe's 35-county senice area link this new communications system to the Energy Control Center, Boyne City headquarters, Woherine generating plants and vehicles. This new Motorola system aho has the capability of communicating with each of the member-systems and their headquarters and vehicles -- even though their mobile radio systems operate on different frequencies. The cooperatise's instrumentation and communication techni-cians also continued with installation of Supenisory Control and Data Acquisition (SCADA) equipment throughout Woherine's senice area.

System reliability will also be enhanced by the initiation of a comprehensive breaker maintenance program, a new relay technician and the compilation of a system switching manual. Department personnel, along with employees from the Energy Control Center, are presently in the final stages of this switching manual project. When completed, this manual will outline specifie switching procedures for all points on the Woherine system. A new utility man / warehouseman has aho been hired to, among other duties, coordinate inventory records in the southern senice area. Routine meter reading, substation checks, oil sampling, relay testing, capacitor regulation and numerous other maintenance operations continue to be a priority for transmission department employees.

In addition, numerous other jobs were undertaken this past year to enhance system operations. Summer work crews completed painting of 23 substations in the northern senice area thi, past year and plans call for this program to be espanded throughout the senice territory this coming summer. The substation grounds at each of the cooperatise's more than 100 substations are aho now receising regular mowing, weed control and yard maintenance.

Woherine's right of way personnel aho continued with a number of projects,includmg N

the supenision of contracted right-of-way brushing crews, purchasing of substation and transminion line properties and completion of Horrowers Ensironmental Reports for the cooperatise's 1987 89 work plans. By the end of 1987, all of Wohenne's nearly 18,000 acres of right of way will hase been inspected and maintamed within the past fise years.

Hkhard B. Chappell Manager, Transmission, Engineering & Operations

n

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_m Page 13 Safety and training efforts also continue to be a most important priority for transmission department employees. Monthly safety and training meetings have been expanded in 1987 to include more extensive information on system operations and safety procedures. Wolverine's apprentice lineman training program has also been en arged and now includes participation by 40 apprentice linemen from more than 15 rural electric and municipal utilities throughout Michigan. Wolverine apprentice linemen Ron Comfort, John DeGear, Dave Howard, Glenn Robinson and Gary Rogers were each graduated from the program during the past year as journeyman / utility linemen.

Transmission system operations will also be enhanced as a result of discussions during the past year with Consumers Power Company. These discussions led to Wolverine's purchase of 93 megawatts in the Consumers Power transmission system. In addition, Wolverine is presently discussing the potential for additional ownership purchases in the Consumers Power system.

This transmission ownership allows Woherine to move large amounts of bulk power over the Consumers Power system while avoiding all wheeling charges. Wolverine's board of directors also approved purchase of the Blendon Interconnection facility from Consumers Power which will result in an annual estimated savings of approximately $40,000. By purchasing the facility, Wolverine will no longer be required to pay carrying charges on this facility to Consumers Power Company. Blendon has now become one of eight Consumers Power interconnection points on Wolverine's transmission system. Initial engineering work is also underway on the Wayland tie with Consumers Power. This tie, scheduled for completion in the next few years, will ensure added reliability in the southern service area.

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Page 14 Regulatory Affairs I rom a regulatory perspectiv, lo86 was a good year for Woherine. No rate increases were required, power supply costs were adequately recosered, the cost of regulation was markedly reduced and the N1ichigan Public Service Commission (Com-mission) authorized large refunds. N1 ore specifically:

- Woherine and the sesen member systems continued to coordinate compliance with the Power Supply Cost Recosery (PSCR)

Act -- leading to large refunds to the member-systems and their member-consumers.

- Woherine, in its first full year offering the same blended rate to all seven member-systems, was able to issue large refunds pursuant to the new TIER ceiling mechanism.

- Woherine, the member-systems and the Comminion continued to attempt to resohe difficult cogeneration questions.

Woherine completed proceedings relatise to the Comminion% requirements for nuclear plant decommissioning.

- Woherine completed the process of reducing its regulatory assessment.

Power supply costs are obsiously important to Woherine and the member-systems -- and fulletimely/ fair power supply cost recosery is sital to financial health. In N1iehigan, the 1982 PSCR Act prosides the mechanism for power supply cost recosery. lor the fourth straight year, PSCR Act compliance was accomplished without a hitch.

f irst, Woherine and the member-systems succenfully obtained Commission approval for their projected 1986 PSCR fae-tors, oser the strong objection of the Ntichigan Attorney General. Second, Woherine again saw stable power supply costs, allowing large PSCR refunds to the member systems, which esentually were returned to member-consumers.

In early 1986, Woherine refunded $1,782,93v based on its reconciliation of 1985 power supply costs and revenues. During 1986, Woherine r: funded an additional $3,290,838 based on the continued stability of power supply costs. Finally, based on actual 1986 powe: supply costs, Woherine will soon refund still another $1,341,668 to the member-systems. These refunds translate directly into lower monthly bilk for the member-consumers at the end of the line.

1986 was WoherineN first year with blended tates -- the same wholesale rate to all sesen member-systems. With these changes, Woherme has begun to analyze its rates to accommodate load management and marketing plans.

In 1986, Woherine aho issued the first refunds under the new "1.35 TIER ceiling mechanism". This mechanism, authorii-ed by the Commiuion in late 1985, allows Woherine to inue refunds to the member systems to the estent that Woherine's year-end times interest earned ratio (TIER) exceeds 1.35. As stated earlier in this report, Woherine's 1985 TIER was 1.65, allowing Woherme to refund $1,295,908 to the member-systems during 1986. These refunds reduced power supply costs to the member-systems by approximately l A milk per kwh, or approximately 3r.,

Awuming that Woherine k able to resohe its termi 2 problems, it is hoped that future annual reports will be able to describe esen more refunds through this mechanism.

In 1986, Wolverine, the member systems and the Commnsion attempted to resohe how cogenerators and small power producers should be addrewed. This has not prosed to be an easy matter.

A 1978 federallaw requires utilities to purchase power from cogenerators and small power producers and to pay for such power at the utihty% asoided cost - ie., the cost of the power which the utihty would hase purchased had the cogenerator or small power producer not prosided the power. Ior Woherine, such asoided costs equate to about 3.0c g

per kwh.

y I he problem is that at least one cogenerator has complained to the Comminion ihat a price of 3Dt per kwh n not enough to support his insestment in the cogeneration

$y facihtiet Woherine4 response is that the federal law does not require that the utility guarantee the profitability of the cogeneratorN imestment -- merely that the utility pay for such power based on its asoided costt In other words, Woherine does not want to be in the position of raising its rates to the member systems solely to guarantee the pro-fitabihty of a cogenerator's imestment.

Albert Ernst General Counsel Oskema, Gossett, Spencer, GooJnow & Trigg

1

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Page 15 l

l The matter is now pending before the Commission in three separate cases. In these proceedings, it is Wolverine's intent (1) to continue to purchase such cogeneration or small power production on behalf of the member-systems,(2) to assure that in those cases in which the cogenerator or small power producer insists that the member-systems make the purchase, that Wolverine's system integrity not be adversely affected, and (3) to make sure that the member-systems are financially protected.

These matters are evolving - and 1987 should, hopefully, bring a successful resolution to these matters.

l As mentioned earlier, Wolverine is part owner of Fermi 2. Therefore, under federal law, Wolverine is required to set aside funds so that Fermi 2 can be decommissioned in the future. In 1986, Wolverine successfully obtained Commission authority i

to assess its members 0.397 mills per kwh for each kwh sold to fund this required trust. This equates to approximately 5400,000 per year starting with Fermi 2's commercial operation.

If all goes as planned, the member-systems and their member-consumers will never be impacted by these surcharges. This is because on October 23,1986, Wolverine and Detroit Edison entered into a letter of Understanding which provided, among other things that (1) Detroit Edison would purchase Wolverine's Fermi 2 ownership on January 1,1990 and (2) that Detroit Edison would reimburse Wolverine for its Fermi 2 related out of-pocket costs. Since these out-of-pocket costs include decom-missioning, Wolverine is presently negotiating with Detroit Edison a mechanism whereby Detroit Edison will pay for such costs so that they never are applied to the member-systems or their member-consumers.

Wolverine, as a utility regulated by the Commission, is annually required to pay a regulatory assessment - based on Wolverine's gross revenues. The same is true for each of Wolverine's member-systems.

The gross revenues of Wolverine and its member-systems are, obviously, earned by " teaming up" to provide electricity to the member-consumers in other words, Wolverine provides the electricity to the member-systems so that the member-systems may distribute the same electricity to their member-consumers. Thus, the gross revenues of Wolverine and the member-systems used in calculating the regulatory assessment relate to the same electricity being sold to the member consumer.

In 1985, Wolverine filed a petition with the Commission suggesting that Wolverine and its member-systems were "being hit twice" in providing electricity to the member-consumer -- once by Wolverine's sale to the member-systems and again by the member-systems' sale to their member-consumers. In view thereof, Wolverine asked the Commission to reduce its regulatory assessment and derive a fairer and more equitable formula for determining regulatory assessments. In an order issued in 1986, the Commission agreed with Wolverine's arguments and reduced Wolverine's assessment by 50%. This should provide cost savings in 1987 and years to come.

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Page 16 System Statistics Purchased Power Costs (mills /kWh)

Advance Plant Fuel Costs (mills /kWh)

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[ZCZ0neseZ 0,?$,T[M8ffl;81!3MCEMMZ3,178,062Z,T%~~)G l're.que Isle 23,768 416 63 3,746 137,% 2,907 11,2(M,770 550,044 68 pguiWJZ3JiWOM] V7_5]@W,$_(D 6W.M?j{((pM?tLCl?]

Irl4'ount) 14,823 224 5.8 2,556 142,491,452 11,005,075 44 j n psem Miesitene E j.4 C.'l N 1 EI ] M C 3I.N I M I Ll N.I N 2 3 5 3 3.233 E 393

Page 17 MICHIGAN 46, NEWAYGO WOLVERINE POWER SUPPLY COOPERATIVE, INC.

BOYNE CITY, MICHIGAN Report on Examination of Financial Statements for the years ended December 31,1986 and 1985 CONTENTS Pages Financial Statements:

Balance Sheets 18-19 Statements of Revenue 20 21 Statements of Changes in Financial Position 22 23 Statements of Patronage Capital and Other Equities 24 Notes to Financial Statements 25-31 Report of Independent Accountants 32

. Page 18 MICHIGAN 46, NEWAYGO WOLVERINE POWER SUPPLY COOPERATIVE, INC6 BALANCE SHEETS, as of December 31,1986 and 1985 i

1986 1985 ASSETS Electric plant, at cost (Notes A, B, F, and G):

In service

$ 148,869,277 104,232,714 Construction work in progress 744,277,503 788,869,140 893,146,780 893,101,854 Less, Accumulated depreciation and amortization 38,047,220 35,055,360 Net electric plant 855,099,5_60 858,046,494 Other assets and investments:

Investments in associated organizations (Note C) 4,486,238 4,507,891 Note receivable 254,080 255,000 Total other assets and investments 4,740,318 4,762,891 Current assets:

Cash and cash investments General funds 7,188,790 8,769,057 Cash Construction funds 894,155 228,199 Accounts receivable 5,374,427 5,610,447 Receivable from Detroit Edison (Note G) 40,371,302 1,171,989 Materials and supplies (Note A) 6,503,844 7,968,051 Other current and accrued assets 695,399 687,358 Total current assets 61,027,917 24,435,101 Deferred charges 22,205 22,205 Total assets

$ 920,890,000

$ 887,266,691 l

l l

The accompanying notes are a part of the financial statements.

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EQUITIES AND LIABILITIES 1986 1985 Mi Equities:

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Memberships 1,400 -

1,400 Patronage yapital

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12,811,484 11,289,531 Other equilles e

1,641,604 i

1,013,770 Total equities 14,454,488

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.,. ' 12,3C4,701 849,' 78,063 Long term debt (Notes F and G) 847,981,019 8

Current liabilities:

Current maturities of long term debt ~(Note F) 9,417,000 10,713,000 Short term borrowings REA (Note G)^

39,769,673 a

Accounts payable purchased power 4,061,040 4,169,412 Accounts payable other 666,905 213,827 Advances payable to members 3,596,500 l Refunds payable to members (Note E) 1,341,668 3,078,847 Taxes and wages payable 2,028,467 2,172,005 Accrued vacation and sick leave I

i$

562,480 557,022 1

(i Accrued Interest 607,260 203,722 t

Total current liabilities 58,454,493 24,704,135 Deferred credits 379,792 n Commitments and contingencies (Note G) t' -

Total equities and liabilities S 920,890,000

$ 887,266,69 t, I

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.y3 STATEMENTS OF REVENUE a

for the years ended December 31,1986 and 1985 a

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( 986 N'

• 1 Percent of Operating j'

,/ Revenue Amount r

Operating revenue 47,982,767 100.0 Operating expenses:

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Purchased power 23,713,390 49.4

,i, Power generation:

Operation 8,768,548 18.3 Maintenance 615,675 1.3 Transmission expense:

Operation 862,996 1.8 Maintenance 545,091 1.2 Distribution expense:

Operation 159,053

.3 Maintenance 95,592

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Administrative and general:

Operation 2,136,012 4.5 1

Maintenance 67,711

.1 b

Depreciation and amortization (Note B) 2,995,131 6.2 Taxes 2,058,700 4.3 Other 3,446 Total operating expenses 42,021,345 87.6 f.

Operating margins before fixed charges 5,961,422 12.4 I%

Fixed charges:

Interest on debt (Note A) 4,439,469 9.2 Operating margins after fixed charges 1,521,953 314 Capital credits 4,522 Net operating margins 1,526,475 3.2 Non-operating margins:

Interest income 623,312 1.3 Gain on sale of electric plant Net margins 2,149,787 4.5 The accompanying notes are a part of the financial statements.

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S 50,042,520 100 4 (2,059,753) s1

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25,322,267 50.6 (1,608,877)

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9,625,956-19.2 (857,408) 999,671 2.0

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827,525 1.6 460,976

.9 84,115 '

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2,128,486 4.3 7,526

't 44,438

.1 23,273 i

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2,981,832 6.0 13,299 f

j' 1,896,388 3.8 162,312 7,575 (4,129) 3

- 44,628,171 89.2 (2,606,826)

,i 5,414,349 10.8 547,073 p

4,663,209 t 9.3 (223,740) 751,140 1.5 770,813 4,522 751,140 1.5 775,335 656,425 1.3 (33,113) 108,502

.2 (108,502) s 1,516,067 3.0 633,720 l

, Page 22' STATEMENTS OF CHANGES IN FINANCIAL POSITION for the years ended December 31,1986 and 1985 1986 1985 Funds were provided by:

Net margins 5

2,149,787 1,516,067 Items not affecting funds:

Depreciation and amortization 2,995,131 2,981,832 Capital credits assigned from CFC (4,451)

(108,502)

Gain on sale of electric plant Proceeds from sale of electric plant 43,685,742 42,351,495 Advances from CFC, REA and FFB 6,524,000 48,106,000 increase in deferred credits 10,707 ~

Decrease in non utility property 12,210 Current portion of note receivable 920 Capital credits refunded from CFC 50,704 1 %,715 Decrease in working capital 5,226,026 Total 55,401,833

$ 100,292,550 Funds were used for.

Extension and replacement of electric plant 43,733,939 89,557,345 Payments and current maturities of long term debt 8,421,044 10,713,000 Terms l stion of deferred compensation plan 379,792 Purcht 3 of CFC capital term certificates 24,600 Increase in deferred charges 22,205 increase in working capital 2,842,458 Total 55,401,833

$ 100,292.550 The accompanying notes are a part of the financial statements.

Page 23 Changes in Composition of Working Capital 1966 1985 Increase (Decrease)

Current assets:

Cash and cash investments -

General funds S

(1,580,267) 2,746,163 Cash Construction funds 665,956 873 Accounts receivable (236,020) 260,109 Receivable from Detroit Edison 39,199,313 1,171,989 Materials and supplies (1,464,207) 981,506 Other current and accrued assets 8,041 517,239 increase in current assets 36,592,816 5,677,879 Current liabilities:

Current maturities of long term debt (1,296,000) 8,655,237 Short-term borrowings REA 39,769,673 Accounts payable purchased power (108,372) 155,353 Accounts payable - other 453,278 (6,636)

Advances payable to members (3,596,500)

(375,000)

Refunds payable to members (1,737,179) 1,885,166 Taxes and wages payable (143,538) 564,221 Accrued vacation and sick leave 5,458 52,776 Accrued interest 403,538 (27,212)

Increase in current liabilities 33,750,358 10,903,905 increase (decrease) in working capital 2,842,458 (5,226,026) l l

Page 24 STATEMENTS OF PATRONAGE CAPITAL AND OTHER EQUITIES for the years ended December 31,1986 and 1985 PATRONAGE CAPITAL 1986 1985 Balance, beginning of ye:ai 11,289,531 10,538,391 Operating margins assignable 1,521,953 751,140 Balance, end of year 12,811,484 11,289,531 Assignable 1,521,953 751,140 Assigned to date 11,289,531 10,538,391 Total 12,811,484 11,289,531 OTHER EQUITIES 1986 1985 Balance, beginning of year 1,013,770 248,843 Non-operating margins 623,312 764,927 Capital credits 4,522 Balance, end of year 1,641,604 1,013,770 The accompanying notes are a part of the financial statements.

Page 25 NOTES TO FINANCIAL STATEMENTS for the years ended December 31,1986 and 1985 NOTE A:

ACCOUNTING POLICIES.

The following is a summary of the accounting policies adopted by the Cooperative which have a significant effect on the financial statements. The policies conform to generally accepted accounting principles and have been consistently applied. Certain reclassifications have been made in the accompanying 1985 financial statements to conform to the 1986 presentation.

Inventory Valuation - Materials and supplies are stated at average unit cost, which is not in excess of mr.rket.

Construction Period Interest - The cost of construction work in progress includes the actual cost of funds borrowed to finance the construction of the Enrico Fermi Nuclear Unit No. 2. The Cooperative has incurred total interest costs of $80,825,041 and $88,147,548, of which $76,385,572 and $83,484,339 has been capitalized during the years ended December 31,1986 and 1985, respectively.

Federal Income Taxes The Cooperative is exempt from federal income taxes under Section 501(c)(12) of the internal Revenue Code. Therefore, no provision for federal income taxes has been made.

NOTE B:

ELECTRIC PLANT.

Electric plant in service consisted of the following at December 31,1986 and 1985:

1986 1985 Intangible plant S

628,005_

628,005 Production plant 38,381,277 38,260,123 Transmission plant 51,049,680 50,557,799 Distribution plant 12,841,428 12,008,987 General plant 3,641,309 2,777,800 Fermi 2 nuclear fuel 42,327,578 Total

$ 148,869,277 104,232,714

Page 26 NOTES TO FINANCIAL STATEMENTS, Continued.

for the years ended December 31,1986 and 1985 NOTE B: ELECTRIC PLANT, Concluded.

Major classes of construction work in progress consisted of the following at December 31,1986 and 1985:

-1986 1985 Fermi 2

$ 737,202,413

$ 785,107,035 Other construction 7,075,090 3,762,105 Total

$ 744,277,503

$ 788,869,140 Provision has been made for depreciation of production, transmission and distribu-tion plants at - a straight line composite rate of 3.10%, 2.75% and 2.88%,

respectively, per annum.

General Plant depreciation rates have been applied on a straight-line basis and are as follows:

Percent Structures and improvements 2

Transportation equipment 14 17 Power operated equipment 10-11 Communications equipment 8

Office furniture and fixtures 6-10 Tools and shop equipment 6

Laboratory equipment 6

Other general plant 5-10

Page 27 NOTES TO FINANCIAL STATEMENTS, Continued for the years ended December 31,1986 and 1985 NOTE C:

INVESTMENTS IN ASSOCIATED ORGANIZATIONS.

Investments in associated organizations consisted of the following at December 31, 1986 and 1985:

1986 1985 National Rural Utilities Cooperative Finance Corporation:

Capital term certificates 2,880,695 2,856,095 Patronage capital credits 1,590,882 1,637,135 Other 14,661 14,661 Total 4,486,238 4,507,891 NOTE D:

SHORT-TERM BORROWINGS.

The Cooperative has avellable an unsecured line-of credit with the National Rural Utilities Cooperative Finance Corporation (CFC), whereby advances of

$12,000,000 for general operations are available until March 30, 1987, interest. on advances is determined monthly by CFCs NOTE E:

REFUNDS PAYABLE TO MEMBERS.

Refunds payable to members consist of two separate refunds. The first is under a Michigan statute,. Power Supply Cost Recovery Clause, whereby estimated power cost for a 12 month period will be billed by the Cooperative to its members each month at a fixed rate. Following the close of the 12 month period, a recon-ciliation of actual power cost to estimated pov.er cost will determine the under or over-collection with the appropriate amount being collected or refunded to the members. At December 31,1986 and 1985, the Cooperative had over-collected $1,341,668 and $1,782,939, respectively, which is refundable to its members.

!Page 28.

NOTES TO FINANCIAL STATEMENTS, Continued for the years ended December 31,1986 and 1985 i

NOTE E:

REFUNDS PAYABLE TO MEMBERS, Concluded.

The second is a 1.35 Tier Refund which was adopted by the Cooperative for 1985. The refund is the difference between 35% of interest on long-term debt and not margins before the Tier Refund. The refund is allocated to the members based on each member's percentage of power purchased to total power purchased by members. The amount of 1.35 Tier Refund payable at December 31,1985 was

$1,295,908. The Tier Refund was not made in 1986.

NOTE F:

LONG-TERM DEBT.

Substantially all assets are pledged as collateral for long-term debt. Long term debt conslated of the following at December 31,1986 and 1985:

National Rural Utilities Cooperative Finance Corporation (CFC) note, bearing interest

.at 10.5% per annum. The note is payable in quarterly installments to the year 2019.

Rural Electrification Administration (REA) mortgage notes, bearing interest at 2%

and 5% per annum. The notes are payable in quarterly installments to the year 2018.

Federal Financing Bank (FFB) notes, guaranteed by the REA and bearing interest at 7.252 % 12.946 % per annum at December 31, 1986. The rate of interest is rede-termined by FFB at each change of maturity date.

Advances made under FFB notes issued prior to October 1,1983 have a seven year deferment before the repayment of pnncipal is required. The final principal pay-ment of all loans is established when the notes are issued. At the time of each advance, the Cooperative can select an initial maturity date for that advance of not less than two years or more than seven years. Extensions of the initial maturity date are available, however, not to be less than two years in length. The total period of the initial maturity date and extensions cannot exceed a maximum of seven years. After the maximum seven year maturity, the advances are to be repaid according to FFB guidelines.

Maturity dates of all advances for Fermi 2 issued after October 1,1983 are determined by REA based on the project's estimated commercial operation date. All advances under these notes are to be repaid according to FFB guidelines.

All notes issued prior to October 1,1983 are 34 year mortgage notes and all notes issued after October 1,1983 are 30 year mortgage notes.

1

Page' 29 NOTES TO FINANCIAL STATEMENTS, Continued for the years ended December 31,1986 and 1985 NOTE F:

LONGTERM DEST, Concluded.

Following is a summary of the outstanding long-term debt at December 31,1986 and 1985:

1986 1985 CFC 1,226,898

-S REA 52,509,443 51,175,587-FFB-803,661,678 809,415,476 857,398,019 860,591,063 Less, current maturities 9,417,000 10,713,000 Total long term debt S 847,981,019

$ - 849,878,063 Unadvanced loan funds of $2,594,181 and $5,762,756 are available to the Cooperative on loan commitments from REA and FFB, respectively.

Maturities of long term debt for those notes being repaid, excluding FFB notes in defer-ment at December 31,1986, for the next five years are as follows: 1987 $9,417,000; 1988 - $10,534,000; 1989 - $12,057,000; 1990 $13,311,000 and 1991 $13,347,000.

i NOTE G:

FERMI 2.

By a Participation Agreement dated February 8,1977, the Cooperative and The Detroit Edison Company (Detroit Edison) are joint owners, as tenants in common, of a 1,093 megawatt nuclear generating unit known as Enrico Fermi Nuclear Power Plant Unit No.

2 (Fermi 2) located in Frenchtown Township, Monroe County, Michigan. Under the Participation Agreement, the Cooperative agreed to purchase a twenty percent (20%)

undivided interest in Fermi 2 and have a twenty percent (20%) entitlement to the capaci-ty and net energy output thereof, i

When the Cooperative entered into the Participation Agreement in 1977, it was anticipated j

that Fermi 2 would be completed in 1980 at a cost of less than $1 billion. To date, Fermi 2 is still not in commercial operation and total construction costs are anticipated to be in excess of $4 billion.

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Page 30 -

NOTES TO FINANCIAL STATEMENTS, Continued for the years ended December 31,1986 and 1985 NOTE G:

FERMI 2, Continued.

The construction delays and cost overruns have adversely affected the Cooperative's financial condition and caused the Cooperative and Detroit Edison to enter into a number of amendments to the initial Participation Agreement. The most relevant of these revisions are the fifth amendment (December 16,1983), the sixth amendment (August 15,1985), and an October 23,1986 Letter of Understanding.

Under the fifth amendment,it was agreed that the Cooperative's portion of construction costs would be limited to $426.9 million, excluding capitalized interest costs. However, in exchange for capping the Cooperative's construction costs, the Cooperative's owner-ship interest would be reduced, based on the ratio of its Fermi 2 investment compared to the total Fermi 2 investment of both the Cooperative and Detroit Edison. Thus, as construction costs increased, the Cooperative's Fermi 2 ownership interest was cor-respondingly reduced. At December 31,1985, the Cooperative's Fermi 2 ownership in-terest was 15.229%.

The continuing construction delays and cost overruns (which correspondingly reduced the Cooperative's Fermi 2 ownership interest) caused the Cooperative and Detroit Edison to enter into the sixth amendment. Under the sixth amendment and a subsequent agreement, Detroit Edison agreed to purchase a portion of the Cooperative's ownership Interest in Fermi 2 plant, nuclear fuel and materials and supplies, quarterly, in amounts equal to the Cooperative's quarterly Fermi 2 principal and interest payments to FFB. Sales to Detroit Edison pursuant to these agreements were $42,028,144 and

$43,685,742 in 1985 and 1986, respectively.

With respect to such sixth amendment transactions af ter December 31,1985, a dispute arose between the Cooperative and Detroit Edison as to whether Detroit Edison's pro-viding funds equal to the Cooperative's quarterly Fermi 2 interest payment to FFB requires a transfer of the Cooperative's Fermi 2 ownership to Detroit Edison.

Accordingly, quit claim deeds, bills of sale and releases of liens relating to the first and second quarterly 1986 transactions are being held in escrow, pending resolution of the dispute. With respect to the quarterly principal and interest payments due FFB for the third and fourth quarters of 1986, the Cooperative did not make such payments

- and the REA, as guarantor of the FFB borrowing, made such principal and interest payments - which are recorded as a current liability in the Cooperative's financial statements at December 31,1986.

Through December 31,1986, the Cooperative has capitalized $42,327,578 and $7,124,752 of nuclear fuel and overhead costs, respectively, and will not begin amortizing these costs to expense until Fermi 2 becomes operational. It is not known when Fermi 2 will become commercially operable.

On October 23, 1986, the Cooperative and Detroit Edison entered into a Letter of Understanding which is intended to resolve all differences between the parties. The terms of the Letter of Understanding include t' e following:

n

Page 31 NOTES TO FINANCIAL STATEMENTS, Concluded for the years ended December 31,1986 and 1985 NOTE G:

FERMI 2, Concluded.

• Detroit Edison will provide the Cooperative with funds necessary to meet its quarterly obilgations to the FFB (including the third and fourth quarter 1986 payments in arrears) through December 31,1989.

• Detroit Edison will purchase the Cooperative's remaining Fermi 2 owner-ship interest on January 1,1990, at which time title will pass to Detroit Edison, whether or not Fermi 2 has attained commercial operation.

• The purchase price which Detroit Edison will pay the Cooperative will be equal to the Cooperative's total unamortized Fermi 2 related debt on January 1,1990, less $200 million. Preliminary calculations indicate that the purchase price will be equal to approximately $550 million and Detroit Edison will assume responsibility for payments to the FFB relative to such amount.

• The Cooperative will convert its short and intermediate term debt into long term notes guaranteed by the REA and the Cooperative will be responsible for any prepayment penalties associated therewith.

• The Cooperative has agreed to purchase major portions of its capacity and energy requirements, on a firm and interruptible basis, from Detroit Edison, through December 31,2025.

• The Cooperative and Detroit Edison have agreed to seek all regulatory approvals required to effectuate the Letter of Understanding.

The Cooperative and Detroit Edison are presently preparing final documents embodying 1

the terms of the Letter of Understanding. The Cooperative is also presently negotiating with the REA to restructure debt service payments associated with the $200 million of Fermi 2 related debt which Detroit Edison is not assuming. Management has Indicated that it anticipates seeking rate relief from the Michigan Public Service Commission, as necessary, to meet any debt restructuring plan.

NOTE H:

RETIREMENT PLAN.

Retirement plan benefits for substantially all employees are provided through participation in a defined contribution retirement and security program and savings plan for employees of the National Rural Electric Cooperative Association and its member systems. Contributions to the retirement and security program were $193,200 in 1986 and $198,900 in 1985. Contributions to the savings plan were $131,100 In 1986 and $125,700 in 1985.

. Page 32 certifed putsc acmuntants 2

ey Amencan Bank in pnncipal areas of the world

&Lyarand

e"1' Lana.34 telephone (219) 234-4021 To the Board of Directors and Members of Wolverine Power Supply Cooperative, Inc.:

We have examined the balance sheets of Wolverine Power Supply Cooperative, Inc. as of December 31,1986 and 1985, and the related statements of revenue, changes in financial posi-tion, and patronage capital and other equities for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

As discussed in Note G to the financial statements, the Cooperative is presently involved in negotiations with The Detroit Edison Company and the Rural Electrification Administration concerning its investment in the Enrico Fermi Nuclear Power Plant Unit No. 2. Adjustments to the recorded asset and liability amounts,if any, which might be necessary as a result of the agree-ment ultimately reached between the parties cannot presently be determined.

In our opinion, subject to the effects on the financial statements of such adjustments, if any, as might have been required

'd the outcome of the uncertainty referred to in the preceding 7

paragraph been known, the finar

- statements referred to above present fairly the financial posi-

. tion of Wolverine Power Supply Ct.,, perative, Inc. as of December 31,1986 and 1985, and the results of its operations and changes in its financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

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Ilowever, when Fermi 2 achieves com-mercial operation, earnings will no longer be supported To Our by the Allowance for Funds Used During Construction (AFUDC), a non-cash accounting credit in the income Shareholders:

siatement, which heiped support ou, record profits in recent years during the company's major construction The year 1986 literally was one for program, h1aintaining earnings at those levels in the future will pose a significant challenge since the rate the record books for Detroit Edison. Our employes pro-increase will not cover the total cost of Fermi 2. Despite vi&d record levels of service to record numbers of cus-the shortfall, we are committed to maintaining our divi-tovers that generated record sales and earnings.

dend at its current level. We will file a new rate case in These historic achievements were ac-1987 which covers additional Fermi 2 costs resulting in companied by other company milestones which took part from the delays in reaching commercial operation.

considerable effort, resulted in significant pride and will Another factor affecting future earnings positively impact the company's future. Yet, our pride and is the new accounting standard adopted in December 1986 progress were offset by disappointments in areas of by the Financial Accounting Standards Board.This new primary concern to your management.

standard requires the company to recognize certain losses For example, while the Fermi 2 power related to abandonments and disallowances of plant costs.

plant produced electricity for customers for the first time As permitted, the company anticipates adopting the new in September, difficulties experienced in our testing pro-accounting standard in 1988, although the standard allows gram and the resulting delays in commercial operation delayed application until 1989 in certain prescribed cir-were extremely disappointing.

cumstances. This is discussed in detail in Note 3 on pages Also, although we adopted in 1986 a 28 to 30.

new strategic plan to position us effectively for the future, To bolster future earnings, and to help your company and the electric utility industry face chal-support the dividend, your company embarked upon lenges on a variety of fronts - regulatory, Icgislative, major programs to improve Detroit Edison's competitive financial and competitive - which are truly historic and and financial positions by holding the line on costs, worrisome. Our plans for meeting these challenges are increasing sales and improving service to customers.

dt.cribed throughout this report.

Simply stated, the operating focus at in 1986, common stock earnings rose Detroit Edison - and the theme of this report -is to better for the eighth consecutive year, totaling a record $378.3 serve all residential, commercial and industrial customers.

million and up 13.2 percent from 1985. The record per-Advances in innovation, leadership, competition, service share earnings of $2.58 - despite more shares outstand-and performance were achieved in 1986 which will serve ing - were up 25 cents from the $2.33 for 1985. The your company and its customers well for years to come.

Comparative Results of Operations and Statistical Review But the most important result - and one on pages 40 to 43 detail the company's long record of year-of which we are particularly proud -is that we held the to-year gains. During the past to years, earnings for line on the cost of producing electricity for customers and, common stock increased a total of 345 percent, and per-in some cases, lowered the cost. For example, in 1986, share earnings increased 55 percent despite a 186-percent industria: customers, on average, paid 6.17 cents per increase in the average number of shares outstanding.

kil9 watthour sold,1 percent less than last year.

Reflecting more aggressive marketing Capital expenditures of $645 milliore, and economic development efforts, along with 1986 im-primarily at Fermi 2, were down slightly from the 1985 provements in Southeastern hiichigan's economy, record level of $711 million. New financing required to fund sales reached 38-billion kilowatthours, up 3.7 percent these expenditures and to refund maturing securities, as from a year ago. These sales were primarily responsible well as to redeem early two high-dividend preferred stock for our record operating revenues, which rose 2.9 percent issues, totaled $609 million for the year. We also have from $2.788 billion in 1985 to $2.869 billion in 1986.

agreed to buy the remaining 13.6-percent share of Fermi 2 Future company earnings will be owned by Wolverine Power Supply Cooperative, Inc., for impacted when Fermi 2 goes into commercial operation, now scheduled for h1ay 1987. The company then will begin to collect rate increases for Fermi 2 approved by the N1ichigan Public Service Commission (h1PSC) totaling

$475.8 million (including interest) phased in over five years. The first year's increase will be $77.9 million.

Ieft to Right:

I:rnest L. Grove, fr.

Charles A1. lleidel Walter J. AlcCarthy, fr.

L_

1

i about $550 million - a discount of $200 million from We also anticipate increased pressures Wolverine's cost. We believe the purchase, scheduled for for changing the regulatory stre.ture of the electric utility completion in 1990, is in the best long-term interests of industry. While many of the changes being proposed both Detroit Edison and Wolverine.

are frequently called "de-regulation" in the name of in-As indicated, progress toward commer-creased competition and lower costs, many changes which

cial operation of Fermi 2 was slowed by problems in 1986.

occur are likely to be "re-regulation" - elimination of

While low-power testing was completed and the plant was some kinds of rules and the imposition of others.

operated at low level 4 during the year, it also was neces-These new facts of life for the industry sary to shut down the plant several times.

and Detroit Edison require a new strategic mission state-Frustrating and discouraging as these ment developed by management in 1986: Toineet the developments have been - and as they continue to thrust energy and related service needs of our customers in order us in the public limelight along with other nuclear util-to prosper as a financially sound business. You will be c ities - they have not deterred us from maintaining our hearing more from us during the year about how we i strict safety and operating standards. Many corrective intend to achieve this mission.

measures implemented in 1986 to resolve these situations We believe we are prepared for what is and improve overall operations already are showing ahead. We have the people, the resources and the plan.

results.

But most importantly, despite the setbacks experienced in Commercial operation of Fermi 2 is but 1986, we have the determination to become a stronger, one of the hurdles we face in 1987. As a result of the 1986 more customer-focused organization which is confident Tax Reform Act, our cash payments to the internal Reve-and prepared for the future.

j 4

nue Service actually will increase substantially, despite lower tax rates, February 23,1987 l

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r Detroit Edison,1986 marked a spirited rededication to a principle that has guided the company since its founding in 1903:

serving customers in ways which effectively meet their needs to enable the company to grow and i

prosper. This resulted in intensified management i

attention, a rekindled and highly supportive employe spirit, revised priorities and aggressive To ensure adequate, reliable elec-new programs - all directed at serving customers tric energy to meet these customers' needs, Detroit J

through leadership, innovation, competitiveness, Edison has spent much of the last 40 years building j

performance and helping improve the quality of life nd modernizing one of the most advanced genera-in the communities Detroit Edison serves.

tion, transmission and distribution systems m the The results of this re-energized country, using highly advanced systems and tech-service effort touched all of our major constituencies n ! gies. The successful startups in 1984 and 1985 in 1986. They also reinforced Detroit Edison's new f its two environmentally clean Belle River coal-strategic mission to become a financially prosperous fired generating units, along with the completion company by ensuring shareholders a fair return on nd test-operation of its Fernu 2 po\\ver plant, vir-their investments, providing employes with oppor-tually ended this massive construction job.

With Belle River and Ferm,2:

tunities to grow and achieve professional goals, and meeting customer needs with first-rate service at the per ting, the company will have nearly 10,500 lowest reasonable competitive price, while being a megaw tts of capacity m place - enough to meet the good corporate citizen.

re 's present and foreseeable future energy needs.

The need for this additional gen-erating capacity was demonstrated on two hot days Se N e in July 1986 when the company twice hit new peak loads. These peaks came earlier than had been The customers at whom the ser-forecast and with no interruption of service to vice rededication is directed are 1.8 million strong.

customers. The record demand resulted not only They live, work and operate their businesses in a from the heat but also from a greater number of 7,600-square-mile area - roughly the size of New customers and increases in both basic and new uses Jersey. The company's service area includes metro-of electricity resulting from Southeastern hiichigan's politan Detroit and stretches southward from the tip expanding economy.

of hiichigan's " Thumb" to near the Ohio border and Kilowatt!.our sales reached an westward from lakes Huron, St. Clair and Eric to all-time record in 1986, up 3.7 percent over 1985, northwest of Ann Arbor, encompassing the state's eclipsing the previous resord of 37-billion kilowatt-most populous counties.

hours in 1978. The company also surpassed the 1.8-hiany of these 1.8-million cus-million-customer mark for the tomers are particularly demanding because of their first time. New construction l

growing and increasingly specialized energy needs.

orders from customers - sub-Accustomed to adequate supplies of highly reliable divisions, apartments, service

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electricity from Detroit Edison for more than 80 work and line extensions for g '

years, they depend on this service not only for other buildings, hotels, factories everyday living and working but also for powering and retail shops - were 53 per-the continuing resurgence of hiichigan's economy.

cent higher than in 1985. In two of the company's six geographic operating divisions - hiacomb and Oakland - this activity rose 141 percent and 82 percent, respectively, from 1985.

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eeping up with new service orders underscored the significance of our new employe motto: " Serving Customers...We're All a I

Part of It!" This dedication was further reinforced when floods - the worst in the area's history -

ravaged parts of hiichigan in 1986. Detroit Edison employes played critical roles in meeting the emer-Responding to customers, desires

{ tensified its home-safety efforts with new sec r brighter, safer neighborhoods, the company gency. In 12-hour shifts, company safety teams in worked with individual flood victims and with police, fire and othec groups to prevent injuries lighting and safety programs. These mcluded a from downed wires or flooded electrical equipment.

C mPrehensw, e marketing, customer relations and hicanwhile, repair teams labored - often around the

• • ""ic tions program to provide helpful home C

clock - to restore electric service.

suunty m. fonnadon for aH custones.

hiany new programs to serve customers were introduced during 1986. They Competition mcluded hietalme, an mformation and consulting service for metal fabricators; a new cost-efficient Competition is growing daily in plasma-arc technology for manufacturers; and a the electric utility industry and is affecting all com-ride-drive demonstration of electric vans for pro-panies, including Detroit Edison. As a result, the spective customers who might use them for many company is anticipating and responding to these light-duty operations. Special incentive rates were challenges with a bold and competitive spirit.

used to help attract new businesses to the area and The company strives to be a pro-retain existing business, while special rates and ducer of low-cost electricity and steam for all of its services for senior citizens and people on fixed or customers - residential, commercial and industrial, low incomes helped protect the quality of life for But now, more than ever, it is competing aggres-these important customers.

sively with other energy sources and distributors, In 1986, the company's meter including independent cogenerators, natural gas readers began using hand-held devices to collect companies and other utilities. That competitive information from electric meters, which willlead to spirit also means seeking legislation and regulation increased accuracy and to lower overall billing costs.

which are fair and beneficial to both the company All six company divisions were using the new and its customers, hiany possible changes are likely system as of February 1987, following retraining of to be "re-regulation," rather than "de-regulation,"

more than 350 meter readers.

or the elimination of some kinds of rules and the Beginning in 1987, the company's imposition of others. Because electricity has charac-entire electrical network will be controlled from a teristics different from other resources, new forms newly remodeled $6-million System Operations of regulation in the electric utility industry probably Center in downtown Detroit, will be different from those that have been put into which was largely completed in effect for the natural gas, telephone, airline and L _

c 1986. When the center's state-of-other industries.

the-art Energy hianagement Sys-Nowhere is competition fiercer tem is put into service in early than in the manufacturing sector, which continues j

1987, Detroit Edison's ability to to dominate the economy of Southeastern hiichi-

{

maximize system reliability will gan. It is a big user of electricity, and the revenues j

be enhanced significantly. The gained and lost with changes in the auto, steel and

i b,

company's energy managers will other industries figure prominently in the econom-I F

have greater control to meet vir-ics of utility operation.

f t

tually any contingency - from l

storm-induced power outages to seasonally high demands for electricity.

7 l

Cogeneration - primarily larger industrial customers producing their own electricity and heat - poses another competitive challenge for Detroit Edison and other major utilities. The com-pany is working closely with customers to meet this challenge. Detroit Edison was the industry leader in Chrysler Corporation, for developing the technical standards required for suc-cessfully connecting cogenerators. Also, the com-example, decided to clese its old Jefferson Avenue pany's SYNDECO subsidiary will be a 50-percent assembly plant on Detroit's east side. This resulted owner of a planned new facility which will generate in intense competition for both a site and energy electricity by burning methane gas produced from sources for the planned replacement plant. In decomposing garbage at the disposal site.

response, a team of senior managers from Detroit Detroit Edison intensified in 1986 Edison joined similar groups from the city, the state, its program of demonstrating to customers the cost economic development councils and other organi-advantages of using electric equipment for planned zations. The outcome was a plan to build the new new or revised installations. These ranged from plant - and other facilities - right on the cleared major industrial process heating installations and Jefferson Avenue site. When the proposed new biscuit ovens for a new breakfast product for plant is completed, the electric energy it uses could Mcdonald's restaurants to heating, cooling, lighting result in more revenues for Detroit Edison than the and other equipment for a new all-electric national old plant provided. The plant also will keep thou-headquarters for Little Caesars Pizza. Similar suc-sands of jobs in Detroit.

cesses were achieved with closed-loop heat pumps Another way of meeting-and and commercial and industrial lighting.

beating - competition is to better control the factors SYNDECO also continues to contributing to the pnce of electricity. Efforts con-woik aggressively to provide services that support tinue throughout the company to operate more Detroit Edison's base business, as well as hone efficiently - and with good results:

the company's skills for dealing successfully in E The Monroe power plant -

its increasingly competitive environment. One of Detreit Edison's largest generating complex, with SYNDECO's newest and most successful products -

a capacity of 3,000 megawatts - uses a complex mix-Powerscan - tests, inspects and even maintains the ture of three different types of low-sulfur coal with emergency battery systems supporting the critical the aid of computer-controlled coal-blending equip-back-up power needs of customers with large com-ment. This process allowed the company to save puter operations. Clients include hospitals, more than $6 million in 1986 alone through skillful municipalities, telephone com-fuel-purchasing and management - while still sur-panies, steel companies, univer-.

~'

passing strict state and federal environmental sities, other electric utilities and s?

D regulations.

all of the " Big Three" automotive

~

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E A new inventory practice-companies. Headquartered in "just-in-time" delivery of coal to some plants -

suburban Rochester Hills, north

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enabled the company to actually reduce its average of Detroit, Powerscan opened a fuel inventory in 1986, despite an increase in pro-second facility in Dallas early 1r W

duction of electricity.

in 1987.

4 E The company has developed j

one of the nation's newest and most highly auto-7 a

l mated cash-management processing operations, em-pleying state-of-the-art electronic equipment. The results include reduced operating costs, better money management and improved service to customers.

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1 Innovative failure-analysis techniques were devised to determine the cause of electrostatic precipitator failures at the River Rouge Innovation Power plant. This analysis and subsequent engi-neering design improvement resulted m reducing Terms which describe character-generating costs and improving the environment.

istics of the quality of electric energy - dips, surges In support of the company's and spikes-are relatively new to many residential marketing program, research also is conducted for customers but not to commercial and industrial business customers to analyze and recommend im-customers with their high-tech applications of proved processing systems. Efforts to help Afichi-electrical power. These kinds of problems are of gan's economy include encouraging and assisting increasing concern, however, to any customer who state organizations to obtain research grants. In uses solid-state electronics: digital clocks and pro-1986, more than $1.5 million of outside research grammable light controllers, microwave ovens, funding was awarded to h1ichigan organizations as VCRs, personal or business computers, electronic a result of these joint activities.

process controllers and some robotics equipment.

Because of researth and develop-Evidence of the company's con-ment projects like these, high-tech has become a tinuing efforts to be truly customer-oriented - and way of life at Detroit Edison. Fiber aptic telecom-innovative in meeting new service needs -is a two-munication systems provide an advanced method of pronged approach to help reduce customer prob-using light for voice and data transmission. Color lems caused by these occasional quality-of-service radar and sophisticated lightning-detection systems irrei;ularities. First is an aggressive program to work track storms - well before they arrive - and improve with customers who are installing new equipment the ability to make effective use of field resources for to identify any special " quality of service" needs storm-related service restoration work.

they may have. Second, Detroit Edison power-hianagers and specialists l

quality engineers are working closely with existing throughout the company are linked by highly customers to identify causes of any problems they advanced computer communication systems which i

might have encountered and then to develop prac-speed the transmission of information and efficient tical solutions.

dispatching of electric energy to meet load demand, At the company's Engineering materials management, customer requests and Research Center, high-tech equipment and methods other operations. Infrared instruments are used to are combined to help reduce the cost of electricity; locate causes of possible equipment failure, further optimize production, transmission and distribution ensuring service reliability.

of electricity; and help customers make the most In 1986, a new computer-assisted efficient use of electricity.

telephone-answering system was tested to help im-State-of-the-art techniques prove the company's ability to respond to customer were used in 1986 to evaluate the calls about power outages resulting from storms.

integrity of re-heat lines at the By early 1987, Detroit Edison Afonroe, Trenton Channel and had conducted 250,000 home energy audits - a total St. Clair power plants.

surpassed by only one other electric utility in the

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In conjunction with the Elec-country. In 1986, the company became the first util-tric Power Research Institute, ity in h1ichigan to offer these home energy audits to g%

g advanced diagnostic techniques area residents without charge.

are being developed to monitor

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the integrity of the company's l

gj high-voltage, oil-filled cable i

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system through dissolved-gas analysis. Such techniques enhance preventive maintenance effectiveness and replace or elim-inate unplanned outages in the i

company's extensive under-ground transmission system.

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Detroit Edison is recognized nationally for leadership in economic develop-ment - helping enhance the economic and social i

climate of its service area. This involves aggressive I

efforts to persuade existing businesses to stay in Leadership Southeastern hiichigan, as well as help them expand, modernize and diversify through inno-Detroit Edison has a long and vative new applications of electrical equipment.

proud tradition of leadership - technical leadership Emphasis also is placed on attracting new busi-in the industry, service leadership in searching for nesses from other states and countries - providing new and innovative solutions to problems, and special services to help them locate in hiichigan.

community leadership in helping to make the com-As part of this program, Detroit munities it serves better places in which to live and Edison has received approval from the hiichigan work. Leadership in all three areas sigmficantly Public Service Commission for special " incentive benefits customers and shareholders over the long rates" for electricity to help companies locating or term. The company's leadership in 1986 focused expanding in Southeastern hiichigan. Efforts to increasingly on safety, operating efficiency, business diversify the local economy already have increased development, education and community service.

the job and tax bases of the area and are expected to For example, a major goal of help cushion Southeastern hiichigan against future Detroit Edison is to operate its Fermi 2 power plant economic downturns.

with special attention to safety, for which the com-Detroit Edison also uses other pany has an enviable overall record among electric means to promote the area's basic well-being.

utilities. One step Detroit Edison has taken to help Through its loaned-executive program, the com-ensure the safe construction and operation of the pany works with local, regional and state govern-plant is an employe feedback and performance ments to strengthen their operations with the tem-evaluation system - SAFETEAht - which has porary use of Detroit Edison people with special become a model for the nuclear industry.

skills and experience. Also, a new entity, the Detroit The company also is a leader in Edison Foundation, was created for the company's its training program for nuclear operators. The pro-longtime charitable grant program for organizations gram resulted in one of the highest percentages of that conduct civic, cultural, educational, health and operators in the country who passed the complex social service programs in Southeastern hiichigan. It licensing test on the first attempt. Fermi 2 also helps ovoid fluctuations in the received accreditation by the National Academy for flow of funds to these organiza-Nuclear Training, equivalent to independent cer-tions resulting from changes in tification of training excellence.

business cycles.

Detroit Edison's concern for and It is in these kinds of lead-leadership in safety and efficiency doesn't stop ership activities that Detroit N

inside the company. When a high-pressure steam Edison -in partnership with its y

pipe failure at the hionroe power plant caused an shaieholders, customers and unusual emergency early in 1986, Detroit Edison employes - helps realize the identified its cause, fixed the problem and later promise in its new corporate B

conducted a seminar to help other utilities avoid the motto: " Detroit Edison.

M same situation and its safety implications.

A Good Part of Your Life."

[

The company continues to show leadership in improving the efficiency of its generat-ing plants. In 1985, Detroit Edison ranked seventh among the country's top 100 utilities in " system heat rate"- the primary measure of efficiency for such facilities - and was well above the industry average for " plant availability" - the time the generating units could actually be at work producing electricity rather than undergomg repairs.

13

E The number of customers j

served by Detroit Edison rose 1.4 percent during the year to a total of more than 1.8 million at year-end 1986. Also reflecting improvements in the economy and new applications of electricity, all categories of PerIOTInanCe trial-are using electricity m. greater amounts for Theperformanceof thecompany electronic equipment, security and outdoor light-can be measured in terms of the quality of its service ing, heat pumps, commercial cooking, process to customers, coupled with its competitiveness, in-heating and other equipment.

novation and leadership. Accomplishing these per-E Stringent efforts continued formance goals is essential for Detroit Edison if it is throughout the year to contain and, in the future, to continue demonstrating its ability to meet an even substantially reduce costs. These included a more basic performance measure: prospering as a companywide complement-control program, a vol-financially secure company while meeting its respon-untary early separation program for management sibilities to shareholders, customers, employes people and across-the-board programs to further and other important groups.

reduce operating and maintenance expenses in 1986 The year just ended saw remark-and beyond. Capital spending also continued to able accomplishments in all these areas. Detroit drop, totaling $645.2 million in 1986, down 9.2 Edison financial performance, in fact, set several percent from the previous year, reflecting the com-new company records. But these must be viewed in pletion of the company's power plant construction context with the major disappointment of not bring-program.

ing Fermi 2 into commercial operation, as well as in While these and other operations perspective with many anticipated 1987 internal and reflected positively on sales, revenues and earnings, external pressures.

the company's earnings also were supported in Earnings for common stock were large part by a non-cash accounting credit unique to

$378.3 million, up 13.2 percent from 1985. Earnings the utility industry. Called Allowance for Funds per share of common stock increased 10.7 percent Used During Construction (AFUDC), this credit has from $2.33 in 1985 to $2.58 in 1986. Both total and accounted for a large part of earnings in recent per-share earnings set new records in 1986. Return years - from a high of 133.4 percent of common-on common equity set another record in 1986, and stock earnings in 1982 to a seven-year low of 65.1 total revenues of $2.9 billion rose 2.9 percent for still percent in 1986. Once Fermi 2 is placed in commer-another new high. Sales also set a record for the cial operation - expected in May of 1987 - AFUDC year, increasing 3.7 percent to 38-billion kilowatt-will drop substantially, but the quality of earnings hours of electricity. There were several reasons for will increase as net income becomes more depen-these increases:

dent on expanded sales and revenues and tighter E While sales to the traditional control of costs. The company has developed Southeastern Michigan heavy industry market expanded marketing, customer service and cost-(steel, automotive and other manufacturing) were reduction programs to increase revenues and earn-up slightly from the previous year, sales to the ings that will support the dividend.

newer service markets (computers, banks, hotels and high-technology companies) increased even more dramatically. Thus, increased sales reflected 1986 Financing the continued resurgence of Michigan's economy, ndonth Soktof security cross cost to Amount Company successes in the continuing shift to a more diversi-fied economy, the increasing shift to electricity in Mortgage Bonds the overall energy mix and Detroit Edison's own April Sed 9.53%

aggressive marketing efforts.

August 100 9.99 December 200 9.66 E liot weather in July pushed

' the demand for Detroit Edison electricity to two all-P[uti "d n

time peaks - 7,840,000 and 8,050,000 kilowatts on July and November 9.2 8.36 July 17 and 18, respectively.

Unsecured Term Notes March 100 8.24 Total

$609.2 14

Earnings for Common Stock (millions $)

37; Operating Revenues (millions 5) 334 Earn!ngs Per Share ($)

T'm 2,%9 38,

g'g 2,788 rr" r

' i '.

266 ;

2,498 i~f ]

t

'1 2.33 2,310 O~'l

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s 79 80 81 82 83 84 85 86 79 80 81 82 83 84 85 86 79 80 81 82 83 84 85 86 C E Actual Capital Espenditures(millions $)

3 Estimated I,135 P'] 1,015 m 938 i

711 645 5 ', '

645 591 5-1 m

g3 373 I

g 259 275 i

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' 229 Q, l.c fA m.,.,....,'...

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The company willcontinue to in 1986, the Financial Accounting need adequate rate increases to reflect its investment Standards Board adopted a new accounting stan-in its new generating plants - Belle River and Fermi 2.

dard, which is another factor affecting future In rate cases involving both plants, the Niichigan Pub-earnings. As discussed in detail in Note 3 on pages lic Service Commission (h1PSC) granted increases 28 to 30, this new standard will require the company of $686 million, the Fermi 2 portion of which will be to recognize certain losses related to abandonments phased in over a five-year period. But this was $283 and disallowances of plant costs. As permitted by million less than that requested by the company.

the change, the company anticipates adopting the The A1PSC disallowed $96.9 million of the com-new accounting standard in 1988, although the pany's Belle River investment, including $60.9 standard allows delayed application until 1989 in million which the commission called an "impru-certain prescribed circumstances.

dent" one-year delay in that project, and $313 mil-In a development which was lion of the company's investment in Fermi 2. The resolved favorably for the company, other Alichigan company has filed appeals in both cases.

electric utilities and their shareholders, a proposal When Fermi 2 goes into commer-by the hiichigan Citizens Lobby for the November cial operation, the first phase of an approved rate 1986 ballot was unsuccessful. The proposal had increase of $77.9 million will begin. A five-year many potentially harmful ramifications. hiost phase-in plan totaling $475.8 million, including seriously, it would have adversely altered the way in interest, was approved by the h1PSC in 1986. The which new and existing power plants are treated for h1PSC order was based upon a total cost for Fermi 2 rate-making purposes. As a result of appeals made of $3.075 billion. Thus, any costs in excess of that by Detroit Edison and Consumers Power Company, amount will have to be considered in a new rate the Niichigan Supreme Court upheld lower-court filing to be made by the company in 1987. The rulings that the proposal did not comply with state current cost estimate for Fermi 2 is $4.23 billion, law regarding the timing of signature collection.

based upon a Afay 1987 commercial operation date.

Later, an independent research firm - commissioned As a result of the 1986 FederalTax by Detroit Edison and Consumers Power to study Reform Act, actual cash payments to the Internal the signatures - submitted to the hiichigan Secre-Revenue Service willincrease. Although there is a tary of State the results of a computer analysis of the reduction in the federal income tax rate, the cash petition signatures. This analysis showed that more requirements for the company's future income tax than 20 percent of the signatures on the petition liabilities are expected to increase significantly over could have been challenged as invalid - more than the next few years due to an increase in taxable base, enough to have stopped the proposal from reaching principally because of the new alternative minimum the ballot had not the timely court decision already tax and the company's inability to use a substantial precluded that action.

amount of its available investment tax credits.

As this report attests, Detroit New financing in 1986 totaled Edison is committed to raceting its economic and

$609.2 million, including $500 million in mortgage competitive challenges head-on. It will succeed in bonds, $9.2 million in pollution control refunding this with better service to customers, increased and bonds and $100 million in unsecured term notes.

more varied sales of electricity, maintenance of the This financing, when combined with internally gen-dividend despite a new accounting standard and crated funds, covered capital expenditures of $645 rate-making uncertainty, and assistance to and million, the refunding of various maturing securities involvement with the communities Detroit Edison l

and the early refunding of the 12.80-percent and serves - while also providing career-enhancing 15.68-percent series of preferred stocks. This opportunities for the company's loyal work force.

refunding enabled the company to take advantage of the lower interest rates available during the Distribution of Ownership of Detroit Edison Common Stock flM emNr 31. hMM year. The company has received approval from the N1PSC for Type of Owner:

state and Country:

Owners Shan".

Owners Shares about $2 billion of refinancing Individuals 106.923 27,328,687 Michigan 103,157 45,310,273 over the next ses cral), ears to Joint Accounts 100,760 33,007,744 Florida 17,415 6,660,878 allow additional refundings, both Trust Accounts 7,492 3.931,123 Cahfornia 12,853 5,149,549 mandatory and optional. It is Nominees 184 66,305,695 New York 11,816 61,063,740

"',100'478 II9 393 I"'h '" d"" * '"d Illi""I*

9 873 l

esPected that all needed funds Foundations

.6<

171,821 Ohio 7,493 2

will come from the sale of general Brokers and 44 Other States 54.212 17,081,243 security Dealers 31 537,016 Foreign and refunding mortgage bonds.

Otheis

_ 1,421 15,417,343 Countries 763 213,827 16 Total 217,5S4 146,649,431 Total 113 M d 69 U 31~-

t

1 Report ofIndependent Accountants 200 RENAISSANCE CENTER DETROIT, MICHIGAN 48243 reruary u, ws7 Responsibility for Financial Statements lHeeIlhtedrouse &

The consolidated financial To the Board of Directors and Shareholders statements of The Detroit Edison Company and of The Detroit Edison Company subsidiary companies have been prepared by man-We have examined the consoli-agement in conformity with generally accepted dated financial statements of The Detroit Edison accounting principles, based upon currently avail-Company and its subsidiary companies appearing able facts and circumstances and management's best on pages 18 through 36 of this report. Our examina-estimates and judgments of known conditions. It tions were made in accordance with generally is the responsibility of management to assure the accepted auditing standards and accordingly integrity and objectivity of such financial statements included such tests of the accounting records and and to assure that these statements fairly report the such other auditing procedures as we considered Company's financial position and the results of its necessary in the circumstances.

operations.

As discussed in Note 3, the To meet this responsibility, Financial Accounting Standards Board in December m inagement maintains a high standard of record 1986 issued Statement of Financial Accounting Stan-keeping and an effective system of internal controls, dards No. 90 which amends an earlier statement including an extensive program of internal audits, and, among other things, requires losses to be written administrative policies and procedures, and recognized as a result of utility plant cost dis-programs to assure the selection and training of allowances and abandonments. Application of this qualified personnel.

Statement will be required in most cases by 1988.

These financial statements have As described more fully in Note 2, been examined by the Company's independent there are uncertainties regarding the recovery of the accountants, Price Waterhouse, whose report Company's investment in Fermi 2. The ultimate cost appears on this page. Their examination was con-of Fermi 2 will depend, in part, on the timing of ducted in accordance with generally accepted attainment of commercial operation status. Further, auditing standards which include a review of inter-the extent of recovery of the Company's investment nal controls, as well as such other procedures they will not be determinable until all appropriate pro-deem necessary to provide reasonable assurance ceedings (including court reviews) have occurred, as to the fairness of the Company's financial state-including the pending appeal of the April 1986 rate ments and to enable them to express an opinion order. The Company is unable to determine the thereon.

effects, if any, that the resolution of these uncertain-The Board of Directors, through ties may have on its 1986 financial statements.

its Audit Committee consisting solely of outside In our opinion, subject to the directors, meets with Price Waterhouse, represen-effects on the1986 consolidated financial statements tatives of management and the internal auditors to of such adjustments, if any, as might have been review the activities of each and to discuss account-required had the outcome of the uncertainties ing, auditing and financial matters and the carrying referred to in the preceding paragraph been known, out of responsibilities and duties of each group.

the consolidated financial statements examined by Price Waterhouse has full and free access to meet us present fairly the financial position of The Detroit with the Audit Comaittee to discuss its examina-Edison Company and its subsidiary companies at tion results and opinions, without management December 31,1986 and 1985, and the results of their l

representatives present, to allow for complete operations and the changes in their financial posi-independence.

tion for each of the three years in the period ended December 31,1986 in conformity with generally accepted accounting principles consistently applied.

M%

6 aum n

Ernest L. Crove, Jr.

Walter j_ McCarthy, Jr.

Vice Chairman of the Board and Chairman of the Board and Chief Financkt Officer Chief Executive Officer 17

0 ~ T. O I 0 8 o

C M

i 0 ~ Ii 00~

Year Ended Decembee 31 1986 1985 1984 (thousands)

Operating Revenues Electric (Note 1)

$2,832,945

$2,738,356

$2,439,835 Steam 36,339 49,801 58,370 Total Operating Revenues

$2,869,284

$2,788,157

$2,498,205 l

Operating Expenses Operation Fuel

$ 741,206

$ 785,110

$ 700,789 Other power supply 191,126 196,918 184,740 Other operation 459,534 422,133 403,616 Maintenance 258,655 250 798 203,945 Depreciation (Note 1) 232,240 218,502 190,420 Taxes other than income 177,381 175,556 144,471 income taxes (Notes 1 and 5) 126,596 124,939 131,459 Total Operating Expenses

$2,186,738

$2,173,956

$1,959,410 Operating Income

$ 682,546

_$ 614,201

$ 538,765 Other Income and Deductions Allowance for other funds used during construction (Note 1)

$ 117,069

$ 113,225

$ 130,350 Other income and deductions (16,869)

(5,240) 1,829 Income taxes (Note 5) 8,827 1,642 (112) 109,027_

$ 109,627

$ 132,067 Net Other Income and Deductions t

Income Before Interest Charges S 791,573

$ 723,828

$ 670,832 Interest Charges Long-term debt S 399,429

$ 401,272

$ 399,448 Amortization of debt discount, premium and expense (Note 1) 2,721 2,502 2,191 Other 41,410 15,M2 30,592 Allowance for borrowed funds used during construction (credit)(Note 1)

(129,082)

(133,103)

(163,336)

Net Interest Charges

$ 314,478

$ 286,313

$ 268,895 Net Income

$ 477,095

$ 437,515 5 401,937 Preferred and Preference Stock Dividend Requirements 98,803 103,264

_ 104,159 Earnings for Common Stock

-$_2_97,U8_--

$ 378,292

$ 334,251 Common Shares Outstanding-Average 146,643,377 143,183,133 135,230,827 Earnings Per Share 2.58 2.33 2.20 (See accompanying Notes to Consolidated Financial Statements.)

nya s e n-g' r :

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'e-ee Year Ended December 31 1986 1985 1984 l

uheu~andu l

Financial Resources Provided

(

Operations Net income

$ 477,095

$ 437,515

$ 401,937 Items not affecting working capital Depreciation 232,240 218,502 190,420 Deferred income taxes and investment tax credit - net 104,430 110,778 127,436 Amorti/ation of extraordinary property losses and unrecovered l

plant costs (Note 7) 12,231 12,231 12,231 l

Allowance for other funds used during construction (Note 1)

(117,069)

(113,225)

(130,350) l Other (1,999) 2,385 (5,286)

Financial resources provided by operations S 706,928

$ 668,186

$_ 596,388 External Financing Sale of common stock

$ 113,683

$ 112,040 Issuance of common stock on conversion of convertible cumulative preferred stock,5%% series 2,139 1,538 2,286 llelle River Project Financing (Note 10) 331,686 Sale of general and refunding mortgage bor ds 491,696 84,728 Funds received from Trustees: Installment sales contracts and loan agreements 16,591 187,091 40,170 issuance of unsecured promissory notes 99,988 309,870 344,754 Increase (decrease) in short-term borrowings 104,656 (2,000) 2,000

$ 715,070

$ 694,910

$ 832,936 Other Sources Change in obligations under capital leases (Note 11) 7,644

$ 48,490

$ 14,010 Increase (decrease) in accumulated rate refunds, with interest 12,345 (43,975) 32,215 Other - net 10,223 (4,224)

(18,832)

Total

$1,452,210

$1,363,387

$1,456,717 Financial Resources Used Plant and equipment expenditures 5 645,196

$ 710,699

$ 938,004 Purchase from Cooperative - Fermi 2 (Note 2) 83,512 40,479 Allowance for other funds used during construction (Note 1)

_ 117,069)

(113,225)

(130,350)

(

$ 611,639

$ 637,953

$ 807,654 Change in net property under capitalleases (Note 11) 7,644 48,490 14,010 Dicidends on commor., preferred and preference stock 344,767 344,621 332,344 Conversion of convertible cumulative preferred stock,5%% series 2,140 1,540 2,291 Repayment of long-term debt 485,975 376,185 370,070 Redemption of redeemable preferred and preference stock 79,613 10,015 6,221 Decrease in working capital *

(79,568)

(55,417)

(75,873) l Total

-. -. _1_0

$1,363,387- - _ _ _ - - -$._1_ _,456,7_1__7_

$1,452,2_

Chan$es in Workimt Capital

( ash and ten +tary cash insestments

${ II,980)

S 3.030 5(40.331)

Accounts recchable 0 2,297) 10,069 10,116 inventories 20,520 (75.179) 42,414 Accounts payable (14,86 0 37,572 (35,M1)

Property, general and income taxes 0 9,595)

(M 220)

(5.0x6)

Interest 3,027 5,lM (39.752)

Other (44,382)

(1,M23)

(7. m )

Decrease in u orking capital'

$(79,568) 5(55,417) 5(75,873)

• INdudmg short-term borrow ings, s urrent maturities of long-term debt, current obhgations under capitalleases and preferred and preference stotL due w ithin one year.

(%ee accompanymg Notes to Consolidated Iinanual %tatements.)

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Decemtwr 31 1986 1985 Uhousands)

Assets Utility Properties (Notes 1,2,4 and 11)

Plant in service Electric

$7,230,676

$7,107,569 Steam 58,816 58,569

$7,289,492

$7,166,138 (1,833,149)

Less: Accumulated depreciation (2,027,733)~

55,3ff,989-55,261,759 Construction work in progress (primarily Fermi 2) 3,772,957 3,299,901 Net utility properties 59,034,716

$8,612,890 Property under capitalleases S 96,097

$ 79,917 Less: Accumulated amortization (16,661)

(8,155)

Net property under capitalleases S 79,436

$ 71,792 Total owned and leased properties 59,114,152

$8,684,682 Other Property and Investments Non-utility property

$ 12,098

$ 10,706 Investments and special funds (less allowance for decline in value of investments of 4,400,000 in 1986) 24,543 27,238 5 36,641 5 37,944 Current Assets Cash (Note 6)

S 2,769 1,741 Temporary cash investments (at cost, approximating market value) 13,008 Custo,mer accounts receivable (less allowance for uncollectible accounts of $32,(K.K),000 and $16,000,000, respectively) 220,293 227,753 Other accounts receivable 29,297 34,134 inventories (at average cost)

Fuel 246,474 236,626 Materials and supplies 132,260 121,588 Prepayments 9,957 6,980 5 641,050

$ 641,830 Deferred Debits Unamortized debt expense (Note 1)

$ 38,408

$ 35,301 Accumulated deferred income taxes (Note 1) 20,850 15,48S Extrao-dinary property losses and unrecovered plant costs (Note 7) 47,131 59,362 Other 99,754 17,753

$ 206,143- _ _ - _ -

$ 127,904 Total 59,997,986

$9,492,360 (See anompany ing Notes to Consolidated hnantial statements.)

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Liabilities Capitalization Common stock -$10 par value, 160,000,000 shares authorized; 146,699,431 and 146,576,496 shares outstanding, respectively (682,766 and 805,756 shares, respectiv v, reserved for 4

conversion of preferred stock)(Note 8)

$1,466,994

$1,465,765 Premium on common stock 551,254 552,847 l

Common stock expense (47,680)

(47,632) l Retained earnings used in the business 745,835 617,045 l

Total common shareholders' equity

$2,716,403

$2,588,025 l

Non-redeemable preferred stock (Note R) 242,284 244,424 Redeemable preferred stock (Note 9) 124,885 197,805 Non-redeemable preference stock (Note 8) 287,406 287,406 Redeemable preference stock (Note 9) 87,698 149,862 Long-term debt (Note 10) 3,656,569 3,770,863 Total Capitalization

$7,115,245

$7,238,385 Other Non-Current Liabilities Obligations under capital leases (Note 11)

$ 70,254

$ 64,882 Accumulated rate refunds, with interest 26,778 14,433

$ 97,032

$ 79,315 Current Liabilities Short-term borrowings (Note 6) llank loans

$ 19,000 Bankers acceptances 18,905 Commercial paper 56,751 Trust demand notes 10,000 Long-term debt due within one year (Note 10) 646,440 404,325 Preferred and preference stock due within one year (Note 9) 70,648 9,087 Obligations under capital leases due within one year (Note 11) 9,182 6,910 Accounts payable 197,248 182,387 Property and general taxes 273,624 251,131 Income taxes 10,713 13,611 Interest 85,617 88,644 Dividends payable 84,764 87,267 Payrolls 50,504 54,948

?

~

MPSC ordered refunds, with interest 10,631 Other 72,902 29,227

$1,616,929

$1,127,537 Defarre 3 Credits Accumulated deferred income taxes (Note 1)

$ 821,224

$ 774,715 f

Accumulated deferred investment tax credits (Note 1) 322,293 259,010 h

Other 25,263_

13,398

$1,168,780

$1,047,123 Commitments and Contingencies (Notes 2,3,4,11,12 and 13)

Totat

$9,997,986

$9,492,360 I

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Premium Retained Common Stock on Common Earnings 510 Par Cornmon Stock Used in the Shares Value Suk bpense Business (dvllars bt thosm&O Balance at December 31,1983 130,334,944 $1,303,M9 $484,375 $(46,921) c454,558 issuance of common stock Dividend Reinvestment and Common Share Purchase Plan 7,577,594 $ 73,776 $ 22,612 $ (398) $

Employes' Savings Plans 1,037,720 10,378 3,672 Conversion of convertible cumulative preferred stock,5%% series 131,304 1,313 1,024 (51)

Gain on preferred and preference stock purchased and retired 718 Net income 401,937 Cash dividends declared Common stock-$1.68 per s hare (228,218)

Cumulative preferred and preference stock *

(104,126)

Balance at December 31,1984 139,081,562 $1,390,816 $512,401 $(47,370) $524,151 issuance of common stock Dividend Reinvestment and Common Share Purchase Plan (Note 8) 6,307,762 $ 63,077 $ 33,409 $ (227) $

Employes' Savings Plans (Note 8) 1,098,764 10,988 6,436 Conversion of convertible cumulative preferred stock,5%% series 88,408 884 689 (35)

Loss on preferred and preference stock purchased and retired (88)

Net income 437,515 Cash dividends declared Common stock-$1.68 per share (241,397)

Cumulative preferred and preference stock *

(103,224)

Balance at December 31,1985 146,576.496 $1,465,765 $552,847 $(47,632) $617,045 Issuance of common stock on conversion of convertible cumulative preferred stock, 5','2% series 122,935 $

1,229 $

958 $

(48) $

Loss on preferred and preference stock purchased and retired (Notes 1 and 9)

(2,551)

(3,538)

Net income 477,095 Cash dividends declared Common stock-$1.68 per share (246,389)

Cumulative preferred and preference stock *

(98,378)

Balance at December 31,1986 146,699,431 $1,466,994 $551,254 $(47,680) $745,835

• At estabh.hed rate for c.x h series.

(%ee act'ompanying Notes to Consohdated Iinantial Statements.)

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neef Date of December 31 Issuance 1986 1985

<th m m &a Cumulative Preferred Stock - $100 Par value A uthorized - 9,000,000 shares; Outstanding -

3,844,524 and 4,548,904 shares, respectively (3,539,827 shares unissued)

Non-Redeemable Preferred Stock (Note 8) 5%"n convertible series, 121,464 and 143,344 shares, respectively October 1967

$ 12,146

$ 14,334 9.32% series,499,080 shares October 1970 49,908 49,908 7.68% series, 500,0tK) shares March 1971 50,000 50,(X)0 7.45% series, 600,(KK) shares November 1971 60,000 60,tXX) 7.36% series, 750,000 shares December 1972 75,000 75,(X)0 Non-redeemable preferred stock expense (4,770)

(4,818)

Total Non-Redeemable Preferred Stock

$242,284

$244,424 Redeemable Preferred Stock (Note 9) 9.72% series, 449, lM) shares December 1978 5 44,915 5 44,915 9.72% series,89,830 shares January 1979 8,983 8,983 9.60% series,319,500 shares and 337,250 shares, respectively October 1979 31,950 33,725 9.N1% series,265,500 shares and 280,250 shares, respectively January 1980 26,550 28,025 12.80% series,400,tXX) shares (redeemed August 1986)

May 1980 40,000 13.50% series, 230,tXX) shares December 1980 25,000 25,(XX) 15.6W% series,250,000 shares (redeemed August 1986)

June 1981 25,000 Redeemable preferred stock due within one year (11,1481 (5,250)

Redeemable preferred stock espense (1,365)

(2,593)

Total Redeemable Preferred Stock

$124,885

$197,805 Cumulative Preference Stock - $1 Par value Authorized - 30,000,000 shares; Outstanding -

18,180,180 and 18,453,480 shares, respectively (11,819,820 shares unissued)

Non-Redeemable Preference Stock (Note 8) 52.28 series, 2,0tk),(XX) shares December 1977 5 2,000 5 2,000 53.42 series, 3,000,0lX) shares October 1982 3,000 3,000

$3 40 series,2,250,(XX) shares December 1982 2,250 2,250

$3.12 series, 750,000 shares February 1983 750 750

$3.13 series, 2,NX),lXX) shares May 1983 2,600 2,600 53.24 series,1.400,tX)0 shares September 1983 1,400 1,400 Premium on non-redeemable preference stock 288,000 288,00X)

Non-redeemable preference stock expense (12,594)

(12,594)

Total Non-Redeemable Preference Stock

$287,406 5287,406 Redeemable Preference Stock (Note 9)

$2.75 series, 1,180,180 and 1,380,180 shares, respectively July 1975

$ 1,180 5 1,380

$2.75 series B, 1,400,000 and 1,473,300 shares, respectively December 1975 1,400 1,473 54.12 series, 2,tXXI,0lM) shares January 1982 2,000 2,000

$4.00 series,1,600,(XXI shares April 1982 1,600 1,600 Premium on redeemable pn ference stock 148,324 154,884 Redeemable preference stock due with;n one year (59,500)

(3,837)

Redeemable preference stock espense (7,306)

(7,638)

Total Redeemable Preference Stock 5 87g8

$149,862 (See accompanying Notes to Consolidated Iinantial Statements.)

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JiiT U e Interest December 31 Rate

• 1986 1985 (thousandd General and Refunding Mortgage Bonds Series P, due 8/15/87 4h%

$ 66,325

$ 66,325 Series Q, due 6/1/89 4%

37,695 37,695 Series R, due 12!1!96 6

100,000 100,000 Series S, due 10/1,98 6.4 150,000 150,000 Series r, due 12/1,99 9

75,000 75,(XX)

Series U, due 7/1/00 9.15 75,000 75,000 Series V, due 12/13J10 8.15 100,000 100,000 Series X, due 6/15/01 84 100,000 100,000 Series Y, due 11/15/01 7%

60,000 60,000 Series Z, due 1/15'03 7%

100,000 100,000 Series AA, due 5/!!O4 9h 100,000 100,000 Series EE, due 12/15 00 11h 35,000 37,500 Series I111, due 7/15/06 10h 50,000 50,000 Series PP, due 6!15/08 9h 70,000 70,(XX)

Series RR, due 10/15 08 9.8 70,000 70,0tX)

Series SS, due 3/15 99 10 %

130,000 140,000 Series UU, due 9!!5 09 10h 100,000 100,000 1980 Series II, due 4!1l00 12 %

86,700 100,(XX) 1985 Series A, due 5/1/92 11.9 35,000 35,000 1985 Series B, due 6/1i92 11.25 50,000 50,000 19S6 Series A, due 4115/16 9%

200,000 1986 Series 11, due 8'15/16 9%

100,000 1986 Series C, due 12!!3/16 9%

200,000 Less: Unamortized net discount (5,372)

(2,096)

Amount due within one year (85,475)

(19,150)

$1,999,873

$ 1,595,274_

Tas Exempt Revenue Bond Obligations Installment Sales Contracts (Secured by corresponding amounts of General and Refunding N1ortgage 11onds)

City of Detroit, due 3/1/87-6!1/94 6.89 %

$ 17,545

$ 19,105 City of I f arbor Beach, due 3 187 - 3/1/05 6.96 3,415 3,490 City of River Rouge, due 2/15 87-10!!!02 6.90 49,500 50,970 City of Superior, due 2/1/87-2/1/01 8.07 41,900 42,500 City of Trenton, due 3!!'87-3/105 7.02 6,215 6,350 County of Alonroe, due 3!!,87-101/14 9.32 60,310 61,590 County of St. Clair, due 6/15 87-5/1/22 10.19 213,265 216,380

1. css: Unamorti/ed net discount (537)

(571)

Funds on deposit with Trustee (97)

(839)

Amount due within orie year (9,025)

(8,235)

Installment Sales Contracts County of Nfonroe, due 5/1/87-12!1/16 10.64

$ 318,110

$ 320,050 1.ess: Funds on deposit with Trustee (7,076)

Amount due within one year (1,940)

(1,940) 1.oan Agreements Pollution liond Refunding Projects, due 2!!5'04 -6:15 07 9.16

_$_ _28,035_

_$ _18,813_

$ 726,696

$ 720,589 Unsecured Promissory Notes llelle Ris er Project Financing, due 4 : 1 < 87 - 10 1. 89 7.4S%

$ 825,000

$1,050,000 Variable interest rates, due 318 87 - 1r 15 90 7.27 125,000 150,000 fixed interest rate, due 101 Sn 14.20 200,000 Fixed interest rate, due 7 9 87 10.0; 250,000 250,000 Fixed interest rates, due 5'l 87-4:23 91 11.77 280,000 180,000 1.ess: Amount due within one year (550,000)

_ (375,(00)

Total Long-Term Debt (Note 10) 53,656.569. _..

.$ 1,455.,000-.. _

$ 930,.000

$3,770,h63 f.

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Note 1 Significant Accounting Policies to construction work in progress in the ba!ance sheet. This Industry Seginent - The Detroit Eoison Company accounting procedure is intended to remove the effect of the cost

(" Company")is a pubhc utikty engaged in the generation, of financing construction activity from the income statement. Under purchase, transmission, distnbution aad sa e of electric energy current ratemaking practice, the cash recovery of AFUDC, as well Regulation - The Company is subject to regulation by the as other costs of construction, occurs only when completed Michigan Public Service Commission ("MPSC") and the Federal projects are placed in service and related depreciation is authorized Energy Regt!atory Commission ("FERC") with respect to account.

to be recovered through customer rates. (See Notes 2,3 and 13 for ing matte:s and maintains its accounts in accordance with Unitarm pending rate matters.)

l Systems of Mcounts prescribed by these agencies.

The Company capitalized AFUDC at 10.73% from January 1, 1984 through July 16,1985 and 10.3% thereafter, except for Principles Applied in Consolidation - The Consolidated AFUDC related to the Belle River Project Financing for which the Finarcial Statements include the accounts of all subsidiary actual interest and commitment fees were capita!ized through July companies, all of wMch are wholly owned.

1984. (See Note 10.)In accordance with MPSC requirements, Revenues - Revenues are recorded when customers are billed on these composite AFUDC rates are equal to the overa!I rate of return a monthly cycle basis. Revenues include the recovery of fuel and authorized in electric rate orders.

purchased power costs, subject to annual reconcihation heanngs in accordance with FERC accounting requirements, the Consoli-conducted by the MPSC. Any over or under recovery of these dated Statement of Changes in Financial Position is not adjusted to costs is recorded in the Consolidated Ba!ame Sheet pending the remove the borrowed funds component of AFUDC of $129.1 results of such heanngs-million, $133.1 million and $163.3 mi!! ion for 1986,1985 and Einploycs' Retirement Plan and Other Ibstrctircincnt 1984, respectively Total AFUDC for both borrowed and other funds Scncfits - See Note 14.

amounted to $246.2 million,5246.3 million and $293.7 million for Pmperty, Dcpreciation, Retircinent and Afaintenance-1986,1985 and 1984, respectively AFUDC amounted to 65%

Utility properties are recorded at original cost. The annual provision 74% and 99% of Earnings for Common Stock for 1986,1985 and for depreciation is calcutated on the straight kne remaining hfe 1984, respectively method by applying annua! rates approved by the MPSC to the Income Taxes - For federal income tax purposes, the Company average of year beginning and year ending balances of depreciabte computes depreciation using accelerated methods and shorter property by primary plant accounts. For major generating units. the depreciable lives. Deferred income taxes are provided for timing first year's depreciation expense is calculated on a monthly br2 sis differences bet,veen back and taxable income to the extent commencing with the month in which the unit is placed into authorized b the MPSC. Investment tax credits utilized are i

commercial operation. Annua! depreciation provisions expressed deferred and amortized over the estimated composite service hfe of as a percent of average depreciab!e property were 3 24%,3.28h the related property (See Note 5.)

and 3.31% for 1986,1985 and 1934 respec ve'y in general, the Capitali:ation - Discount, Premium and Expense - The cost of properties retired in the normal course of business is discount, premium and expense related to the issuance of fong charged to accumulated deprecianon Excenditures for mainte term debt is amortized over the lives of the issues Capital stock nance and repairs are charged to expense, and the cost of new expense related to that portion of preferred and preference stock property instahed. which rep! aces procerty rebred, is charged to redeemed is wntten off first against the accumulated net gain on property accounts reacquired capita! stock included in premium on common stock Allomance for funds Used During Construction and subsequently against retained earnings used in the business

("ATUDC")- AFUDC, a non operahng non cash item,is 6traordinary Property bs's and Unrecovered Plant dehned in the FERC Uniform System of Accounts ta include "the Costs - See Note 7.

net cost for the penod of construct;0n of borroced funds used for g '

construct on purposes and a reasonaD'e rate on 0"ler funds when so used " AFUDC invoNes an accounting procedure whereby the approximate interest expense and the cost of other (common.

preferred and preference shareho'ders' equity) funds app licaD:e to the cost of construction are transfened from the income statement h

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e, sr - 4 Note 2 a'l apprognate corrections and mod.hcations were in place or were M2 progressing satisfactorily In September 1986, the NRC approved power l'n> ject Costs - The pro!ect estmate for fermi 2, a nut! ear ascension to levels up to 20%. The testing required at 20% power has generabog unit having a naminal capabdity rahng of.10C MW. is been comp!eted. There are six testing stages and Fermi 2 has completed

$4 230 buon (including $1.299 bnon cf AFUDC), based upon the first of such stages. Progression to the final testing stages norma lty anbcipated May 1,1987 commercial operabon at a 90% Twar proceeds at an increased pace, since the first stage requires adjust-level. In an Apnl 1,1986 order, the MPSC imposed the iequirement ments necessary for increased power to be attained. In FeDruary 1987, that fermi 2 may b. declared to be in commercial operabon only the NRC approved power ascension to levels up to 50R when a 90% power level for 100 contnuous hours is achieved From bme to time the NRC may consider taking enforcement action (See " Rate Matters", herein ) The project estimate of $4 230 bil lion against the Company as a result of technical and procedural violations at includes the endivided ownership interest of WoNenne Power the piant. Any enforcement action may resuit in fines levied against the Supply Cooperative, Inc (" Cooperative") of $427 mdlion, but does Company not include other costs of approximatdy $315 milhon (including interest on cor,struction loans) capitabled by the Cooperative or an l'n ntamf Gvpcrativc's Ownership Inten st - In 1977, the Company and the Cooperative entered into a Parti;ipation Agreement eshmated $148 milhon ($124 mdhon through December 31,1986, and under which the Company sold a 20% undivided ownership interest in an eshmated $24 mdhon for the penod January 1987 to anticipated Fermi 2 to the Cooperative. The Cooperative s investment in Fermi 2 was t'

commercial operabon) of expenditures by the Comoanj for quarterly kmited by a 1983 amendment to the Participahon Agreement to $426.9 purchases from the Cooperative of an additional ownership interest in Fermi 2. (See " Purchase of Cooperative's Ownership Interest", herein )

mSion for plant (excluding other costs of approximately $315 million capita!ized by the Cooperative), $24.3 mi!! ion for nuclear fuel and $3.0 Through December 31,1986, actual project expenditures were $4 090 m on for matenals and supo!ies, which limitations were reached in bdiion (including $1.217 bdlion of AFUDC) The Company's porhon of 1984. Expenditures to comp!ete plant construction in progress at the the project estimate for fermi 2 is $3 803 bi!! ion (including $1280 bi!: ion time the plant investment limitation was reached in 1984 have been of AFUDC); and, through December 31,1986, the Company had made so!ely by the Company with the Cooperative's participation in.

expended, exclusive of purchases I:om the Cooperative, $3 663 bi!! ion terest decreasing through December 31,1985 as a result of the invest-(including $1.198 bdhon of AFUDC) for project costs apphcabfe to its ment limitation.

undivided cwnership interest in this unit. The Company is currently An August 1985 amendment to the Participation Agreement between funding all fermi 2 costs since the Cooperative's ob!igations were the Company and the Cooperative required the Company to commence hmited by an earher a;,reement.

quarterly purchase payments equal to the Cooperative's quarterly Under current genera 1y accepted accounbng principles, the Com.

interest payments on indebtedness relaMd to its investment, and pany wdl conhnue to capitakze all costs, including AFUDC, associated stopped the decrease in the Cooperahve s participation interest at Mth the unit until commercial operation.

December 31,1985 except for such quarterly purchases. Through As discussed above, fermi 2 has an anbcipated commercial December 31,1985, the Company made such quarterly purchases operation date of May 1,1987. However,if difficulbes cetay power amounting to $39 8 milkon for plant, $2.1 milhon for nuclear fue! and ascension, the commercial operabon date may be modified to take into c'

$0.1 mdhon for materials and supp!ies, which, together with the account the delay and each month of delay would increase the project decrease caused by the investment limitation, reduced the Cooperative's estimate by $30 40 million, of which approximately $21 mdkon would be adjusted participation interest to 14.41% at December 31,1985.

AFUDC. In addibon, the Company's obhgation to purchase a portion of Though it is agreed that the payments through December 31,1985 the Cooperative's interest in Fermi 2 will average approximately $6 represented purchases, a dispute developed between the Company and mil tion per month and wdl conbnue untd commercial operabon the Cooperahve relating to payments made thereaf ter. The Company Thting ami licensing - The Company is subject to the jurisdiction made quarterly purchase payments on March 31,1986 and June 30.

of the Nuc! car Regulatory Commission ("NRC")with respect to 1986 to the Cooperative in amounts totahng $39 6 mdlion ($37.4 mdlion construction, licensing and operabon of Fermi 2. Power ascension at for plant, $2.0 milhon for nuclear fuel and 50.2 million f or materia!s and Fermi 2 wi:1 occur in intervals following the completion of planned supphest However, due to the dispute bet Aeen the Company and the stages of testing Under a format proposed by the Company, and agreed Cooperative. the Company did not receive title documentation from the i

to by the NRC, the Company estabkshed an indeoendent Overview Cooperahve nor re! eases from a mortgage held by the United States of J

Committee, comprised of recognized nuclear inaustry consu!tants. The America (Rurat Electnfication Administrabon) on the Cooperative's Committee must recommend each incremental power ascension at six ownership interest in Fermi 2. This ti!le documentabon was placed in increasing power levels up to and including lu!! power pnor to the time escrow and wdl not be released untd 1990 as a result of a subsequent that concurrence is received ' rom the NRC to increase power agreement with the Cooperative, discussed below Therefore, the March In July 1985, the Company received a lu!! power operating kcense 31 and June 30,1986 quarterly payments aggregating $39 6 rr:dhon

. 3 E

for fermi 2 from the NRC which permded power ascension at levels have been recorded as Other Deferred Debits in the Conschdfed above 5% power Dunng tcshng. a number of management, procedural Balance Sheet at December 31,1986.

and techn ca! d,fhcu' ties were expenenced in hght of these dithculbes, the Company ag'eed that ;t wou!d not ascend to power levels in excess of 5% unbl such bme as the NRC and the Company were sabst:ed that h

The qcarterly amounts due to the Cooperative for purchases on During the period from the receipt of rate relief associated with September 30,1986 and December 31,1986, totating $36.3 million commercial operation of Fermi 2 through the January 1,1990 planned

($34.4 milbon for plant, $1.8 mdl;on for nuclear fuel and $0.1 million for purchase date, the Company will purchase 100% of the Cooperative's materials and supphes) were not paid in 1986. These purchase Fermi 2 capacity and energy entitlements. The costs for the buyback of payments are expected to be made in 1987 and have been recorded as power will be based on the Cooperative's total debt serlice (interest and Other Deferred Debits and Other Current Liabi!ities in the Consolidated amortiza!!an of principal) and certain other costs such as fuel and

=

Balance Sheet at December 31,1986.

operation and maintenance expenses. Buyback payments to the in March 1986, the Company and the Cooperative further agreed Cooperative are currently estimated at $66.6 million, $99.6 million and that the Company will make quarterly purchases of an additional portion

$100 million for 1987,1988 and 1989, respectively. In addition, under of the Cooperative's ownership interest in Fermi 2, the amount of which the terms of the Letter of Understanding, the Coopera'Jve will continue will be equal to the Cooperativet quarterly principal payments on to purchase capacity and energy from the Company and such indebtedness related to its investment. The Company made payments purchases will continue on a graduated basis through 2025.

for such purchases for the quarters ended March 31 and June 30,1986 Rate Matters -In July 1983, the Company requested rate relief from totaisng $41 million ($3.9 million ior plant and 50.2 million for nuclear the MPSC with respect to Fermi 2 ($556 million coincident with fuel) and received title documents for such purchases. The quarterly commercial operation). On April 1,1986, the MPSC issued a final amounts due to the Cooperative for such purchases on September 30 opinion and order with respect to the Company's request. The rate and December 31,1986 tota!ing $3.4 mi!! ion ($3.3 million for piant and increase granted by the order is to be phased in over a five-year period

$0.1 million for nuclear fuel) were not paid in 1986. These purchase in 20% increments commencirg with the commercial operation of payments are expected to be made in 1987 and have been recorded as Fermi 2. Based on current genera!!y accepted accounting principles, the Other Deferred Debits and Other Current Liabilities in the Consolidated phase in plan would be accounted for by recording non cash items of Balance Sheet at December 31,1986.

income, deferred depreciation and deferred return (at the overall rate of At December 31,1986, the Cooperative's adjusted participat.on return of 10.15%) totating approximately $474.7 million (annual defer-interest in Fermi 2 was 13.56% based on amounts paid to the rats of $189.9 mi!! ion, $142.4 million, $94.9 million and $47.5 million for Cooperative in 1986.

the first four years of Fermi 2's commercial operation) The deferred On Octet er 23.1986, the Company and the Cooperative executed a amounts would be amortized to operating expense as the cash recovery Letter of Understanding, subsequently approved by the Boards of of such deferred amounts is realized through revenues over the life of Directors of both the Company and the Cooperative, providing for the plant.

agreement as to the general terms of a purchase by the Company of the Based on the five-year phase in plan, the MPSC approved rate Cooperative's remaining undivided ownership interest in Fermi 2, which increases apportioned by year are as follows:

is to be completed on January 1,1990. This agreement is subject to the wan i

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receipt of appropriate regulatory approvals.

The Letter of Understanding provides that the Company wdl continue to make quarterly purchases of portions of the Cooperative's ownership Annual Anw nt

$77,921 5m 5W $W H21M interest in amounts equal to the Cooperative's payments of principal and interest (approximately $18 million per quarter) on indebtedness related

("((

$77,921 5166,583 5237,649 53R714 5473,7x2 to its investment until the Company receives MPSC authorized rate relief associated with the commercial operation of Fermi 2. The Cooperative The Company will fde proposed rate schedules on an annual basis will conhnue to furnish the Company with title documents with respect commencing with commercial operation of Fermi 2. Rates will become ke.

to purchases equal to principal payments (approximately $2 mdlion per effective upon approval of the rate schedu!es by the MPSC.

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quarterJ However, title documentaban related to quarterly purchases The Company has traditionally been allowed to determine the point in equal to interest payments, commencing with the third quarter of 1986, time at which a generating unit commences commercial operation and, will be held in escrow and wi:1 be released, a!ong with escrowed according!y. placed into rate base for ratemaking purposes. However, the

. 4 documents for the March and June 1986 purchases, upon the order requires Fermi 2 to operate at a 90% rated output level for 100 aW complebon of the final purchase in 1990-continuous hours before commercial operation may be declared. In

'S Subject to the receipt of appropriate regulatory approvals, the addihon, the Company must certify to the MPSC in wnting that the unit

>,g Company wdl on January 1,1990, as final payment of the purchase has met the definibon of commercial operation. Within 15 days after the price, assume responsibdity for approximately $550 million of the Company cerbfies the plant to be ready for commercial opestion,

. M,.?-

Cooperative's long term Fermi 2 related debt or, in the atternative, issue parties to the proceeding may review the Company's certificabon other evidences of indebtedness for the purchase price. The Company The order is based upon a 1983 total project cost estimaW of $3.075 M

has fded an apphcahon with the MPSC seehng financing authonty for bi!Iion of which $2.648 bdlion ($2.552 billion MPSC jurisdictional and i

this transaction. It is anbcipated that the planned purchase by the

$0 096 bdkon FERC jurisdictiona!) relates to the Company's portion of 6

Company wou!d result in the Company repaying approximately $550 the plant The order grar ts recovery of $2.237 bd; ion in MPSC f

md! ion of debt over a 27 year pened including interest on the unamarbled debt balance

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,u junsdictional project costs for Fermi 2. Based upon alleged imprudence Because the order discussed above does not provide for the return of certain expenditures, no return on or recovery of $313 million of the on and the recovery (from either current customer rates or phase-in Company's MPSC jurisdictional project costs were allowed. The order revenues) of all the project costs and operating expenses (operation, allows recovery through depreciation of $2 million of disallowed project maintenance, depreciation, property and other taxes) for Fermi 2, future costs, but a return on such costs is not allowed.

total and per share Earnings for Common Stock will be adversely As discussed herein under " Purchase of Cooperative's Ownership affected when this unit commences commercial operation.

Interest," the Company is obligated to purchase the capacity and energy Under current generally accepted accounting principles, if it is entitlements of the Cooperative until Jar.uary 1,1990. The Cooperative's ultimately determined that a portion and/or the return on a portion of portion of the Fermi 2 disa!!awance is reflected in the capacity buyback project costs is disallowed, total and per share Earnings for Common costs and, therefore, the Company expects that the MPSC may disa low Stock will be reduced over the period of time the plant remains in the recovery of a corresponding portion of such capacity buyback costs service. A write-off would be required under current generally accepted

'i in Power Supply Cost Recovery proceedings.

accounting principles only if, and to the extent that, anticipated future In order to recover all expenditures in excess of $3.075 bi!! ion revenues associated with the plant, including return, are insufficient to (estimated at $1.155 bill ion based on the current project estimate of recover current operating expenses and depreciation of all of the plant

$4230 bilhon plus purchases from the Cooperative) incurred in investment, including the amount disallowed, plus associated ongoing constructing the plant, it will be necessary to request additional rate interest costs. While the Company believes commercial operation of relief from the MPSC. The Company plans to file for such additional rate Fermi 2 will commence before the point in time when the total plant relief in 1987. The Aphi 1,1986 order contained language which costs and expenses would equal anticipated future revenues associated indicated that the MPSC might not allow recovery of costs in addition to with the plant, it is possible that delays in achieving commercial the $3 075 billion of costs presented in the record before the MPSC. The operation status may occur. Should such delays occur and should Ccmpany appeared this specific portion of the April 1,1986 order to the additional rate ielief be insufficient to recover total plant costs and Ingham County Circuit Court, and in a stipulation executed by the MPSC expenses, wnte offs may be required under current generally accepted on January 13,1987, the MPSC stated that it would fairly review any accounting principles. See Note 3 for a discussion of a change in subsequent request for a return on and recovery of Fermi 2 costs that accounting standards for abandonments and disallowances of plant might be filed by the Company This stipulation has been approved by costs, and for capitalization of AFUDC.

the court.

Duommissioning - The NRC has authority to regulate the method by The MPSC also ordered that, once Fermi 2 commences commercial which Fermi 2 will be decommissioned. The MPSC has jurisdiction over

'~'

operabon, the Company is to remove its 795 MW oil fueled Greenwood the matters pertaining to the recovery of costs of decommissioning Unit No.1 from rate base unhl it is determined in future proceedings to nuclear power plants. For Fermi 2 this would include the manner of be necessary for reliability or economic reasons. However, the Company funding the expenditures (which could cost in excess of $100 mi!! ion is permitted to recover through rates operating expenses with respect to in 1987 dollars) and the recovery of these costs by the Company from Greenwood Unit No.1, including depreciat on, but may not earn a its customers.

further return on the $283 million net investment. The Company has On August 26,1986, a Settlement Agreement providing for the appealed to th3 court the removal of this unit from rate base.

establishment at an external trust fund to cover future decommissioning The Company has appealed other provisions of the order to the expenditures for Fermi 2 was approved by the MPSC. On January 13, Ingham County Circuit Court. The Company intends to seek recovery of 1987, the MPSC issued an order authorizing the establishment of a all fermi 2 costs disallowed, as well as those not yet presented to the

$100 million External Trust Fund (in 1987 dollars) to finance the MPSC, including purchases from the Cooperative. (See " Purchase of decommissioning of Fermi 2. The order approves surcharges on Cooperahve's Ownership Interest," herein.) The Michigan Attomey customer bills of both the Company and the Cooperative commencing General ("AG") has also appea!ed portions of the Corrmission's or*_r.

with the commercial operation of Fermi 2.

including placing Fermi 2 in rate base and allowing a t eturn on the amounts deferred under the phase in plan. The matter has been referred

~

to the MPSC for further proceedings and additional test mony has been Note 3 liled with the MPSC.

Change in Accounting Standards in July 1985, the MPSC reduced the Company's return on common In December 1986, the Financial Accounting Standards Board ("FASB")

equity to 14.5% and overall rate of return to 10 34. The Fermi 2 order issued Statement of Financial Accounting Standards ("SFAS")No. 90, will further reduce the Company's authonied rate of return on common

.. Regulated Enterpnses - Accounting for Abandonments and Dis-equity to 14 0% and its authorized overall rate of return to 10.15%, to be a!!awances of Plant Costs " SFAS No. 90 is an amendment of SFAS No.

effective when Fermi 2 commences commercial operation. However, 71, " Account;ng for the [ffects of Certain Types of Regulation."

such returns are not assured, but rather are dependent upon levels of SFAS No. 90 requires the future revenue that is expected to result sa:es, revenues and expenses from the regu!ator'sinclusion of the cost of an abandoned plantin allowable costs for ratemahng purposes to be reported at its present value when the abandonment becomes probab!e, using the enterpnse's qc

3 3 my ; c

. pq y y 3 q p g.p y

~ z, >, ;.,

j 7.;

s.:..; e

;; 4,

. e a

h

incremental borrowing rate. If the carrying amount of the abandoned On a pro forma basis,1986 has been adjusted for disa!!owances of plant exceeds that present value, a loss would be recognize :

Fermi 2 project costs (including AFUDC) of $305 million. Due to the SFAS No. 90 also requires any disa!! awed costs of a recently insignificant pro forma effects,1985 and 1984 viere not adjusted. On a completed plant to be recognized as a loss when such a disallowance pro forma basis, the removal of Greenwood Unit No.1 from rate base becomes probable and a reasonab!e estimate of the disallowance can be would be recognized as a loss under SFAS No. 90 at the time Fermi 2 made. lf part of the cost is disalloweu indirectly (such as a disallowance achieves commercial operation.

of return on investment on a portion of the plant), an equivalent amount in order to recover and earn a return on all Fermi 2 costs in excess of cost shall be deducted from the reported cost of the plant and of $3.075 billion (the project estimate in the record before the MPSC l

recognized as aloss.

compared to the current project estimate of $4.230 billion). it will be l

SFAS No. 90 specifies that AFUDC should be capitalized only if necessary for the Company to request additional rate relief from the I

its subsequent inclusion in allowable costs for ratemaking purposes MPSC. The Company must request rate adjustments for additional is probable.

Fermi 2 project costs of $1.155 billion pbs quarterly purchases of As permitted, the Company anticipates adopting the provisions of ownership interests from the Cooperative of approximately $148 million SFAS No. 90 in 1988, a!though SFAS No. 90 allows delayed application for purchases through April 30,1987. Under the provisions of SFAS No.

until 1989 in certain prescribed circumstances. SFAS No. 90 permits 90, any project costs which are considered probable of disallowance retroactive application of the change in accounting to years prior to 1988 shall be recognized as a loss at the time such determination is made. If through restatement or, alternatively, t;irough recognition of the additional costs were disallowed by the MPSC, the Company would be cumulative effect of a change in accounting principles in 1988.

required to recognize an additional net after tax loss of up to a maximum in accordance with SFAS No. 90, the Company would be required to of approximately $1.0 billion. The Company believes that all costs record at the date of adoption, either through recognition of the associated with Fermi 2 have been prudently incurred and intends cumulative effect or by restatement, estimated aggregate net losses of to seek recovery of all Fermi 2 costs not yet presented to the MPSC up to approximatefy $428 mi!Iion as shown in the following tab!e. The for review.

amounts set forth in the tabte have been reduced by interperiod income The Company also intends to seek a rate adjustment from the MPSC taxes, where applicable, using the income tax rates in effect at the time to reflect (1) the anticipated January 1,1990 $550 mill;on purchase of of the adverse event.

the Cooperative's remaining ownership interest in Fermi 2 through the assumption or issuance of an equivalent amount of debt and (2) the ht i,'I$

partial offsets to such rate adjustment by reduced billings through the Reference Be Recognized Power Supply Cost Recovery Clause upon termination of the 100%

Dm/ho d buyback of the Cooperative's Fermi 2 capacity and energy entitlements

1. Iwanimancesof f ermi2 project on January 1,1990, and the effect of additional purchases of capacity costs based on the 53 (TN Inthon and energy by the Cooperative from the Company. (See Note 2.)

EtNrYt te!! rI "8/,

A required write off of abandoned plant costs, disallowances of plant plus Al L'DC thereon through Af ay costs and possible additional disallowances from rate base for Fermi 2 1,1987 Note 2 530; could have a material adverse effect on the Company's financial position and results of operations. These adjustments could significantly reduce i ni f rom rate base on the antkipated Ntay 1,1987 or eliminate retained earnings ($746 million at December 31,1986) and commerciakreration date of lermi 2 reduce total common shareholders' equity ($2.716 billion at December as ordered by the NtP5C Note 2 11('

31,1986), and accordingly could result in a substantial reduction in the r lit 213 in 1980 aggregate am0unt of funds legally available for the payment Of Note 7 1

u

4. Dnahouances of Bene Rn. proicci dividends. As a result, the Company may be requested to fund certain costs m loss Note 13 3_

escrow accounts in an amount that mJy approach $130 mil lion, under rotal 5428 terms of Indemnity Agreements relating to insurance on tax exempt obligations. Also, the earnings test provision of the Company's 1924 The fo!!owing tabte shows pro forma amounts assuming that the Mortgage and Deed of Trust, as amended (" Mortgage"), could preclude Company app!ies SFAS No. 90 retroactively in 1988 by restatement of the issuance of additional General and Refunding Mortgage Bonds financial statements for prior years:

(" Mortgage Bonds") on the basis of property additions for at least nine months However, Mortgage Bonds could be issued on the basis of year i nde_a De3 ember 31--

Mortgage Bond retirements. (See Note 10 )ln addition, due to the 19% _

_l?L l*4 customary conditions associated with extensions of new, or renewal of om/hoummt n r are amomu existing, credit facihties such as commercial paper, revocable lines of tIr common 5toa credit and revolving credit arrangements, such facilities may be available n

l'armngs Per 5 hare 5030 52.33 52 20

to the Company. if at a!!, on the basis of less favorab!e terms. Fixed power based on MPPA's plant-related investment in the Belle River income quality ratings of the Company's securities might also be project, interest costs incurred by MPPA on their original project adversely affected, and the Company's abihty to obtain long term funds financing plus 2.5%, and certain other costs such as depreciation and from the financial markets on favorable terms may be adversely affected operation and maintenance expcases. Buyback payments to MPPA were Si as No. 90 did not address accounting for phase in plans. The

$75.3 million and $72.9 mi!! ion for 1985 and 1986, respectively, and are FASB concluded that adduonal consideration is necessary to resolve currently estimated at $72.7 million, $71.9 million, $71 million, $70.1 i

the accounting issues related to phase-in plans. The FASB has indicated million and $62.4 million for 1987,1988,1989,1990 and 1991, that it will consider accounting fcr phase in plans at a later date.

respectively.

Ludington Pumped Storage - Operation, maintenance and other Note 4 menses of the Ludington Pumped Storage Plant are shared by the Jointly-Owned Utility Plant Company and Consumers Power Company ("Consumen")in proportion The Company's portion of jointly owned utility plant at December 31, to their respectiva interests in the plant.

,i 1986is as follows:

Note 5 W

Ludington J

rumped Income Taxes lermi 2_H_eHe Ri er(2L 5torage Totalincome tax expense as a percent of income before tax was less t

in4erva e date (3) 1973 than the statutory federal income tax rate for the following reasons:

Undis ided ow., hip int.> rest (1)

(4) 49%

Ins estment (milhons)

$3,713 4 51.029.2 5168.3 Percent of Income Betore Tas Accumulated depretiatie n 1986 195; 1984 (mdhons)

$ 83 1 5 44.4 Statutory income tas rate 46.0 %

46.0%

46.0 %

AIUDC (22.5)

(21.3)

(18.4)

(l} See thscussion in Note 2.

(2) Indudes belle River Unit No.1, fatihties used in common with Unit "E

No 2, huhties used.iintly by the Belle Rner and St. Clair Ibwer

["f["

Plants ar.d certain transmission Imes.

- jj J

(3) L' nit No. I and fauhties used in common with Unit No. 2 were Lifectise income m rate

__19.8%

_22.0%

_ 2 4.7_.%

plat ed in sersit t on August 1,,1984. Unit No. 2 wr placed in service on July 9.1983. Certain toal handling facihties used jointly by the Belle Rn er an i St. Clair Ibwer Plants were plat ed in servite in 1976 C0mponents of income taxes were appIiCable to the following:

+

8 and 1977. The transmiwion lines were placed in servite in various gf.

(4) I he Companv % undn ided ow nership interest is 62.78% in Umt No.

g,gy,p gears between 14 0 and 1981.

1986 198; 1"84 h

(q 1 M t 39% of the portion of the taolities applicable to Belle River used 7

jointly by the Helle River and St. Clair Ibwer Plants, 49.;4% in Operating npenses b

(ertam transmiwion knes and at least 70% in facihties used in mm.

Current 5 18,304

$ 13,;49

$ 3,411 mon with Unit No. 2.

Deferred - net Horrowed funds component of Ai UDC (20,609)

(6,394) 36,724 liclle River -In 1983, the Company sold to Michigan Pub!ic Power DePreciati""

64'423 62

• 4%I3" Indirec t construt tion costs 5,819 6,926 8,634 Agency ("MPPA") an undivided ownership interest in Bel:e River Unit Amonifation of estraordmary 4j No. I and facihties used in common by Belle River Unit No.1 and Belle property lowes and River Unit No. 2, and certain other related facihties. At December 31, unrecowred plant costs n,823)

R 823)

R 817) common facihties, $28 mil l ion for certain coal handhng and transmis

~g-[~~

~-[,h 73-~

1986, MPPA's insestment consisted of $343.4 mi!l ion for Unit No. I and

~

~

sion faciLies and $17.2 milkon for coalinventones and other non inwsiment tauredit-net capita!Ilej Costs.

L'tihnd 71,790 53.409 43,667 1

MPPA is ent; tied to 18 61% of the capacity and energy of the entire

--]'

'(

^'"""i"d plant and is responsible for the same percentage of the plant's operation

-- g' 3y, g,3y

'[3]s9--

g and maintenance expenses and capital improvements. The Company is obhgated to provide MPPA with backup power when either unit is out Q'j """ d"d dd"' h""'

g 93g gy 73 of serVICc-Deferred - net

_ O,r*62)

. J 612)

(613)

The Company began obligatory purchases of MPPA's capacity and Totai 38,827) g i_.632)

_ _ii2 energy entit!ements at the commercial cperation date of Unit No.1 and total mmme taws 5:17,769 5121,297 s131,;71 will continue to do so for up to eleven years, initiaily at 100% through 1990, w:th dechning amounts thereaf ter The cost for the buyback of The Company defers income taxes for the borrowed funds compo rent of AFUDC and indirect construction costs which are deducted currently for federalincome tax purpcses in accordance with MPSC requirements, deferred income tax accounting is not lo!! awed for such construction costs relating to Fcrmi 2. interest en nuclear fuel financing

.,.;/ 7 w a g' ~

w "1*=-

3g g

t c: %g s

?

Note 7 (See Note 11) and certain other current income tax deductions.

in July 1985, the MPSC ordered that, for accounting and ratemaking Extraordinary Property Losses and purposes, the accumulated deferred income taxes related to indirect Unrecovered Plant Costs construction costs and the borrowed funds compcnent of AFUDC for Amortization of extraordinary property losses and unrecovered plant Belle River Unit No.1 and common plant be amortized to income over a costs commences when recovery of such costs is authorized by five year period rather taan over the life of the plant. Such credits to accounting and ratemaking orders of the MPSC. A return on investment income amounted to $24 million and $12 million for 1986 and 1985, is provided only for the unamortized extraordinary property losses. (See respectively Note 3.)Information relating to these items is as follows:

The cumulative net amounts of income tax timing differences for U "'"'""i'ed which deferred taxes have not been provided at December 31,1986 and 1985 are $2.2 bdhon and $2 billion, respectively The tax effect of these Amortization Dt 31 cmounts not provided fur currently will be recorded when such taxes ivriod Total 19m 1985 beceme payable and are recovered from customers.

nimusanM Investment tax credit carryforwards of approximately $198 million htraordinary are available to offset future years' tax habihties as permitted by law. This Property Lowes aggregate amot,nt of credits has been reduced by 17.5% and will be

[M9 y,*"'

[$

s 12 9j s

5 s

further reduced by an additional 17.5% in 1988 in accordance with the provisions of the federal Tax Reform Act of 1986 ("TRA") Such credits,if "Q"'[s unused, expire over the period 1997 through 2001.

I:nrico Fermi Unit No. 3 19 77-1986 6,810 681 Greenwood Note 6 Unit Nos. 2 and 3 1983-1993 71,282 44,531 51,680 Compensating 13alances and Short-Term Borrowings 5"B291 546 131 s%2 As descnbed below, at December 31,1986, the Company had total short term credit arrangements of $349.1 milhon under which $104.7 Note 8 milhon of borrowings were outstanding Common Stock and Non-Red?emable Cumulative The Company had bank knes of credit of $300.1 million, of which Preferred and Preference Stock

$51 milhon required compensating balances, $293 5 million had In the fourth quarter of 1985, the Company discontinued the issuance of commitment fees in lieu of compensahng balances and $1.5 million did new shares of its Common Stock through the Dividend Reinvestment not 'equire compensating ba!ances or commitment fees. In support of Plan and the Employes' Savings Plans.

lines of credit requinng compensating balances, the Company main-The Convertible Cumulative Preferred Stock,5%% Series, is tained bank balances which during 1986 averaged $0.5 milhon. None of convertible into Common Stock. The conversion price was $17.79 per these balances is subject to usage or withdrawal restrictions. Commit-share at December 31,1986. The numbers of shares converted during ment fees paid in lieu of compensating bank balances for 1986 were 1986,1985 and 1984 were 21,880,15,739 and 23,417, respectively

$1.4 mdlion. Substantially all borrowings are at rates below the banks' The number of shares of Common Stock reserved for issuance upon priue lending rates.

conversion and the conversion price are subject to further adjustment in The Company has a nuclear fuel financing arrangement under which certain events. The Convertible Cumulative Preferred Stock,5%%

Renaissance Energy Company (" Renaissance") an unaffikated company Series, may be redeemed at any time in whole or in part at the opbon of raises funds, subject to the satisfaction of certain conditions, to the Company at $100 per share, plus accrued dividends.

purchase nuclear fuel and to lend to the Company, pursuant to a The following series of Preferred and Preference Stock, which are not separate loan Agreement, for general corporate purposes for periods redeemab!e pursuant to sinking fund requirements, are redeemable not to exceed 270 days. Renaissance may issue letter of credit backed solely at the ophon of the Company at stated per share redemption commercial paper (currently hmited to 180 days' matunty) or borrow prices, plus accrued dividends:

from participahng banks on the basis of promissory notes hmited to 270 days' matunty To the extent the maximum amount of funds available to Det reasing Prior on and N""**""'d M"i"'

h""i To To Ahn Renaissance (currently $309 million)is not needed by Renaissance f rom time to time to purchase nuclear fuel, such funds may M loaned to the Preterred sto< k Company pursuant to the loan Agreement At December 31,1986, $24 Z

IN 7

milhon was availab!e to the Company under such loan Agreement.

7.49%

101 11-1s-86 7.3et 102.30 12-1-87 101 12 1-87 (See Note 11 )

The Company has a $25 mdkon cred:t arrangement restncted to Pretnent e Not k s2 28 2n ;0 1 lLM 23 23 1-1591 bankers acceptances s3 42 28.42 1 n-M 212; l B 98 51 40 28 40 1-ILM 23.25 1-15 98

$112 28 m 1 14M 23 00 1-l % 98

$1.13 28 13 7 M 2123 7-1498

$124 28 24 10- I LM 2123 10-15-98

aa

-x

.e1 M.

dW ~ N J a., A W W M m w k. u. _

None of the shares of the $3.42 Series, $3.40 Series, $3.12 Series, in the event that a payment due under requirements of a sinking fund

$3.13 Series or $3.24 Series Preference Stock may be redeemed for any series of redeemable Preferred or Preference Stock is not made, through certain refunding operations prior to January 15,1988, January no dividend shall be paid (other than a dividend paid in junior stock) or 15,1988, January 15.1988, July 15,1988 and October 15,1988, declared or other distribution made upon any junior stock (Common and respectively, at an effective cost less than that indicated by the original Preference Stock in the case of Preferred Stock, and Common Stock in dividend rate.

the case of Preference Stock) until such payment is made.

Apart from MPSC approval and the requirement that Common, The following series of Preferred and Preference Stock, which are Preferred and Preference Stock be so!d for at least par value, there are redeemable pursuant to sinking fund requirements, may also be no legal restrictions on the issuance of additional authorized shares of redeemed at the option of the Company at stated par share redemption such stock.

prices, plus accrued dividends:

l Note 9 Decreasing Prior onand Redeemable Cumulative Preferred and Preferred Stock Preference Stock 9.77g gg3 gg guy ggi 34394 On August 15,1986, the Company redeemed 360,000 shares of 9ars 107.m 10-1589 101 10-1594 12.80% Series and 250,000 shares of 15 68% Series, $100 par va!ue 13.Nrb 110.80 1 1587 100 1-15-90 cumulative preferred stock, constituting all of the outstanding shares of Preference stiwk both issues, at a price of $108.50 and $105.88 per share, respectively, y

,g jj yyj

]

y p!us accrued dividends.

9.12 (redeemed The following redeemable series of Preferred and Preference Stock 1-1587) 29.15 1-15-87 23.25 1-1597 9m 29.m 44587 2125 44 597 are entitled to the benefit of sinking funds (provided that no dividend arrearages exist) providing for the annual redemption of shares at stated per share prices, plus accrued dividends, commencing on None of the shares of the Cumulative Preferred Stock,9.60% Series datesindicated:

may be redeemed through certain refunding operations prior to October

, Non.

15,1989 at an effective cost less than that indicated by the original

[

dividend rate. None of the shares of the Cumulative Preference Stock,

+

n Redeem

$4.00 Series may be redeemed through certain refunding operations Annual Price Additional prior t0 Apnl 15,1987 at an effective cost less than that indicated by the Commendng Number Per Shares in Original dividend rate.

R.ede. e._m_ab_le S_eri_es__O_n of Sha_res Sh. a re Anv Year

~

The combined aggregate annual amounts of redemption require-I'"[72 ments at December 31,1986 for all series of redeemable Preferred and

- t s8s 30.000 um 30axu 9mrt to-is8s 32au 100 32,soo.

Preference Stock are $20.6 million for 1987 and $18.3 million ior each itsrs

1. is-87 suxu im of the years 1988 through 1991.

Prefereni c Sto< k On January 15,1987, the Company redeemed 2,000,000 shares of Ix j

$)

[$

$4.12 Series, $1 par value redeemable Preference Stock constituting all wries n 81 v iz iredeemed of the outstanding shares at a price of $25 per share for the redemption 1 1; 87) 14587 100,000 2;

1;o,oon of 250,000 shares and $27.85 per share for the early redemption of 9 00 44 w7 m.om 23 120axo 1,750,000 shares. A total of $50 million has been reclassified in the

• Not to cweed 220avo cumulain e adamonakhares.

Company's 1986 Consolidated Ba!ance Sheet to amounts due within one year.

The folloung numbers of shares were purchased for application to sinking fund requirements:

Note 10 Long-Term Debt General arid Refwidirig Mortgage Bonds - The Mortgage, the lien Preferred sim L,93rt Series 31.020 30axo of which covers substantially all of the Company's properties, limits the r$s amount of additional Mortgage Bonds which may be issued on the basis Ir f r i

12 s x

rreferenie,to L. s2.73 senes 200.000 119,800 2s.900 of property additions, an earnings test provision and Mortgage Bond Preference uL, $233 Series 8 73.300 28.7m 99,920 retirements: At December 31,1986, approximately $3 6 bi! lion principal amount of additional Mortgage Bonds could have been issued on the basis of property additions or the earnings test provision of the Mortgage, assuming an interest rate of 9 25% on any such additional Mortgage Bonds. In addition, at December 31,1986, approximately

$332.1 million principal amount of Mortgage Bonds could have been i

'(

a

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a _

7<y~

^

[ ;.;

_ g> _ y;

~

.Ms

- ;.-. :. ; ;, _ 3. f _ 3 ;;,;;...3;.; p ',[ Q;,_L.

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R / f Q f;;.3 [gQ.QjplgQ jgjg&Q}gg&&RQ[,3 jhlx l issued on the basis of Mortgage Bond retirements. See Note 3 for a to Renaissance to purchase such fuel. Title to the nuclear fuelis held by l change in accounting standa:ds, the cffects of which could limit the Renaissance. The Company's obligation to make quarterly payments l Company's abMty to issue Mortgage Bonds.

under the heat purchase contract commenced on September 21,1986, Tax Excrnpt Rcrenne dond Obligations - Agreements have been with the consumption of nuclear fuel for the generation of electricity signed with certain municipa!ities and municipal agencies, under which related to the ore-commercial testing of Fermi 2. Renaissance's investment in nuclear fuel was $285 million and $264.4 million at

?.

the municipalities and acencies issued tax exemot bonds to finance certain Company projects and to refund maturing issues. The Company December 31,1986 and 1985, respectively The increase in 1986 over is obligated to make payments sufficient to meet the pnncipal and 1985 of $20.6 million includes net additions of $22 million due primarily interest due on the bonds. To secure the Company's obligations under to capitalized interest on nuclear fuel, less $1.4 million for the r

certain el these agreements, the Company has issued Mortgage Bonds amortization of nuclear fuel consumed in 1986. (See Note 6.)

f.A with pancipal amounts, interest rates and maturity dates corresponding in accordance with SFAS No. 71, the Company has recorded capital to those of the tax exempt bonds. Payments made on the tax exempt leases for which the inception date is after December 31,1982. Accord-revenue bond obligations secured by Mortgage Bonds automatica!!y ingly, balance sheet assets and liabilities at December 31,1986 and discharge corresponding Mortgage Bond obkgations.

1985 include certain property and related obligations under capital leases.

Effective January 1,1987, as permitted by SFAS No. 71, the Bellc River Prvject financing - The Company has an agreement Company will record capital leases for which the inception date was on with a group of commercial banks for a $1.2 billion project financing o

e Dece@eG,22. Had aM ewe leases Nen relating to Belle River Unit No.1 and facihties used in common with accounted for as capital leases, assets at December 31,1986 and 1985 Belle River Unit No 2. In 1985, the Company prepaid $150 milhon would have included additional property under capital leases (including representing quarterly repayments due January 1 and April 1,1986. In nudeateu less acwmulaW amo@a%n, oWW mhn aM 1986, in addition to quarterly payments due July I and October 1, the

$3M m@on, respemely Nso, kanes at December 31, M86 and Company prepaid $75 milfion representing the quarterfy repayment due 1985 would have included additional noncurrent liabilities under capite, January 1,1987. Quarterly repayments are due Apnl 1,1987 and leases cf $85.6 million and $98.1 million, respectively, and additional continuing thereafter through October 1,1989 with provision for w

eHnMng Mear bel o@aMnsWndenaNaheases prepayment at any time woout penalty The agreement contains a od2m men aM $2MnWespey number of covenat, including an agreement by the Company not to t

o@ahn ONased assdsis modeh@at g

pledge or sell any of its assets except in the ordinary course of business a%2ehn be #gaMn aM am0@ab He leasd assd 3

and except for the safe or conveyance to one or more utihties of is equaMe Ma%nse a%whatemaking purposes Net X

undivided interests in genei ating plants; and not to create certain liens income is not affected by capitalization of leases.

on sassds.

For ratemaking purposes, the MPSC has treated allleases as long-Tenn Dcht Afaturifics-In 1987,1988,1989,1990 and operating leases.

1991, long term debt matunties consist of $646.4 million, $479.8 mdkon, $429 6 mdlion, $92.1 milhon and $94.0 mi!! ion, respectively Note 12

%. N Commitments and Contingencies l

Note 11 Conunitments - The Company has entered into purchase commit-Leases ments of approximately $314 million at December 31,1986. The s

~

Rental expenses were $41.1 million, $391 mdlion and $38.0 mdlion for Company has also entered into substantial long range fuel supply 1986,1985 and 1984, respectively-commitments.

Future minimum lease payments under long term noncancellable Contingencies - On May 13,1986, Quivira Mining Company (for-m.

leases, consisting of nuclear fuel ($409 8 rr.illion computed on a merly Kerr McGee Nuclear Corporation) fded a suit against the Com-U proiected Units of production basisk lake vessels ($97.1 mdlion),

any claiming contractual damages in the amount of $60 million. The b.

locomobves and coal cars ($97.7 milhon), office space ($541 million) suit alleges that the Company did not take nuclear fuel on a timely basis.

L and computers, vehicles and other equipment ($721 mdlion) at On March 19,1986, the Company initiated htigation in the U.S.

T December 31,1986 are as follows-Distnct Court for the Eastern District of Michigan 6 gainst Decker Coal

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(nunens)

Company (" Decker") seeking recovery of approximately $39 million of

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$ M2 two

$7e overpayments of Montana state coal taxes the Company claims were 19M 100s twI m7 improperly ca!cu!ated since 1973. On May 9,1986, Decker fded a low 81.5 Remaininn ean

slo counterclaim for breach of contract and demand for trial by jury Total

$731.4 m ~

The Company has a heat purchase contract with Renaissance which provides for the purchase by Renaissance for the Company of up to

$300 mdhon of nuclear fuel, subject to the continued avadabdity of funds

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The State of Montana has filed assessments claiming that additional The Jefferson School District (" School District"), located in Monroe Montana severance and re!ated taxes, p!us interest, are due for 1980 County, filed three actions with the State Tax Tribunal (" Tribunal")

and 1981 as a result of costs incurred by the Company resulting from contesbng the Company's 1985 property tax assessments for Enrico the renegotiation of a contract with Decker. These assessments have Fermi Unit Na.1, Fermi 2 and the Monroe Power Plant seeking been filed against Decker as the producer, and they have been forma!!y reassessment which would resutt in an annual tax increase of protested. It is anticipated that Montana will file assessments for approximatefy $57 million for the Company On September 30,1985, the additional taxes for 1982 through 1984. The 1980 through 1984 Inbunal ruled the School District did not have proper legal standing to assessments could amount to as much as $11 13 mi!! ion plus interest. If appeal the Company's tax assessment before the Tribunal and the Decker is unsuccessful in its protest and appeal, the Company may be Tribunal's decision has been affirmed by the Michigan Court of Appeats.

required to reimburse Decker for all or a portion of the assessments.

The School District requested a re-hearing before the Michigan Court of (See Note 13.)

Appeals, which was denied, and has filed an application for leave to Ownership of an operating nuclear generating unit subjects a appeal to the Michigan Supreme Court. The School District filed three company to additional risks. The Company is insured as to its interest in similar actions with the Tnbunal contesting the Company's 1986 Fermi 2 under property damage insurance provided by Amerun property tax assessments. No specific assessment increases were Nuclear Insurers ("ANI") and Nuclear Electric Insurance Limited indicated in these filings.

("NEIL") Under the ANIinsurance policies, $500 million of composite On September 4,1986, the AG, acting on behalf of the people of the primary coverage and $120 million of excess coverage is provided for State of Michigan and the Michigan Natural Resources Commission, decontamination costs, debris removal and repair and/or replacement of filed a lawsuit against the Company and Consumers, as co-owners of property The Company pays annual premiums for this coverage and is the Ludington Pumped Storage Plant, alleging violations of the Michigan not kabte for retrospective assessments. Under the NEll insurance Environmental Protection Act and the common law for claimed aquatic policy, $610 million of excess property damage insurance is provided.

losses. The lawsuit claims past damages (incluaing interest) of approx-The combined limits provide total property damage insurance of $1.23 imately $148 million and future damages (from the time of the filing of billion ($500 million of composite pnmary coverage, $120 million of the lawsuit)in the amount of approximately $89.500 per day On excess coverage and $610 million of additional excess coverage) In September 25.1986, an answer was fi!ed denying liabi!ity The matter addition, the Company will obtain coverage for fuel costs associated remains pending before the Inghan County Circuit Court.

vuth plant outages through NEIL Under the NEll coverages, the In addition to the litig3 tion discussed above, the Company is Company could be liab!e for maximum retrospective assessments of up involved, from time to time, in litigation dealing with the numerous to approximately $16 million per year if losses were to exceed aspects of its business operations. The Company believes that the accumulated funds available to NEIL outcome of all such litigation will not have a material effect on its As required under the Price Anderson Act(which expires on August financial position or results of operations.

1,19871 the Company maintains public liability insurance for a nuclear See Notes 2,3 and 13 for a discussion of contingencies related to incident. The current I,m:t of liability is $160 million of private insurance Fermi 2 and other rate matters.

plus deferred premium charges of $5 million which may be levied against each nuclear unit licensed to operate (but not more than $10 Note 13 million per year per nuclear unit). On December 31,1986, there were Rate Matters 107 licensed nuclear units in the United States. Thus, deferred premium General - The Company is subject to the general regulatory jurisdic-charges in the aggregate amount of $535 million could be levied against tion of the MPSC, which, from time to time, issues its orders pertaining all owners of licensed nuclear units in the event of a nuclear incident.

to the Company's conditions of service, rates and recovery of certain According!y. public liability for a sing!e nuclear incident is currently costs. Orders of the MPSC are of ten subject to judicial review over limited to $695 mi!! ion ($160 million of private insurance and $535 protracted periods of time and such matters are often remanded to the mil; ion of deferred premium charges)

MPSC iar additional proceedings. This review process may result in the To the extent that insurable claims for replacement power, property development of new pc! icy designed to take into account statutory and damage, decontamination, repair and replacement and other Costs and regu atory changes.

expenses ansing from a nuclear incident at Fermi 2 exceed the policy

/

limits of insurance, or to the exent such insurance becomes unavailabic in the future, the Company wi!! retain the nsk of loss as a self insurer.

rate case with the MPSC requesting an annual revenue increase ci approximately $969 m4 ion for general cost increases for the 1984 test Although the Company has no reason to anticipata a senous nuclear incident at Fermi 2,if such an incident did happen it could have a year and for revenues coincident with the commercial operation of Belle River Unit Nos.1 and 2 and Fermi 2. On August 1,1984, Be!!e River matenal but presently undeterminab'e adverse impact on the Company's Uryt No. I commenced commercial operation and the Company began financial position.

co3ecttng rates designed to produce annual revenues in Ine amount of

$182.9 milhon pursuant to an interim order of the MPSC. On Ju!y 9, 1985, Bel'e River Unit No. 2 commenced commercial operation and the

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Company ceased to accrue AFUDC on the unit and began to record final opinion and order concluding that there was insufficient evidence to expenditures associated with plant operations and depreciation as support the collection of the additional $13.7 million of revenues. In current operating expenses. On Jufy 16,1985, he MPSC issued a 1984, after a series of appeals, a final opinion and order of the Ingham partial final opinion and order designed to produce annual revenues in County Circuit Court was affirmed, thereby requiring a refund, with the amount of $99.3 million for the commercial operation of Belle River interest. In February 1985, the Ingham County Circuit Court ruled that Unit No. 2. On April 1,1986, the MPSC issued a final opinion and order the statutory interest rate should be used for the refund and remanded for the Comp 2ny's Fermi 2 rate request. The Apol 1 order grants the the case to the MPSC to determine tha method of refund. While MPSC Company rate increases effective w;th the commercial operation of proceedings continued as a result of the remand, the MPSC, the AG and Fermi 2 totating $475.8 million (including interest), phased in over a five-the Association of Businesses Advocating Tanff Equ4y(" ABATE")

year period.

appealed the decision of the Circuit Court to the MichW.ourt of In its July 16,1985 order, the MPSC allowed rate base treatment of Appeals. Pursuant to an MPSC order issued in August 19e, '

the Belle River Project but based on its " reasonable and prudent

Company refunded approximately $28 million (principal and ir, astl On standard concluded there was unreasonable delay in the construction of April 29,1986, the MPSC issued an order requiring the Company to this project. The MPSC disallowed approximately $96.9 million ($90.2 refund an additional $519,000 of interest, and the Company has million of which is applicable to Ine Company's rate base) including appealed this order to the Ingham County Circuit Court. On October 20,

$33.9 million for certain coal handling facilities, $2.1 million for certain 1986, the Michigan Court of Appeals issued an opinion stating that the other boiler plant equipment and $60 9 million due to what the MPSC Ingham County Circuit Court Judge did not have jurisdiction to make the termed an imprudent delay of twelve months. The order denied both the interest rate determination and, accordingly, remanded the matter to the retum on and a recovery through depreciation of the $60.9 million MPSC for a determination of the interest rate. On January 5,1987 the disa!!owance related to the delay in construction and the $2.1 million Company filed an application for leave to appeal to the Michigan disallowance for boiler plant equipment. The order allows recovery Supreme Court. At December 31,1986, the Company has recordeo $20 through depreciation, but denies a return on approximately $32.8 million million for additional interest related to this matter.

of the 533.9 million related to the coal handDng facihties, but the Dcferred Fuct Cost Rcfund -In 1983, the Michigan Supreme Court Company is denied both the return on and a recovery through denied the Company S motion for a re-hearing of the deferred fuel cost depreciation of the renaining $1.1 milkon of these expenditures, mat er, thereby requiring a refund of $23.5 million of revenues collected, The Company appeared the July 16,1985 crder to the Ingham with interest. Pursuant to an MPSC order issued in September 1983, the County Circuit Court, which, on September 17,1985, issued an Company refunded approximately $47 million (principal and interest injunction which allowed the Company to collect, subject to refund, rates prekminarily determined). In 1984, the MPSC issued a final order in an amount designed to produce an additional $12.1 million in annual directing the Company to refund $19.1 million of interest. In January revenues to compensate for the $60.9 million of the Belle River 1985, the AG and ABATE filed an appeal with the Ingham County Circuit disallowance. On December 16,1986 the Court ruled that the MPSC Court which challenged the MPSC's method of dJtermining interest. In had not met the substantial evidence standard for the $60 9 million Belle September 1985, the Court remanded the case to the MPSC for River costs disa!! awed due to impruden 1elay The Court found that the consideration of additional evidence presented to the Court and a i

MPSC had properly disallowed costs of $36 million related to the coal decision with respect thereto. On March 11,1986, the MPSC issued a

\\ handling facihties and boiler piant equipment. The matter has been final order directing that interest be refunded in cdd: tion to the amount remanded to the MPSC for further proceedings consistent with the refunded in 1983. The order requires an additional refund of interest of Court's decision-up to $8 million, which amount has been recorded at December 31, The Company's analysis of the rate order indicates that the revenues 1986. On September 8,1986, the Ingham County Circuit Court attirmed allowed for the Bel;e River Plant are sufficient to recover current the decision of the MPSC. The Company has appealed this decision to operahng expenses and depreciation of all of the plant investment, the Michigua Court of Appeals.

including the amount disallowed, plus associated ongoing interest costs.

Tuct Cost Recovery - The MPSC has taken up the propriety of the Therefore, the Company beheves that, under current generally accepted nclusion in a Power Supply Cost Recovery plan of costs associated with accounting principles, a current period wnte off of the amounts the deferral of coal deliveries from Decker. Specifica4y involved in this disallowed is not required.

e@i@ ion ne $318 Mion menWe We See Note 2 for a discussion of the MPSC's Apol 1,1986 order with D&W@mmWWHamWW respect to Fermi 2 and Note 3 for a discussion of the application of taken from 1979 to 1984 and approximately $10 million incurred under SFAS N190 to the disa!lowances contained in the July 16,1985 and current contract terms as a result of the Company's decision to decrease Apol1,1986 MPSC rate orders ts annual tonnage received during 1984. The MPSC indicated that the Rate Rcfund - In 1976, pursuant to a temporary order of the Inqham resolution of the issues related to the inclusion of costs associated with County Circuit Court, the Company collected revenues of $13.7 million, the renegotiation of Decker coal should be addressed in a reconciliation subject to refund. In 1981, the Ingham County CFcuit Court issued a proceeding The MPSC cited sections of Act No. 304 of the Michigan Public Acts of 1982 reprding the disallowance of charg6, additional costs and pena'ty charges unreasonably or imprudently incurred as a y

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basis for raising the issue of the Decker renegotiations. In 1979, the AG The change in interest rate from 10% to 9% resulted in an increase in requested orders from the Ingham County Circuit Court and the MPSC the total actuarial present value ol accumulated Plan benefits of prohibiting the Company from charging its customers such costs under approximately $39.6 million at December 31,1985.

I the former luel cost adjustment clause. In 1980, the Circuit Court denied in 1985, the FASB issued SFAS No. 87," Employers' Accounting For l

the requested relief and remanded the case to the MPSC. In 1983, the Pensions". The Company will adopt these new pension accounting and MPSC issued a final order which dismissed the AG's complaint. The AG disclosure requirements prospectively in 1987. As a result of changes in appealed the order to the Ingham County Circuit Court which denied the actuarial assumptions effective January 1,1987 and the Internal appeal in September 1985. In September 1985, the AG appealed this Revenue Service full funding limitation, na retirement plan contributions case to the Michigan Court of Appeals which on November 5,1986, are expected to be made in 1987.

affirmed the Circuit Court decision in favor of the Company On Other Ibstrctirement Benefits -In addition to providing pension November 25,1986, the AG filed an application for leave to appeal with benefits, the Company provides certain postretirement health care and the Michigan Supreme Court. (See Note 12.)

life insurance benefits. Substantially all of the Company's employes will Tin Refonn Act of 1936 - The TRA reduces corporate tax rates become eligible for such benefits if they reach retirement age while still effective July 1,1987. The MPSC has initiated pioceedings requiring the working for the Company These benefits, as well as similar benefits for Company and other Michigan public utilit:es to present information as to active employes, are provided principally through insurance companies the impact of the TRA. In an order issued December 17,1986, the and other organizations whose premiums are based on the benefits paid MPSC indicated that the Company, as well as other Michigan public during the year. The Company recognizes the cost of providing these utilities, must substantiate why its rates should not be reduced to reflect benefits as the premiums are recorded.

the effects of the TRA. The Company is preparing the requested information. The MPSC has ordered that the submission be made by 1986 1983 19 4 February 17,1987.

nhousanM Cost to the Company of prosiding Note 14 health care and hfe insurance tvnehts to employes Employes' Retirement Plan and Other Attive employes

$37,678 s31,227 531.083 Postretirement Benefits Retired emploves 10,268 6,30s 7,712 b 'l

• 47 "4"

$375" 538 7"3 Entployes' Retirement Plan - The Company has a trusteed and noncontnbutory defined benefit retirement plan covering all eligible employes who have completed six months of service. The ('ompany's Note 15 policy is to fund pension cost annually as it accrues based on the Supplementary Quarterly Financial Information actuarial cost of the Plan, subject to the Internal Revenue Service full (Unaudited) funding limitation. il applicable. Untunded ptior service cost is amortized over Mty years and thirty years (for costs relating to amendments to the 19M6 Qunwr l'nded Plan after April 1,1976), as appropriate, and net experience gains and sia,. 3 i

on,3n 3 y,. 30 nec,31 losses are amortiled over fif teen years. Cost to the Company to fund the uhousands, en,;4 p r sh'in amounta P'.an was $27.0 million, $37.9 million and $35.7 million for 1986,1985 o erating Revenues 5748,862 sn91,37

573s a l 5690.990 r

and 1984, respectively Effective January 1,1986, the actuarial interest operai ng income 182,250 133,618 176,973 In9,703 rate used in determining pension cost was changed from 7% to 9%

Net income 130,097 108.593 127.099 111,308 Cost to the CompIny to fur.d the Plan was reduced approximately $10.6

'""$nN n stott Im.443 82,934 102,733 88,142 mdlion in 1986 as a result of this change.

I arnings Per Share 0 71 0.57 0.70 0 60 A comparison of the actuarial present va!ue of accumutated Plan benefits, detcrmined using interest rates of 9% and 10% at December 1983 quaner Ended 31,1985 and 1984, respectively, and net assets available for Plan star.31 June 30 Wpt. 30 Dec.31

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benefits at December 31,1985 and 1984, the latest dates for which nhousa A emrf ter sha'ramounts) actuarial informati00 is available, is as follows:

gg,ratin Resenues 5713,032 5651,273 5722,297 5701,553 n

Operaung int ome 149,512 131,101 17J,ml 162,684

_ DecemtvrJ1---

Net income 10s.421 94Ms 121,042 113,444

__198L _. _19R I arnings for uhemanM Common 5 toc k n2,;M 68,749 93,242 87,723 I"*"M C'

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At tuanal prevnt value of.numulated Plan Ivnef:t*

Vested 54 K 2li 5106,914 Nons ested

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. l_7_,177 lotal W o.91I sk4 091 Net awets avadaNe for I'lan Ivnents 5612.M;8 54R M91 (y '. p a.(

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Managernent's Discussion and Operating revenues realized from rate increases are dependent upon actuallevels of kWh sales and billing demands (requirements for Analysis of Financial electricai power measured in kiiowattsy Condition and Results Cnangesin kWh sales were as follows:

of Operations increase (Decrease) From l'rior Year a

This analysis should be read in conjunction with the Consolidated 1986 1985 1984 Financial Statements and accompanying Notes thereto, contained

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Industrial 3.8 1.8 7.7 Total 3.7*.

2.3%

4.6%

Consolidated Statement of Income General-Improved business and economic conditions existed The increases in commercial and industrial sales were due primarily throughout the Company's service area during the three year period to improved business and economic conditions throughout the Com-resulting in higher kilowatthour ("kWh") sales, particularly in the pany's service area, with increased sales to automotive and automotive-commercial andindustrialsectors.

related customers. Sales to steel customers increased in 1984, but Operating Revermes - Approximately 97% of the Company's operat.

decreased in 1985 and 1986. The decreases in residential sales in 1984 ing revenues are subject to the jurisdiction of the MPSC, with the and 1985 were due primarily to cooler summer weather. The increase in g

remaining 3% subject to the jurisdiction of the FERC.

residentia! sales in 1986 was due to an increase in customers and to E

Revenues increased in each year due to the following factors:

warmer summer weather.

Operating Expenses - Operating expenses increased in each year.

gdr$kErIm"Sr"i,'r$ ear Fuel expense increased in 1984 and 1985 due primarily to increased 9 36--

39s3 3934 generation reflecting higher kWh sales to customers and, in 1985, to omumna higher costs of coal. The increase in 1985 was partially offset by a Rat i rease and ri er offuel reduction in expense I0r a reclamation settlement with Decker Coal E

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g Kdowatthour sales 95 54 103 C0mpany Fuel expense decreased in 1986 due to lower unit fuel costs Other-net (34) 7 18 and lower quantities of steam said to otner companies, partiairy offset by Taal 5_s t.

5290 5189 higher electric generation and a reduction of expense in 1985 for the Decker reclamation settlement. The average cost per ton of coal Operating revenues include the following MPSC authorized electric consumed for 1984,1985 and 1986 was $41.96, $44.34 and $41.67, rateincreases:

respectively Coal as a percent of total fuel consumed in 1984,1985 and 1986 was 97.8%,98.0% and 97.9%, respectively Other power supply Annual Revenues atahon expense increased in 1984 and 1985 due primarily to the purchase of Interim incluamg interim MPPA's capacity and energy entitlements beginning in August 1984 and s1412 0uly 1982) s203.4 mtar.1983) lower sales of energy to General Public Utilities Corporation. The ts2.9 0urie 1984) 282.2 0uly 198;)

increase in 1985 was partially offset by lower purchases of energy from other electric utilities. Other power supply expense decreased in 1986 The June 1984 and the July 1985 rate increases became effective due primarily to purchases of energy from other electric utilities and with the commercial operation of Belle River Unit Nos. I and 2 in August MPPA at lower unit costs, partially offsat by higher quantities of energy 1984 and July 1985, respectively purchased. Other operation expense increased due primarily to higher in April 1986, the MPSC granted $475.8 million (including interest) labor and employe benefit costs (which for 1986 included non recurring of rate relief for fermi 2, to be phased into the Company's rates over a expenses related to a voluntary separation plan for certain management five year period commencing with commercial operation of the plant.

employes)and the cost of operating Be!!e River Unit Nos.1 and 2, which (See Note 2.)

commenced commercial operation in August 1984 and July 1985, Revenues include an electric rate surcharge ordered by the Ingham resoectively The 1984 increase was partially offset by the write-off in County Circuit Court effective in September 1985 in the annual amount 1983 of fuel oil conversion projects at two peaker sites. The 1984 and of $12.1 million. For 1984, revenues decreased by $13.7 million due to 1985 increases included participation in the Electric Power Research a court ordered refund of revenues collected in 1976 (See Note 13.)

Institute which was suspended effective January 1986. The 1985 and 1986 increases included higher public liability insurance expense and Ip.,c -

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the 1986 increase included higher uncollectible expense. Maintenance interest expense increased in 1986 due pnmarily to the accrual of expense increased due primarity to higher labor and material costs and additionalinterest on the deferred 'uel cost refund and on the court continuing efforts to maintain or improve the availability and efficiency of ordered refund of revenues collected in 1976. (See Note 13 ) The all generating equipment. These increases also reflect expenses average interest rate for short-term borrowings decreased from 11.7%

associated with the commercial operation of Belle River Unit Nos.1 and for 1984 to 8.8% for 1985 and to 6.7% for 1986.

i 2, while the 1985 increase included the costs of a severe ice storm in Earnings for Cominon Stock and Earnings Per Share - Eamings January 1985 and the 1986 increase included increased production for Common Stock increased in each year due to higher kWh sales and maintenance at Monroe Power Plant. Depreciation expense increased to rate increases, partially offset by increased operating expenses in due to increases in depreciable property including the addition of Bnle spite of managemenfs continuing stringent control of expenses. Despite River Unit Nos.1 and 2 in 1984 and 1985, respectively. (See Note 1.)

the increases in Eamings for Common Stock, earnings per share Taxes other than income taxes increased due to higher payroll taxes, declined in 1984 and were reduced in 1985 and 1986 as a result of higher property taxes in 1984 and 1985 and higher Michigan Single ncreases in the average number of common shares outstanding.

Business Tax in 1985 and 1986. Income taxes decreased in 1984 and Eamings for Common Stock include AFUDC, a non operating non-1985 due to lower deferred taxes on the borrowed funds component of cash item, consisting of the net cost of borrowed funds used for AFUDC resulting from commercial operation of Belle River Unit No.1 construction purposes and a reasonable rate on other funds when so parbally offset by an increase in pretax income. Income taxes increased used. AFUDC increased in 1984 due to additional capital expenditures in 1986 due primady to higher pretax income, partially offset by the and an increase in the AFUDC rate in April 1983 (in recognition of accelerated feedback of deferred taxes related to indirect construction ncreasing costs of capitall in 1984, the increase in AFUDC was costs and the borrowed funds component of AFUDC for Belle River Unit substantially offset by the commercial operation of Belle River Unit No.

No 1. (See Notes 1 and 5.)

1. AFUDC decreased in 1985 and 1986 due to the commercial operation Other Incorne and Deductions - Other income and deductions, of the Belle River Power Plant, partia!!y offset by add.tional capital after income taxes, decreased in 1985 due primarily to a loss on the expenditures for Fermi 2. AFUDC amounted to 99%,74% and 65% of retirement of the Pennsait Power Plant and additional expenses Eamings for Common Stock for the years 1984,1985 and 1986, associated with a court ordered refund of revenues collected in 1976.

respectively Accordingly, earnings available for dividends on Common (See Note 13 ) 0ther income and deductions, after income taxes.

Stock are dependent in part upon sources other than current operating decreased in 1986 due pnmanly to a contnbution to establish a income. (See Note 1.)

charitable foundation and the recording of a reserve for loss on an Return on average total common shareholders' equity was 12.9%,

investment.

13.3% and 14.1% for 1984,1985 and 1986, respectively, as compared Costs of Capital-Dividends on common stock increased in all with the 15.0% return authorized by the MPSC from Apnl 1983 to Jufy periods due to increases in the number of shares outstanding Dividend 1985 and 14.5% thereafter for the electric business (with a further requirements on preferred and preference stock increased in 1984 due reduction to 14.0% when Fermi 2 commences commercial operation) pnmarily to issuance of securities to finance the Company's capital Consolidated Balance Sheet expenditure program and decreased in 1985 and 1986 due t Other Deferred Debits and Other Current liabilities increased due redemption of outstanding shares. Interest expense on long term debt increased in 1984 and 1985 due primarily to the issuance of securities primarily to the recording of purchases of the Cooperative s interest in t; finance the Companyt capital expenditure program and, to a lesser Fermi 2 for which title documents are being held in escrow. (See Note 2.)

extent, to refund maturing secunty issues. The increase in interest Liquidity and Capital Resources expense on long term debt was partially offset by lower interest rates in g

Funds generated intemally provided 16%,40% and 59% of capital 1985. Interest expense on long term debt decreased in 1986 due to expenditures (excluding total AFUDC)in 1984,1985 and 1986, refunding of maturing secunties, early repayment of Belle River Project respectively The higher levels of internal generation of funds in 1985 financing oNigations and lower interest rates (pnncipa!!y the Belle River and 1986 result f rom increases in net income and depreciation Project Financingl substantially offset by issuance of new securities.

combined with reduced plant and equipment expenditures.

Other interest expense decreased in 1984 due to lower levels of short-Cash re(Wirements for capital expenditures from 1987 to 1991 are term borrowings and the accrual in 1983 of interest on the deferred fuel estimated to be approximately $1.3 billion (excluding approximately cost refund, parhally offset by higher interest rates and interest on the

$106 million of AFUDC) In 1987, cash requirements for capital court ordered refund on revenues collected in 1976. Other interest expenditures are estimated at $286 million (excluding $87 million of expense decreased in 1985 due pnmanly to the accrual in 1984 of AFUDCl These estimates assume the commercial operation of Fermi 2 interest on the court ordered refund of revenues collected in 1976. Other n May 1987dSee Note O Cash requirements for the Company's obligation to purchase a portion of the Cooperative's ownership interest in Fermi 2 are approx-i e

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l inflation imately $18 million per quarter and will continue until the Company receives MPSC authonzed rate relief associated with the commercial The Company has been and will continue to be impacted by an l,

operation of Fermi 2. See Note 2 for a discussion of the purchase in inflationary economy Although the current inflation rate is relatively low, yE i

l 1990, for approximately $550 mi!! ion, of the Cooperative's remaining its compound effect through time is significant, primarily in its effect on P

C ownership interest.

the Company's productive capacity.

Cash requirements for long term debt matunties and preferred and The regulatory process limits the amont of depreciation expense Q

preference stock redemption and sinking fund requirements are approx.

recoverable through revenues to the histo,ical cost of the Company's 4

imately $717 million (after prepayment in 1986 of $75 miliion under the investment in utility plant. Such amouot produces cash flows which are O

k Belle River Project financing), $498 million, $448 million, $110 million, inadequate to replace such property in future years or to preserve the C

and $112 million for 1987,1988,1989,1990 and 1991, respectively purchasing power of common equity capitalinvested. As a result, the Pending the receipt of proceeds from unsecured long term bank Company must rely on the capital markets to provide necessary financial M

borrowings and the sale of debt and equity secunties, short term resources to replace pro 1uctive capacity, thus further exposing the

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borrowings are incurred to finance the Company's capital expenditure Company to the eCects cf higher inflation in the form of increased s

program, refund maturing long term debt, redeem securities pursuant to financing costs. It' Cort pany, therefore, incurs a significant purchasing

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sinking fund requirements, redeem outstanding secunties when eco-power loss which is experienced by the common shareholder and can t

nomic and meet interim cash requirements. The Company had short-be overcome only as a result of adequate rate relief in the regulatory 7

term credit arrangements of aporoximately $349.1 million at December process. The cost of fuel used in the generation of electricity, the M

31,1986 under which $104.7 million was outstanding. Any material Company's single largest expense, is subject to increase due to price h?

disruption in the secunties markets or any other circumstance that escalation provisions in long term coal contracts. However, the impact might significantly delay or restrict the Company's access to long term on the Company is not expectec to be significant, since regulation

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Cost Recovery Clause. Recovery of increases in other operation and f_

E Until fermi 2 goes into commercial operation the Company's maintenance expense is dependent on timely and adequate rate relief in b.

objective is to achieve a capital structure with a minimum of the regulatory proces.

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approximate!y 35% common shareholders' equity,1015% preferred f"

and preference stou and 50 55% long term debt. The ratio of common shareholders' equity to total capitalization (excluding amounts of long-

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term debt and preferred and preference stock due within one year) increased from 35 8% at December 31,1985 to 38.2% at December 31, 1986 due primanly to the increase in net income in 1986 and the

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issuance of 122,935 a%tional common shares. Th1 ratio of preferred e

and preference stock to total capitalization decreased from 12,1% at M

December 31,1985 to 10.4% at December 31,1986 due primarily to f'

[k both early and scheduled redemptions of preferred and preference stock and the increase in common shareholders' equity The rati3 of long term

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debt to total capitalization decreased from 52.1% at December 31,1985 to 51.4% at December 31,1986 due pnmanly to increases in amounts 9 L-due within one year Certain provisions of the TRA impact the public utility industry 1

'k H Although there is a reduction in the federal income tax rate, the cash requirements for the Company's future income tax liabilities are expected to increase significantly over the next few years due to an

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increase in taxabte base. pnncipally because of the new alternative y$

minimum tax, and the Company's inability to utilize a substantial amount 3%

J 3N of its available investment tax credits (See Notes 5 and 13.)

See Note 2 for a discussion of the Apol 1,1986 MPSC rate order T@'

which will phase in the cash recovery of a portion of the net income

. D%

requirement associated with fermi 2.

f~R See Note 3 for a discussion of the effect on the Company of SFAS Qg No.90 g

See Notes 4,6,11,12 and 13 for other matters that may affect the V.

Company's liquidity and capitai resources

fy.

w, yh w

y

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W

e, e

e

e 9e ee 1986 1985 1984 1983 Operating Revenues I lettric

$2,832,945

$2,738,356

$2,439,835

$2,260,021 Steam 36,339 49,801 58,370 49,637 T(dal Operating Res enues

_$2,869,2_84_

$2,788,157

$2,498,205

$2,309,658 Operating Espenses Operation I uel

$ 741,206

$ 783,110

$ 700,789

$ 676,409 Other power supply 191,126 196,918 1M,740 128,921 Other operation 459,534 422,133 403,616 374,164 Maintenance 258,655 230,798 203,945 187,769 Depreciation 232,240 218,502 190.420 171,940 Tases other than income 177,381 175,5;6 144,471 142,743 income taxes 126,596 124,939 131,459 145,559 Total Operating i spenses

$2,186,738

$2,173,9~.6

$1.959,440

$1.827,505 Operating Income

$ 682,546

$ 614,201

_$_538J61

$ 482,1;3 Other Income and Deductions Allowante for f unds used during tonstruction Allowante for of her f unds used during construction 117,069 113,225 130,350 92,750 Other insome and deductions (16,869)

(3,240) 1,829 7,877

_8,8_27__

_ __ 1,642 (11_2)

(5,48 J 7

Ins ome tases

. $ 109,027

$ 109,627

$ 132,067

$ 93,140 Net Other Income and Dedu(tions Income Before Interest Charges

$ 791,573

$ 723,828

$ 670,832

$ 577,293 Interest Charges long-term debt

$ 399,429 5 401,272

$ 399,448

$ 331,8;4 Amorti/ation of debt discount, premium and expense 2,721 2,502 2,191 2,131 Other 41,410 15M2 30,592 53,088 Allowance for borrowed funduiwd dunng (129,082)

_(133,13p]

_ (163,336)

(194,402) t onstruction (credit)

__$ 314,478

$ 286,313

$ 268,895

$ 212,671 Net Interest Charges Net Income

$ 477,095

$ 437,515

$ 401,937

$ 3M,622 Preferred and Preference Stock Dividend Requirements 98,803 103,2M IN,159 98,614 Iarnings for Common Stock

,$ 378_,292.. _ - - -

_ L 266,0ti8.. _ -

$ 3M,251

_ $_ 297,778_

Common Shares Outstanding-Average 146,643,377 143,183,133 133,230,827 120,274,269 I arnings IVr Share 2.58 2.33 2.20 2.21 Dividends Declared IVr Share of Common Stock 1.68 1.68 1.68 1.68 Ratio of I arnings to l'ised Charges (SI C Basis) 2.29 2.28 2.19 2.22 Ratin of I arnings to Tised C%rges and Preferred and Preference 5tock Dividend Requirements (St C Basist 1.81 1.75 1.67 1.67 l

f g3 $

.y 4

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~

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i

~

'5.

.l>

1 i

l 1982 1981 1980 1979 1978 1977 1976 uhousandsk

.y.8

'b 52,078,965 52,011.217 51,776,3M

$1,667,679

$1,561,296 51,423,909 51,241,883

_ _ 44,289

___418*[

36_ 150 30,832 28,546 27,012 24.284

. (d

$2,121,254 52,054.037 51,812.514 51,698,511 51,589,842 51,4;0,921 51,266,167

. g%,.

k@[$

d

[

$ 718,411 5 689,165 5 670,116 5 647,620 5 580,869 5 538,325 5 477,231 N@.

g;Mk 74.6 %

139,981 107,767 96,502 158,098 108,648 88,3;0 372,767 333,440 290,566 266,410 233,720 203,300 179,867 170,974 164,978 133,270 128,600 124.804 110,736 100,577

~

161,410 1;0,240 141,948 129,M4 115.325 102,3N 93,875 l18,537 117,224 115,520 99,552 91,488 96,597 94.234 96 912

_ _M,3M_

37,012 54.7 %

56,686 66,717 35,940 2

_51,713,705 51.6;9,416 51,496,199 51,423,0M

$1,362,990 51,226.627 51,070,074 5 409,M9 5 394.M i 5 316,31; 5 275,477 5 226.852 5 224,294 5 196,093 5

5 5

5 5

5 5 49,833 47,99; 39,398 38,815 38,323 32,273 23,7;0 (4.820)

(9, Nil) 692 3.6M 2,371 4,821 1.728

_.._.I lii.

_.. _ 4:7~l.

_ _ M*9)

(I334}

_ LIE 2S}

_ (I 700) 52,012 45I s

5 48,310 5 M 668 5

38,818 5 40,433 5 33 416 5 26,871 5

5 4;1879 5 429,3tN 5 15;.15; 5 315,910 5 2N),2ts 5 251,165 5 248,10; 5 331.469 5 240,04; 5 211,8;7 5 167,;8;

$ 140,288

$ 129,078 5 124.992 2,0th 1.831 1,776 1,M4 1,403 1,339 1,084 59, 7 9 37,02; 19,662 13,823 5,248 1,959 2,404

_ __.I 31*7)

___166,708)

_ _ 183,171)

_(31,;90)

_ (25,726)

_ M9IM76}

(

5 tw,178 5 194.9;6 5 166,587 5 139.881 5 113,399 5 106,6;0 5 128,480 5 214 701 5 2M.3;3

$ 188.;66 5 176,029 5 146.869 5 144,51; 5 119,625 73,2 li 57,;66 31,017 41,437 38,056 M.09; M,589 5 181,4;6 5 176.787 5 137,529_

$_ l12,572_

_5 _I_08,813 5_ _ l_l(),420

$ ___M;,(136 103,58; 91; 87,473,;81 78.780,861 69,848,484 61,898,763 55,202,974 51,277,789 5

1.7; 5

2.02 5

133 1.90 5

136 5

2.00 1.66 5

1 68 5

1M 5

1 N) 5 l N) 5 1.52 5

1.4675 5

1.45 1.8; I 84 1 90 2.17 2.28 2.48 2.13 1.4 )

1 ;3 1 53 1.69 1.71 1.85 1.61 l' '

h 4

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g 1986 1985 1984 1983 Operating Revenues (thousands)

Residential-f lectric

$ 880,205

$ 827,210

$ 758,124

$ 741,399 Commercial-Electric 693,071 651,559 570,082 513,292 Industrial-E'lec tric 1,063,551 1,0M,374 919,490 818,660 Other 232,457 275.014 2;0,;09 236,307 Total

$ 2,869,284

$ 2,788,157

$2,498,205

$2.309,658 Sales (millions of kWh)

Residential 10,492 10,077 10,150 10,2 %

Commercial 7,501 7,130 6,850 6,479 Industrial 17,240 16,613 16,324 15,162 Other 2,807 2,875 2,%3 2,402 Total 38,040 36,695 35,887 M,299 I lectric Customers (year end)

Residential 1,664,226 1,642,981 1,629,668 1,621,172 Commercial 148,987 144,942 142,395 140,403 Industrial 2,384 2,314 2,246 2,253 Other 1,8%

1,883 1,885 1,878 Total 1,817,493 1,792,120 1,776,194 1,765,706 Average Annual Use IVr Residential Customer (kWh) 6,350 6,165 6,253 6,332 Average Annual 11i11 Per Residential Customer

$532.74

$;06.06

$467.03

$457.74 Average Revenue IVr kWh Residential 8.39e 8.21c 7.47c 7.23e Commercial 9.24 9.14 8.32 7.92 Industrial 6.17 6.23 5 63 5.40 Capitalisation (thousands) d long. Term Debt

$ 3,656,%9

$ 3,770,863

$3,845,272

$3,542,43f, f

l' referred. Preference Stot k 742,273 879,497 894,168 907,505 i

Common Shareholders' Equity 2,716,403 2,588,023 2,379.998 2,195,361 lotal

$ 7,115,245

$ 7.238,385

$7,119,438

$6,f>45,304

~$

Capitalisation (percent)

Ieng-Term Debt 51.4 52.1 54.0 53.3

,J l'reterred l' reference Stock 10.4 12.1 12.6 13.7 7

Common Shareholders' I:qmty 38.2 33 8 33.4 33.0 Total 100.0 100.0 100.0 10).0 i

Common Stock Data

'#~

I arnings IYr Share

$2.58

$2.33 S2.20

$2.21 Dnidend Paid l'er Share

$1.68

$ 1.68

$1.68

$ 1.68

.. -g Pavout 65 %

72 %

76 %

76 %

?g Shares Outstandmg-Average 146,643,377 143,183,133 13;,230,827 120,274.269 Return on Average Common i quity 14.09 %

13.31 %

12.87 %

13.03 %

?

M Book Value IVr Share

$18.34

$17.47

$ 16.91

$16.63 a

Alarket l' rice f~

lhgh

$19 %

$17 N

$16%

$16 Iow

$15%

$14

$11')

$13 j c.

Nliwetlaneous f inancial Data 6

Aserage Interest Rate on long-Term Debt 9.2%

9.9%

9.9%

9.5%

Q:

Ascrage Dn istend Rate on Preferred l'referente $ tot k 11.5 %

11.6 %

11.6 %

11.6 %

Ivng-Term Debt Obhgations and Redermable l' referred and Pr"ferent e Stot k Outstandmg ( Thousands)

$ 4,600,917

$ 4,5;2,755

$4,343,674

$4,027,029 7.f '

Gross Utihty Plant ( T hoasands)

$ l1,062,449

$ 10.466,0N

$9,752 346

$8,843,779 Total Assets (T housands)

$ 9,997,986

$ 9,492,3h0

$8,970,014

$8,201,418 3 <

4/

Net Utihty I'lant (Ihousands)

$ 9,034,716

$ 8,612.890

$8,07., InM

$7,320,570

,}y7 Capital l yvndit ures ( t housands)

$ 643,196 5

710,6'N

$ 938,m1

$ 1,014,568 Ntiwellaneous Operating Data y,'h; '

5ystem Capabihty at lear I nd - N!W 9,070 9,29h 8,898 8,162 Nin S) stem CJpability at Ilme of IVak-N1W 9,199 9,367 9.271 7,810 Sutem iVak Demand - N1W 8,0;0 7,172 7,3m 7,063 Rewne Alargm at lime of IVak 14.3 %

30 6 %

26.1%

10 6 %

Sotem I oast I at tor 57.9 %

633%

60 2 %

N)2%

Ileat Rate--H u IVr L% h 10,090 9.990 9.990 10.040

{

l url Cost - C IVr hlithon Utu 189.2c 202.0c 190 bc 190 2e Numivr of I mploy es at icar l'nd 1J,967 11,086 11,136 11,152 m

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'b 19M2 1981 1980 19W 1978 1977 1976 l

5 676,370

$ M2,301

$ 583101

$ 524.613

$ 497,988 5 464.906

$ 408,M28 J.8 473,498 4 %.868 382,018 M3,576 313,673 291,220 254,363

'i 754,23M 763.167 6;M,051 M7,41M 611,404 539,469 463,174 219,148 211,721 IMM,744 1M0,884 166,777 155,326 139,802

$2,123,234

$2,054.057

$1,812,514

$1,698,511

$1,589.42

$1,430,921

$1,266,167

]

1 9,9 10 10,lM 10,394 10,274 10,3M6 10,385 10,105 6.252 6,310 6,265 6,251 6.073 6,027 5,802 13,751 15,471 15,472 17,9N) 18,3;4 17,915 17,253 2,0;2 2,107 2,104 2,406 2,333 2,287 2,16M 31,99; R 022 34,235 3n,891 37,148 36,614 35,328

.n 1,619.Tn9 1,624,161 1,623,162 1,622,768 1,600,988 1,5W.f4V 1,560,669 139,376 13M.M30 136,983 135.788 127,6M 118,942 118,107 2.2 19 2,30; 2,293 2,264 2,201 2,126 2,018 1,H27 1.M21 1,750 1.713 1,675 1,648 1,589 1,762 Mll 1,767,117 1,764,lMM 1,762,533 1,732,498 I,702,323 1,682,383 6.131 6,243 6.40M 6,402 6,529 6,616 6.51H

$417.31

$39; 66

$339 M6

$326.92

$313 OM

$296 20

$263.71 j

6 Moe 6.Me 5 62c 5.Ile 4 79e 4.4Mc 4.05c

)

7.57 6 92 6.10 5 53 5.16 4.83 4 3M

%.49 4.93 4.25 3 N) 3.33 3.01 2.6M

.O 1

$1,218.649

$2.753,97M

$2,4%),437

$2,069,518

$1.843,036

$1,738.185

$1,681,998 NO2.423 603,161 591,346 510,748 494.691 448,M92 412,699 4

1,M72.181

.. l.675,3M3 1,114.169

_ 1,387,7_68

_1_,241,401

_1,118.065 1,004,124

$3.M91,231

$5,012,524

$4.555,972

$3,968,034

$3,5N,128

$3,305,142

$3,098,821

' y ig a

54 6 54 7 53 M 32.1 51.5 52 6 54 3

1. +'h 11 6 12.0 13 0 12.9 13.M 13 6 13.3 il M 31.3 31 2 3; O 34 7 33.8 32.4

i 100 0 100 0 100 0 100.0 llM) 0 100 0 100 0

y af

$17;

$2 02

$115

$ 1.90

$1.76

$2 00

$1.66

$1fa

$162

$160

$ 1.58

$1.52

$1.4;

$1.4;

'4 un%

Mo'%

91 %

M1%

M6%

73 %

M7'b 4

103,w i91; M7,473,w l 78,7MO.M63 69,84M,484 61.898,763 53,202,9'4 51,277,789 10 14%

11.I2 %

9 47 %

10.0l'%

9 26 %

10.;0%

M19'%

j

$16 N)

$17.47

$17.8%

$ 18. 46

$18 62 518.67

$18.40 l6 1

Sih

$12%

$1%

$1%

$16 N

$1H

$1%

$11

$10 %

$10

$12 %

$13 %

$15%

$13 9;%

9. 4%

90%

M;%

75%

7.5%

7.6%

i 1.1%

98%

9. 5%

9.0'%

M.M%

M6%

M.4%

$1.N2,4M2

$1,182,011

$2 809,976

$2,312,200

$2,096,540

$1.MMMJ40

$1,W 1,180

$7.t>l;Xw

$6 617,911

$i 731 All

$; 1%.138

$4 641.N12

$4,141,711

$1,818.964 vs 2;2 ;70

$7,1 N J90

$6. 211. 49;

$lhN)021

$;,102.M41

$4.4MI.MM;

$4.2tN,6W snM240w SiM42.w7 SiO2n 24;

$4,590.829 54,140,521

$1 NIN.NN

$1,414,5%

$1,Ili01;

$ 9r+1261

$ 64 8,5 40

$ 591,3x9

$ 642,676

$ 383,4%

$ 297,240 7,762 M.221 H 214 M,u t M.;91 M14; M,9n; n

H, %9 M, Iw M.;11 M.Mr H.9M4 MJ;l MyN

6. N 4 7,171 fCO) h M29 7,112 7,3M I 6 611 34 0%

17tr%

27. 3'%

10 0 %

22.9'%

IM 6%

3n 1%

nl 7%

% 4%

63 1%

hn 2%

62 3 %

N) 7' o 6; ;%

10Ou) 10 Om) 10,I40 10 2MO

10. 3.%)

10. Nd) 10.29) 19176e 100 ;c 17M Te 1614e 149 De 1%) 2e 120 Me i1.208 11.024 10189 10.918 10329 9.931 9,5N i

i 43 i

Y W

Market for the Company's Common Equity and Related Shareholder Matters The Company's Common Stock is listed only on At December 31,1986,146,699,431 shares of the cipal market for such stock.ge, which is the prin-the New York Stock Exchan Company's Common Stock were outstanding.

I he following taNe These shares were held by a total of 217,584 share-indicates the reported high and low sales prices of holders.

the Company's Common Stock on the Composite The amount of future dividends will depend Tape and dividends paid per share for each quar-upon the Company's earnings (which in turn are terly period during the past two years:

dependent, among other things, upon levtls of kWh sales and timelv and adequate rate relit tj, capital n,uaena, requirements, financial condition and other factor.

erg e Range pa,a Calendar Quarter ihgh, _l im l'er %ha re 1%n iirst

$1% $1%

50 42

%csund 1%

1%

0 42

~!!urd 1%

16'.

0 42 l ourt h le lh 0 42 IW; l irst 16 5 1;

0 42 Actond 17 %

lh 0.12 t hird 17 %

ll 0 42 l our t h th N 14 %

0 42 Miscellaneous Corporate Data Annual Niceting Scheduled for April 27 Corporate Address The 1987 Annual N1eeting of Shareholders will The Detroit Edison Company be held at 10 a.m. EST N1onday, April 27, at the General Offices N1acomb Center for the Perforining Arts in N1ount 2thX)Second Avenue, Detroit, Alichigan 48226 Clemens. Shareholders a ill be asked to elect mem-Telephone: (313) 237-8(XX) bers of the lloard of Directors and ratify reappoint-Independent Accountants ment of I' rice Waterhouse as independent accoun-l' rice Waterhouse tants for the Company.

200 Renaissance Center, Detroit, Ntichigan 48243 At the 1986 meetin'g, on April 28,15 members form 10-K were re-elected to tht iloard of Directors for one-Copies of Form 10-K, Securities and Exchange year terms.

Commission Annual Report, are available.

Director Changes Rquests should be directed to:

Malcolm Carron, S.J., a director since 1979, Kathryn L %estman resigned from the lloard of Diret tors effective SCC'"Id'Y luly 24,1986. I.illian llauder, president of the

.lhe Detroit Edison c,ompany Cranbrook Educational Community, was elected by 2000 Second Avenue, Detroit, Alichigan 48226 the lloard to fill the vacancy.

~

Transfer Agents Mellon Securities Trust Company, New York Of ficer Changes 67 Ilroad Street, New York, New' York 1(XX)4 Wayne i1. Jens, John %'. Johnson, Jr., William K.

l'ence, and Donald J. I i/nmenti retned as vice The Detroit Edision Company

~

2000 Second Avenue, Detroit', Niichigan 48226 presidents ef fective April 1,19S6. Arnold J. lienes retired as General Auditor etfective August I,1986.

( harles A. Ilabcm, s.oplu.a L k,o/iatek Ronald J. Gdowski Kathryn L hestman

- J New I'ublications Elaine N1. Godfrev lished by the (general booklets and brothures pub-ge,istrars of Stoc'k Among the ompany in 1986, the following may Nie lon Securities Trust Company, New York be of interest to you:

6711 road Street, New York, New York llk)04

~lhe l'attnersinp lic;iort. Descnbes the conununity-(Preterred l' reference and Common) f related at tivities of the Company and its Comerica llank Detroit I

employes.

211 West Iort Street, Detroit, Alichigan 4M231 llome Sn untu. I'rovides tips for improving home (Common) y secunty and a chet khst to help you determine National llank 01 Detroit improiements u his h may be niade.

611 Woodward Asenue, Detroit, Niichigan 4M232

'[

Copies of these publications may be obtained by (l' referred and l'reterence)

P wnting to l'oblic Attairs ikpartment, Detroit I di-~

Common Stock W3 son,1)cpt. l(MbAR,2tkki Second As enue, Detroit, l.isted on the New Tork Stotk I whange M

Nbt higan 18226 Symbol - D I E 97

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Iloard of Directors Wendell W. Anderson, Jr.

Chairman of the Board and Chief Executive Officer, Bundy Corporation (N1anuf acturer of steel tubing, flexible hose and engineered plastic products) 1.illian Hauder President, Cranbrook Educational Community David fling Chairman and Chief Executive Of ficer, Bing SteelInc. ( A steel service center)

Charles T. Fisher ill Chairman and President, National Bank of Detroit David Nt. Gates l'rofessor of Botany, University of Alichigan l

I:dward J. Giblin Retired Industrialist Ernest L. Grove, Jr.

Vice Chairman of the Board and Chief Financial Officer, The Detroit Edison Company Charles N1. IIcidel l' resident and Chief Operating Officer, The Detroit Edison Company Patricia Shonti Longe Economist; Senior l'artner, Imeco - I onge Company ( An economic and investment consulting firm)

Walter J. AlcCarthy, Jr.

Chairman of the Board and Chief Exetutive Officer. T he Detroit Edison Company I rank hierriman Dairy Farmer Dean E. Richardson Chairman of the Board, N1anufacturers National Bank of Detroit Louis II. Roddis, Jr.

Consulting Engineer Alan E. Schwarti Senior l'artner, lionigman N! iller Sc hwarti and Cohn ( Attorneys at law)

Otis Al. Smith Retired Vice President, General N1otors Corporation Committees of the Iloard of Directors Audit E16ecutive Nominating Organization and Edward l. Gibhn

• Walter J. NitCarthy, Jr.*

Alan E. Schwarti' Compensation Pat rit la Shonte I onge"

!.ilhan llauder Charles T. Fisher lilo Wendell W. Anderson, Jr.*

1.ilhan llauder Ernest L. Grove, Jr.

Wendell W. Anderson, Jr.

Edu ard J. Giblin" David Ihng Charles N1. lleidel David N1. Gates Charles T. Fisher ill Dean I:. Ra hardson Frank Nternman Charles N1. lleidel Frank Nterriman Otis N1. Smith Dean E. Richardson Patricia Shonte 1.onge Dean E. Richardson Alan I:. Sihwarti i rank N1erriman Alan E. Sthwarti I:ncrgy Resources Planning Otis N1. Smith I rank N1ernman*

Finance Retirement Fund Review Wendi ! W. Anderson, Jr."

Dean E. Richardson

• ucfear Rolew I'atricia Shonte Longe *

"' I T

• Wendell W. Anderson, Jr."

Data aing 1.illian llauder D.n id N1. Gates Charles T. I nher 111 dt C'"

David N1. Gates I

d

""I'

""RC I:dward J. Giblin Charles NI. lleidel I dward J. Giblin

""*d" Ernest I.. Grove, Jr.

I ouis ll. Roddn, Jr.

I rnest l<. Gros e, Jr.

l'atricia Shonti i unge Otis N1. Smith 4 hauman Alan I. Schwarte "Vn e rhauman Officers Walter J. NicCarthy, Jr.

Chairman of the lloard and Chief N1, Jane Kay Vice l' resident - Administration I Act utis e Ottit er J. Philip Lenihan Vn e President - N1ar ketmg and Charles N1. lleidel l' resident and Chief Operatmg Customer Relations of ticer John E. I obbia Vice President - Financial Services I rnest I., Grose, Jr.

Vit e Chairman of the lloard and Claybourne Alitchell, Jr.

Vice President - I'lan ning,

( hief I inant tal Otta cr Researth and I ns ironmental I con S. Cohan Senior Vit e l' resident and General l'rotet tion Counsel James 11. Olis er Vit e l' resident - I mplove llurkhard II. Sihneider Group Vn c l'resulent Relations II. Ralph S> lsia Group Vn e President William S. Orser Va e l' resident - Nut lear llarry lauber Group Vis e President i ngini aing and 'sen it es t rank I. Agosti

\\ n e l'resulent - Nut lear Saul J. Waldman Vit e l' resident -l'ubhc Af f airs Operations Nathry n I.. West man Sesretary NIalcolm G. Dade, f r.

Vn e l' resident - Commumts and I eslie L. Inomans treasurer Gos ernmental Attairs Ronald W. Gresens Controller Willard R. Ilolland Vn'e l'resntent -l'im er Ss stem i1o)d W. Coombe General Auditor d nd Ners at's n.

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Detroit Edison :=rre::s A exxl pirt of yxirlife.

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