ML20247J069
| ML20247J069 | |
| Person / Time | |
|---|---|
| Site: | Fermi  |
| Issue date: | 12/31/1988 |
| From: | Grove E DETROIT EDISON CO. |
| To: | |
| Shared Package | |
| ML20247J067 | List: |
| References | |
| NUDOCS 8906010027 | |
| Download: ML20247J069 (48) | |
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Percent FINANCIAL HronuanTs- 1988 1987 Increase (Decrease)
Operating Revenues $3,102,172,000 $2,856,731,000 8.6 Income (Loss) Before Cumulative Effect of Accounting Changes 8(235,334,000) 8554,974,000 -
Cumulative Effect for Years Prior to 1988 of Accounting Changes (Net ofIncome Taxes) $(143,492,000) - -
Earnings (Loss)for Common Stock $(428,583,000) 8476,734,000 -
Earnings (Loss)per Common Share 8(2.92) 83.25 -
Common Shares Outstanding (Average) 146,761,458 146,729,292 -
Dividends Paid perShare $1.68 81.68 -
Gross Utility Plant $10,766,755,000 $11,893,418,000 (9.5)
Capitalization $6,881,697,000 88,135,566,000 (15.4)
Sales of Electricity (kWh-Thousands) 40,958,000 39,492,000 3.7 System Capability at Time of Peak (kW) 10,038,000 9,020,000 11.3 System Peak Demand (kW) 9,133,000 8,427,000 8.4 Electric Customers at Year End 1,882,000 1,857,J0 1.3 CONTENTS Letter to Shareholders 1 Managing Change 4 Change 4 Competition 8 Customers 9 Costs 11 FinancialStatements 15 Notes to the Statements 23 Management Discussion 37 10-year Comparative Operating Results 40 10-year Statistical Review 42 Corporate Data 44 Directors and Officers 45 About the cover: From left to right, company System Operations Center supervisors Thomas Romanoski, Larry Maxwell and Joseph Kramer use hi-tech computers to manage the flow of electricity in good weather-and bad (see photo at right).
- B nE - T E B.*IT E~D-I~B0 N+
To0ur Shareholders:
These achievements, which will benefit Your company faces the future today wi:.
greater certainty and confidence than it hasin many years. Paramount shareholders, customers and employes for years to come, were the results of tough, realistic among the reasons for this optimism are a host planning and companywide implementation by a of achievements by our employes in 1988 and the supportive and productive work force.
resolution of mWor uncertainties that had Progress on three major corporate goals-clouded our future and made planning difficult Fermi 2, sales and costs-was particularly sig-and risky. nificant because of both the short- and long-Resolving the uncertainties-including settle. term favorable impacts on the company.
ment of the Fermi 2 rate case and taking major In January, Fermi 2 began commercial opera-write-offs-led to a loss in earnings for 1988. But tion, enabling the company to begin collecting it also set the stage for a prompt return to revenues based on increased rates and to start profitability in 1989 in a more stable financial recovering its investment in the plant. In and operating environment. November, the plant successfully completed its six-phase testing program and its warranty run.
The one constant in our industry is that in the summer and fall, the plant was upgraded change is a way of life. Managing Change-the in its Institute for Nuclear Power Operations theme of this annual report-underscores your rating. It also operated at or near 100 percent of managements continuing recognition of its capacity for a good part of the year, including responsibility to direct and control change in periods of critical need durmg the record hot ways that strengthen the company and increase sununer.
shareholder value.
We have many more improvements to make at 1988 was a banner year for achievements. For Fermi 2 to meet the high standards set both by example: the company and by the Nuclear Regulatory n Records were set in production, sales and the Commission (NRC), and to meet the operating number of customers served, requirements set in the final Fermi 2 rate case n The common stock dividend was maintained settlement. But we believe we are turning the despite the first loss in the company's history. corner as a result of sweeping changes in plant n The Fermi 2 nuclear power plant was placed personnel and programs and by adherence to our in commercial operation and successfully Fermi 2 business plan. While Fermi 2 continues t be listed by the NRC as a plant requirmg completed all testing.
special attention, our goal is to have the plant u All rate-making issues surrounding Fermi 2 rem ved from that list as soon as possible w hile have been resolved.
sustaining safe, reliable and efficient operation.
r/ The company is completing a major At year's end, the final Fermi 2 rate case was reorganization to become more responsive to resolved, with the Michigan Public Service Com-a changing industry and marketplace while mission (MPSC) approving a settlement reached paving the way for a smooth transition to a by the company, a number of interveners and new management team that will guide it in the MPSC staff.
the1990s and beyond. The settlement contains tough conditions, e Rigid cost controls are continuing in the most presenting mWor challenges to the entire com-extensive expense-reduction program in the pany. But we believe the agreement represents a company's 86-year history. reasonable and fair balancing of the interests of z The employe count is at its lowest level in 11 our shareholders and customers. It was signifi-years, despite record sales and a record cant to the company and its future for number of customers served. many reasons.
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Ann senw news Inner.t necuns k;Emnet L Breve, klndM L LaWe. - ,
J Dn F'TSR- 0J-1: T'< E 8 1- B 0 N" )
First, with this major uncertainty Future earnings should be strength- We have such an agenda. Anticipating l removed and its impact now clear, the ened by continued strong sales perform- these challenges, the company is moving company faces no known major rate- ance. Sales in 1988 surpassed the 40- ahead through an orderly process of making hurdles and is able to plan more billion kilowatthour mark for the first planning and implementation that has confidently for the future as it concen- time, reaching nearly 41-billion kilowatt- taken place during the past two years. It trates on operational efficiencies and hours delivered to a record 1.0-million started with a new Corporate Strategic ;
improvements. customers. New highs were reported in Plan in 1987, followed by a Competitive i Second, the company is recovering all major customer categories-residen- Assessment Study that suggested the l I
more of its fermi 2 investment through tial, commercial and industrial-and need for new companywide initiatives to reasonableincreases in rates. December marked the 14th consecutive improve our effectiveness in cost control, Third, these rates will remain rela- month of record sales. marketing, use of human resources and tively stable for our customers over the Revenues on those sales also reached organizational structure. Implementation next five years with increases less than an all-time high of $3.1 billion in 1988, up of action plans resulting fro.m these pro- l the expected rate ofinflation. 8.6 percent over the $2.9 billion in 1987. grams willcontinue indefinitely.
Finally, the company has strengthened The weather certainly had something Our future will be determined by how its ability to continue the common stock to do with sales. New load peaks were successfully we manage what we call the dividend at its current level. recorded almost hourly on some days of four "C s"-changes in the energy mar-As mentioned earlier and discussed in blistering heat and new winter peak ketplace, meeting competition, our special letter to shareholders late in was reported in December. Some utility responding to customer needs and expec-1988, large write-offs totaling $968 mil- observers had not predicted loads this tations, and controlling costs.
lion after taxes were taken in January high until the year 2000. We believe our planning and accom-and December in 1988, resulting from the But the real reasons for record sales plishments in 1988, bolstered by your recent rate case settlement and MPSC were a fundamentally strong South- patience and support through the recent disallowances in an earlier Fermi 2 rate eastern Michigan econom>-which difficult years, have honed our company case. These resulted in a loss of $428.6 completed its sixth straight year of to a competit've edge that will carry us million, or $2.92 per share, for the year, expansion in 1988-and our aggressive to new successes in the years ahead, which compares with earnings of $476.7 marketing and economic development million, or $3.25 per share, in 1987. programs, which helped spur and culti-Also severely impacting 1988 earnings vate growth through special services, February 27,1989 was the discontinuance, effective Janu- special rates and special incentives.
ary 1, of an accounting credit-the Future earnings also will be supported Allowance for Funds Used During Con- by continuing tight expense control. In struction (AFUDC)-which reflected 1988, building on major expense reduc-capitalization of Fermi 2 financing costs. tions in recent years, management This er edit no longer applies since the looked at literally every program and -
plant is now in service. AFUDC organizational unit in the company and _
accounted for about 57 percent of earn- reduced the Operation and Maintenance Ernest a m e, Jr.
ings in 1987 and even larger amounts in expense budget for1989 by more than Vice Chairman of the Board and prior years. $100 million. These reductions will be Chief Financial omeer Resolution of all outstanding fermi 2 sustained in the future, enhancing the rate case matters, adoption of new long-term prospects for increases in pro-accounting standards and the cessation ductivity and profitability. '
of AFUDC-all occurring within a single The clearer focus we now have on our *[
year-were distressing to the company future is comforting, but it also spotlights John E. lobbia and its shareholders in the short term. the serious issues still facing the com- President and But we believe we now can return to a pany. Competition in new and varied Chief operating omeer more stable operating environment in forms seriously affects our core business, which future Fmancial reports will Regulation at both the state and national (
reflect the company's fundamental earn-ings strength.
levels presents vexing challenges that could be detrimental to both customers h , (
y and shareholders. Add increasing and specialized customer needs and you have Walter 1 McCarthy. Jr.
Chairman of the lioard and
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V a new agenda for company action. Chief Executhe omeer a
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.g-B-t BM' I T E 5. ' 1 ' E B 'E l Ch Changes in regubtion, legislation and the marketplace are turning the electric utility industry into a more competitive playing field.
Detroit Edison is reshaping itself to be a key player with new priorities and new programs involving literally all of i its 10,260 employes. The company thus expects to better serve its 1.9-million customers and 203,000 shareholders.
"7@Edison heinfuture It was this kind of planning that CHANGE 1988. Thearrived company wasearly for Detroit enabled Detroit Edison to perform suc-si buffeted by a swirlof events and cessfullyin1988 despite changesin actions that, to a great degree, will almost every facet ofits operations. The determine its future direction. company handled alarge increase of $ important etr it Edison has mad and far-reaching Record electricity demands, which about 8.4 percent in electricity peak changes in the last two years than were not expected until the year 2000, demand and 25,000 new customers; in all the rest of its 86-year history.
came years earlier than anticipated. coped with record extremes in both hot Collectively, these changes constitute the Challenging and troubling legislation and and cold weather energy demands; literal restructuring of our company."
regulation that could greatly affect the weathered six major service-disrupting Those words by Chairman Walter J.
way the company does business quickly storms; and set near-records in thermal McCarthy, Jr. underscore the range and came to a head. The energy marketplace efficiency and plant availability at its depth of an organizational and opera-became more competitive, demanding fossil-fuel power plants. tional rebuilding effort undertaken by new marketing strategies. Large custom- Simultaneously, the company made Detroit Edis(m since 1986 to gird itself for ers, with more energy options to choose good progress in becoming a leaner, more continuing changes in every facet of its from, were seeking their best deal to cost-competitive and more aggressive business.
meet their growing and increasingly marketing organization. Significant changes had been antici-sophisticated needs. A more focused set of organizational pated on two mqjor fronts-unprece-Like other electric utilities determined operating strategies helped point the dented competition in the energy mar-to succeed in a changing environment, company in the new directions required. ketplace and accelerated actions by Detroit Edison has recast its mission, Rate design, for example, is now a mar- government to encourage that competi-goals and organizational structure and keting function with emphasis on t,on.
i reassessed its staffing needs, capacity developing alternative pricing options in The more dramatic of the twois the requirements, operating skills and man- direct response to market forces. greater competition-something to which agement objectives. Most of this work This kind of organizational re-defini- public utilities have not had to devote has been donein a remarkably short tion, together with aggressive marketing major concern until recently. Histor-period of two years, and cost control, is making Detroit Edi- ically, utilities have obtained service area "Today's priorities," says company son more cost-competitive without franchises in exchange for a commitment President John E. Lobbia, " center jeopardizing service quality. one of the to provide reliable service, at reasonable around intelligent, innovative, action- significant results of these efforts will be rates, to all customers and to accept a oriented strategies, including risk-taking enhancennt of the value ofits share- rate of return prescribed by public ser-to achieve specific payoffs for the com- vice comnussions, holders' investments. How the company pany's shareholders. Thus, the company fares in the future will depend on how it but that has changed. once considered is focusing on actions calculated to deals with four distinct "C's"-Change, to have exclusive service area arrange-improve earnings and shorten the pay- Competition, Customers and Costs. ments, utilities now are facing back time for major projects." challenges on their own home ground as potential competitors seek to provide j service to some of their customers. And 4
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D E7 5 0 1 T =f D I 8 0 N-in this quest, the competitors have bene- In pursuit of that goal, PURPA created the additional power to satisfy their lited importantly from actions of the a special class of non-utility povier gen- customers' energy demands-and (2) pro-federal government. erators called " qualifying facilities" vide "non-discriminatory" backup Two such actions stand out. (QFs). These facilities were to receive service to QFs unable to meet their own In 1978, on the heels of back to-back unique benefits, provided they contri- energy needs. energy crises, Congress passed the Public buted to U.S. energy production in ways More recently, the Federal Energy Reg-Utility Regulatory Policies Act (PURPA) that did not force the established utilities ulatory Commission (FERC) has issued a to lessen the United States' excessive to charge their customers inequitable series of Notices of Proposed Rulemaking dependence on imported fuels. The rates for electricity. (NOPRs) further encouraging indepen-stated goal of PURPA was to strengthen To encourage QF development, PURPA dent power production. energy independence by encouraging required utilities to (1) buy any elec- One FERC proposal, for example, energy conservation, by diversifying tricity the qualifying facilities in their would establish a class of non-utility energy sources and by improving the service areas could not use or sell- electricity supplier called Independent efficiency of electricity production, regardless of whether the utilities needed Power Producers, or IPPs, which would operate without the severe regulatory M7C
* ~ gi restraints presently imposed on public utilities.
"As an electric utility we have an obligation to serve our customers here and can't pick up and leave," says Detroit Edison President John E. Lobbia.
"But we're wondering where third par-d ties would be if the economics of d om ,
electricity production turned against ["") "9 them. Would they continue to serve their t1: customers even in the bad times? Could M7' you count on them for the reliability provided by the franchised utilities?"
}; y; ' Detroit Edison and most other U.S.
U:3 ' utilities have labeled the FERC proposals unnecessary. Leon S. Cohan, Detroit q Edison senior vice president and general
- r. counsel, says approval of the proposed 7 , rules would " change basic ways in which utilities do business-to the distinct dis-
) '
. advantage of utility shareholders and
,- customers-and would place the utilities m . at a further disadvantage in relation to p 1 the virtually unregulated non-utility pro-b, ducers."
In addition, proposed new acid rain i i '3 - 4 and " global warming" legislation-expected to be reintroduced in Congress in 19b9-could add enormous additional costs to electric utilities and their cus-tomers. For I)etroit Edison, such i legislation could add $1 billion to its environmental protection investments on
, a top of the approximately $2 billion lg 3 <Ny '
already made for this purpose since 1970. c Jw Moreover, the company already is a
> > - , ^ leader in the use of low-sulfur coal. For
'wru t # wjc a < 3 u, example, between 1974 and 1987 sulfur a dioxide emissions were reduced by f>9 percent by 5troit Edison and by 60 percent throughout the state of
-- n- -
Michigan. cashwho as maaps helsksw manus samske amusw seus 44 mes agwssenesNw Atos - messere, asser acus seen savesassantsees messor any asumet asse aussesrasse cwf ser '
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- r assysermenhebenswsssenmasser.sesse - ,
e 19 STRONG ECONOMY 8PUR8 GROWTH jr g~bn When the country catches a cold, does y Michigan stillgetpneumonia? Granted, that once was the case; but is it still true of the state that hasjust comnieted
? an unprecedented sixth siraight year <$
;' , economic expansion, despile the tricissitudes of the automobile industry? -
.' Thejury is still out on that q:testion, but .
Detroit Edison, tehich helped in many ways to stimulate the recovery which is continu-ing to take placein its Southeas'ern Minhigan service area, is nott benefiting . mightilyfrom that recovery.
' .. . Some numbersfor 1988 tell the story:
5 a' ' Detroit Edison k sales have increased an $.7,5 average of 4 percent a year over the last six .W .
' years Unnnployment has dropped to a ; ,
post-recession low of 6. 7 percent, compared
~ with 17.9 percent in late 1982. '
But more importantly, in terms of avoid-.. ing economicpneumonia, major . impmvements have been made in diversify
. ing the Southeastern Michigan economy.
. The area > plastics industry now rivals Ihe steelindustrjin terms ofjobs. Robotics, electronics a nd other high-technology com-
. panies also add importantly to the area b '
^
economic strength. . Expansion also has occurred in the ser-; vice indastries, residential housing arid business construction, finance a nd insur-ance, health care and hotels, and a multitude ofretailservices. Can the recovery besustained? South-eastern Michigan t economy is expected io remain relatively healthy in the years ahead and may infact be helped by the new U.S.-Canadian tradepact and by strong incentivesfor investment in capital equip-L y: ment resultingpartial!yfrom the weak U.S. g % dollar
~
f' " Q The nete and changing businessesin the company s sm' ice area, whilepotentially n ~ f" increasing the use ofelectricity, are also bnnging with Ihnn demandsforfaster, greater responsiveness by Detroit Edison to :
~ provide reliable, high-quality, com-petitively priced electric service.
' nu. . Eramples qf diverse area growth in 1988 that helped boost sales are pictured at left.
yl,j bl}& v : i L n Ibp teJ1: The new lhiace ofA uburn Hills, a l ? j' sports-entertainment complex and hony of the Detroit Pistons. Top right: New steel-
' .nN
** l.V ' . , - forgingplant ofNakatan-florizon m%
- Industries in Huron Ibwnship being
^
dedicatedin a traditionalShinto ceremony. ' ~ Bottom: Completion of the restoration of the fbx Theatn: wnich uses steam heat, is - reviewed by feft) Mike McCabee, Detroit Edison marketing represa lative, and Dennis Ecoe ofLittle Caesark Enterprises, g g'
........i.....D...tA Inc., owner of theIby.
I
( g. 9 g (
,\ 4&1 '
Added to the potentially extensive leg- G '
%l" '#
islation and regulation are changes
] 1 taking place in the composition of the ;3 :p a company's customers and the waysin g Q 44 which those customers use electricity. ,
p w For example, high-technology and ser- , vice companies, as well as an increasing , , , - l number of manufacturing firms, today W' 'j f require unprecedented quality in the electricity they use in order to operate ye T [m '$ y 4 (j and maintain sophisticated electronic ) j ? m equipment. 1S h / The increasing role of energy, and M %,fi@ (['Ag@p ' e. particularly electricity, in the personal P
- and business lives of today's population j M
- A-TI G has sent users-residential and business i alike-searching for new ways to use ob
. . . ~
that electricity efficiently. Improved
. f Ml(b energy efficiency is one way for fami-messbosassawwmasermeswammantasmosessemphWes/ go lies-especially people with low or fixed mesameWees e mpressasWessness sammennhsussenws. ar tappatsses 11
'anseessymannesse4' 7 g '
inconies-to control their expenses. For &
~
' ' 94 ' ' ' ; -
business, energy efficiency helps keep costs lower and more competitive. flexibility and accountability. This new COMPETITION The high cost of buildinglarge new structure aims to reduce layers of man-l electric generating plants demands alter- agement, move decision-making closer to i native ways to meet growing and those with immediate problem-solving yh ompetition is becoming an changing capacity needs. Customer options such as cool storage-making ice needs and help improve response time for meeting customer requirements. [fO in the increasinglyimportantword public utility vocabulary. during off-peak hours to air-condition a in addition to better preparing the In the 1920s and 1930s, Congress and the building during the day-are being inves- company to cope with change in both the states created a legal framework for tigated as a way to help meet growing public and private arenas, this approach public utilities, resulting in a vertically demand. According to Willard R.1101- is reshaping almost all company assign- integrated industry structure regulated land, senior vice president for Power ments. With operational authority more primarily by the states. Utility service Supply, Detroit Edison expects-at least effectively delegated, senior officers can areas became relatively well-defined in the short term-to meet increasing focus their attention more intensively on and what competition existed was energy demands by optimizing the per- those issues that have more pervasive predictable. ! formance of its generating equipment. impact on the bottom line of financial That situation has changed. Electric l Later, the company may take one or soundness and improved shareholder utilities have always competed vig-more additional alternative paths that value, orously with the sellers of natural gas are available to meet future resource Clearly, the changes and challenges and, to a lesser extent, with domestic oil i needsif demam imount in the future. facing the industry and the company are dealers. But they now face mounting These include (1) building smaller gener- considerable. But when you boil down competition from cogenerators and other ating plants that require less time and the alphabet soup of change and competi- smali power producers who are vying for investment to complete, (2) buying elec- tion represented by PURPA, QF, NOPR, a growing share of local electricity mar- , tricity from other suppliers, including a IPP, FERC and so on, the bottom lineis kets. In addition, the more aggressive growing number of cogenerators and (3) the customer. No matter how the indus- utilities are finding ways to expand their exploring a variety of demand-side try is restructured, no matter how the business beyand their service areas. options, such as cool storage and inter- players change, no matter what the Electric utilities also face competition ruptible service, to influence desired accounting changes, no matter what the from some of their own large customers. changes in customers' use of electricity. regulatory authorities do, the successful Some are building or threatening to build Detroit Edison is also changing the utilities will be those that listen to and their own power-generating facilities. way it manages its operations in order to serve their customers. Building on its And, of course, their own increasing cope with the forces of change. A new traditional strengths of serving customers competitive pressures lead them to place organizational structure has been cre- was one of Detroit Edison's biggest chal- increasing demands on utilities for lower ated with increased emphasis on lenges in the past year-and will rates. continue to be a major challenge in the future. 8
;D ETR 0'l T E~D 15 0: W~ l cogeneration option for15 years and - company ensure a reliable supply of its The concern of business is understand-able. 'Ib compete effectively in both will continue to do soin the future. product at fair prices and an equitable domestic and world markets, U.S. com- But it opposes proposals that do not return on shareholderinvestments.
panies must excelin all phases of benefit the customer base at large. activity. In addition to reducing costs in L It has taken a new, more aggressive order to sell their own products or ser- stance in the energy marketplace, CUSTOMERS vicesin the face ofincreasingly pursuing added sales through a re-worldwide competition, they share a structured and more focused and national commitment to increasing pro-ductivity, enhancmg U .S. technological segmented marketing and sales effort. e Detroit Edison has developed special [{4 ugust 2,1988, dawned ho k For days the temperature had Ubeen inching up through the 90s, standing vis-a-vis other countries, and ratesin order to retain its customer past 100, and finally to a record-breaking helping resolve the nationt stubbornly base-both to help keep large custom- 105 degrees. The hot weather had persistent trade deficit. Those are major ersin Michigan and to match savings started prematurely, in May, with little responsibilities, and Detroit Edison is that they could realize by building or no rain. Records kept toppling for high helpingits business customers meet their own power-generating facilities. temperatures, air conditioner sales, rain-them. The company has met the challenge of less days and use of electricity. The company views the price and natural gas head-on-despite the fact During the first week of August, that loss of business, excess supplies Mother Nature handed Detroit Edison's eti tit o Iofit s. and resultantlow prices have driven Southeastern Michigan service area a The challengers to add more value I algas companies to conduct one-two punch: sizzling heat and violent without unduly raising prices-not an aggressive promotional and sales cam- thunderstorms. The company chalked up easy task in the complex and pervasively regulated environment in which Detroit P^#8' Edison operates.
' The company has succeeded in hold- g a4 j ing the line on the cost of electricity.
Even so, the company is succeeding. Despite modest rate increases autho- e o @g m ^
- lt is vigilantly monitan. ng regulatory rized by the Michigan Public Service Y Y b '.a -
- f['"
actisity in %ashington and Lansing. Besides its historical " obligation to Commission (MPSC) effect.ive January m 4 y 24,1988, and at the start of each of < serve" customers, Detroit Edison the next four years, the increased cost believes it has an " obligation to pro-to both resi lential and business cus-tect"its customers from energy tomers durmg this period is expected generation proposals that benefit a t be less than the rate ofinflation. few at the expense of many-and particularly those that would benefit Detroit Edison expects to be com- UJ thelarger and more powerful at the petitive on all fronts in the years ahead. expense of the company's many Only by meeting successfully the chal-smaller customers. lenges posed by other energy sources, by The company has supported explor- government and by an increasingly ing renewable resources as a sophisticated customer body can the semangemenseameragonesspequeM cshsenspupswasasessmosestasst' ' " , appasstheussesresassempans: m the highest demand for electricity ever whilenon-utility electricityin S. the h.enerationof is estimated recorded by a utility in Michigan-U.S. COGENERATION GROWTH (Millions of Mwh) 70 tobe only1to2percentof the total 9,133,000 kilowatts-on August 2. Also 8 Output, cogeneration has been during that week, the company's com-growing ata rapidpace as the . g0 A)89 chartalleftindicates. puterized weather-tracking system recorded nearly 1,700 cloud-to-ground 50 - 51 lightning strikes, significantly above nor-e. [%g M mal experience. Use of electricity was so high in many j!Mf( ; b 30 - MQQ4% f areas that some distribution equipment failed under the extraordinary load. The
. /@g/QJ gQ j storms only added to the problem: Nearly 20 MfgM j@gc M 65,000 phone calls came in from custom-W . fg 7! ] ers without electric service. Out in the
#" U o1 li,dk b ' '
N '" ' 84 - 85 86 Source: U S. Department of Ener;y
' 81 ' 82 83 (Latest data available) 9
4 shifts around the clock to restore service to more than 85,000 customers. In the power plants,2,000 employes also wo;ked in shifts around the clock to keep the plants operating at high capacity. Many employes were called back from vacation to help, and many others were on emergency standby. It was that kind of year. Extremes in the weather pushed Detroit Edison's peo-ple, plants and power system to operate at their full potential. But coping with the weatherin summer was only one of the challenges. Providing a competitively
- priced product and reliable, efficient ser-vice year-round-no matter what the weather or season-were the others. The company responded with a series of pro-grams.
"The equal parts ofimproving our l competitiveness are pricing our product right and providing quality service,"
notes Senior Vice President Burkhard H. <?. Schneider, head of Energy Marketing and g Distribution " Storms and very hot or g% ' $ < g" m very cold temperatures compound service . problems. But, frankly, that's when we ,M shine. What we're really working hard M" 4'< " ' to do is not only meet storm emergencies, 3" f$ 4 t' but also enhance the quality of our
, ' i>
~ "" # ,
service on a routine, day-to-day basis." h %N One way the company is finding new ; and better ways to serve customers is by getting out and talking to them, face-to- -- face, about their needs and problems. Through an executive contact pro- 4 gram, for example, senior company managers meet regularly with top execu-tives of major commercial and industrial NNN"6M6"*MW"" customers. Sometimes problems are iden- ##"" tified. Other times opportunities for new Detroit Edison's own 1987 Competitive responses to customer needs generally, business are uncovered. ' Assessment Study identified and quan- One of the roles of Market Pianning is The commitment to customers doesn't tified the various competitive threats and to better identify market segments and stop at the top. For example, one evening customer options, including cogenera- develop programs designed specifically - - some -150 Detroit Edison employes heard tion, natural gas and conservation. for hospitals, auto suppliers, plastics firsthand from Ford Motor Company As a result of that study, the com- companies, retail chains, fast-food out-executives about the many available energy alternatives the automaker said it pany's rate design unit, formerly lets and shopping malls, among others. M considered a financial function, was re- The activities of Marketing Technical would not hesitate to use to achieve its cast as a pricing function and ?ransferred Services involvejoint efforts with me goal of reducing energy costs by 20 to Marketing. Other examples of changes tomers on such projects as cool storage, pe cent. These options include energy external combustion engine development that reflect the company's growing cus-conservation, fuel-switching and tomer and marketing orientation include and infrared paint drying. Another inno-involvement in utility rate-making and the formation of a new Customer Options vation: To introduce new or unfamiliar regulatory procedures through a state group and a Market Planning function to electric technologies, Detroit Edison coalition of large mdustrial electricity develop new sales and service strategies, launched a leasing program in 1988 for users. All will help Detroit Edison stay on top of high-technology processing equipment so various energy use and pricing alter- customers can improve operations-natives-as well as provide faster 10
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! ansagessemm enengsteesmassessemamenew r aussansm agassager ammatesakenessee msemeauputeemasswa 6 x assessenspes, sesemessnessys summessesammy mehmessoass semuspapesMaimysassef armentaess emasseksAss tras gf G tusenswassommasses; pie asemanniaw anstemuseramassam an meno m an. ,s involving electricity, of course-without New York to Ann Arbor. The move was and 1,700 additional newjobs for the heavy capital outlays. influenced both by more favorable elec- area. Anotherexample: After16yearsof tricity rates from Detroit Edison and by Providing customers with options will using natural gas for heating, the Com. the proximity of the University of Michi- help the company meet growing demands merce Buihiing in downtown Detroit was gan, one of several major universities for electricity without exceeding gener-converted back to steam heat provided and colleges in Southeastern Michigan. ating capacity. The company believes by Detroit Edison. A similar success story The firm's new facilities will add more new power plant construction can be involves a new 20-year contract to pro- than $500,000 in annual electricity reve- deferred by working with customers to vide thermal energy (steam heat) to the nues for Detroit Edisor. and 180 newjobs help them adjust their energy demands. Detroit Medical Center, which had con- to the area. Focusing on service helps Detroit Edi-sidered building its own natural gas-fired Working with state and local economic son retain existing customers and attract system to produce steam and electricity. development organizations, the com- new ones. Good service also involves The medical complex will save more than pany's econoicie development team helping customers control their costs
$600,000 a year in energy costs-about helped attract Jean's Mazda Motor Man- through alternative use patterns and what it had projected it could save with ufacturing Corporation to Southeastern installation of more efficient electrical its own cogeneration facility-and Michigan. After years of planning and equipment.
Detroit Edison will retain the Center as a construction, the plant opened in 1987.
% m customer. Now at full capacity, it employs nearly in addition to working with existing 3,300 people, produces 20,000 cars a COSTS area companies, bringing new com- month and has a monthly electricity panies-and iobs-into the service area demand of 23 megawatts. .
teminues to be a cajar Ddrmt Msun There's also a favorable postscript. p)n right and early every Friday effort. The company's economic develop- Mazda currently purchases about 50 per- [; q at 7 a.m. this past wmter, ment staff is taking a market-segmenta- cent ofits components in the Detroit Q spring and summer, members of semor management who constituted a tion approach, targeting largely on petro- area and plans to increase this to 75 Smurces Allocation Comnuttee met chemical firms, suppliers to the auto percent by 1991. To meet these needs, 25 . , w th one objectivein mmd: To cut costs industry and high-technology research companies have added capacity or have relocated to the area. This mesns dramatically so the company could , and manufacturing companies. beme a lomeost, more competitive For example, the company persuaded monthy demandsof another15mega-producer of electricity and at the same one particular high-technology compo- watts of electricity for Detroit Edison time improve the bottom h,ne. All this nents manufacturing firm to move its while ensuring that important service headquarters and research facilities from reliability programs were not compro-mised. 11
pagg g q >
.h ) w The sessions at dawn worked. With j v
/fd y
- aD h,
-d the help of an experienced, full-time staff drawn from across the company and il M , [d hy DQ_ 'M building on major cost reductions N achieved in recent years, the 1989 Opera-ip
~
'@ Jj hg a 'g '
g 4 tion and Maintenance expense budget s (excluding fuel and purchased power) _y' y 4 g was reduced by more than $100 million to
$785 milhon.
m/h) % d ylE u The resources allocation process was lJ sweeping and comprehensive, involving F bE l and affecting every organizational unit in
;MkI-hjh %
{; g (4 i ggWtM fi 6 l the company. The committee was chaired by Vice Chairman Ernest L. Grove, Jr., who calls the effort the most extensive A I
@ W My:
cost-reduction program in the companyk h 4w!- M M 86-year history. "It was hard, painful
& M - l' -
t} ' work that will result in tough changes for all employes," he adds, "but it will L l I hQ, [b d lll l J l jj make the company stronger in the long i N eubebustheuera lautapand b.abay moputJ [ term for shareholders, customers and employes by laymg a solid foundatlon for W Lassmassage e , Q N % W' 4 the future." M 2 WERATES SUCCESSFULLY M 1988 The committee performed a functional In1988, Fermi 2achieveda numberqf'~ attention. analysis of each department, its pro-1 milestones in a year that capped tough . During the year; many activities already grams and the capital and labor resources l years ofsvork by Ihousands ofemployes in . under way were strengthened to improve used to supoort its activities. The mid
' planning, designing, constructing, testing '
operations. Plans were set in motion to test applied: Do tbese activities enhaace l andoperating theplant. .. ' achieve a stronger, more stable organiza- shareholder value, improve customer ser- ! . The1,0&B-megawatt nuclearpowerplant tional structure. The leadership efective- vice and/or help the company become l went into commercial operation on Janu- ness ofsupervisors was addressed with a more competitive? Also, other compara-ary 23, completed itsfirst required testtng . series ofnew technical and management ? ble electric utility costs were used as l training programs. Plant communicahon
. outage in May, reachedfullpowerfor the .
l benchmarks ior comparison. Cuts were first hme during the summer, operated at or channels and methods were amproved to better claWy operating expectations and made m. those cases where Detroit Edv. nearfullpowerfor several months thrvugh-I out the second ha{f of the year, completed a . goals. New, more specific priorities have son costs were out 0ihne wlth mdustry
' prolonged and complex start-up testing [ been setfor use of resources as part of an norms.
program in latefall andfinished its tear- aggressivefive-yearperformanceplan. Overall, the 1989 budget incorpoules a ranty run on November 18. .. Operator trainingprograms also are being reduction of 600 positions to be cut by
> While these achievements closed one . intensified. With start-up tcsting complete, means of attrition and a voluntary sepa-Ichapter ofFermi 2's history, they opened the Fermi 2 business plan isfocusing on ration program available to employes another-sqfe, efficient and reliable gener- long-term operating improvements. Better whose positions or functions were either ; ation ofelectricity to serve Southeastern engineering support and equipment per- discontinued or restructured. In 1988 Michigan over what is projected to be a 40 . formance now are toppriorities. . alone, a work-(orce reduction oi more year plant life. Fermi 2provided about 12 . During theyear; theNRCproposedfines than 500 people was achieved. Other percent of the area s total energy needs ^ totaling $225,000for three molakons.
savings will be realized through reduc-during some of the summer > hottest days. Later; theNRCagreed with a company -
"Overall,1988 was a year ofsignificant appeal that two of the violations did not llons m overtlme and by theJudicious use accomplishmentforFermi 2," sap B. warrant thelevelsat which they were ,
of contract labor. By 1990, staff will have Ralph Sylvia, senior vice president in assessed and reduced thefines by $25,000. been reduced by 10 percent since 1985. charge qfNuclear Generation, "even in January 1989, the NRCproposed a Other changes implemented to achieve though we did have some setbacks and our $50,000finefor a problem 3 hat caused a 1989 budget goals include: progress was not alunys asfast as tce valve malfunction. While thefine waspaid, w Productivity improvements, such as would have liked. " . the NRC recognized the compa ny > prompt the use of one-man line crews and Spectal review teamsfrom theNuclear correchve ach,on. changes m. meter-reading procedures. Regulatory Commission (NRC)and "lWre confident that fermi 2 > strategic Institute ofNuclearPower Operations con and business plans, the manyprograms of Closing of some customer offices. cluded extensive evaluations of the plant in corrective action now under way, and the Bearganization and consolidation af thefall. While they recognized overall quality and dedication ofourpeople have many units and functions. improvements in Fermi 2 > performance us on the right track so we can operate as and capabilities, they also ident{fied the sqfe, reliable, efficient powerplant that some weaknesses that required additional has always been our goal, " says Syh'ia. 12
-D E T E O 1 T E D 1 8- 0 N<
years. Total savings of $120 million over15 years are expected. B,_ 1
! An agreement reached in a long-standing suit and counter-suit between the company and the Decker
, g, .
[ E - y
% Coal Company, high-volume provider of jow_ sulfur Western coal, reduced ed c . .o q ( ." costs by an estimated $15 million in
~{ - - s. 1988. Over the remainder of the con-m f f ,
tract, an estimated $47 million will be
$ f 8 saved.
$]7l]r
' .a@
~
~[Mi Placing the Marysville and Conners Creek power plants in extended cold
" - - - j" -
standby saved $7.5 million in 1988 and will save $13 million in 1989.
,ag A new low-cost, unsecured short-term h4 Eurocommercial paper program J5 allowed the company to repay an existing $60-million bank loan one year early and save $300,000 in inter-nessee see essesser seswess apese se dass he messay sentammese Asse RMe, assisi l '
est costs.
>u w AntsWLaos,Amessikspanfetsdustsats k ' "
An innovative low-cost, two-year unsecured $105-million financing a Broadening supervisory spans of con- $1 billion per year during the four- agreement allows the company to trol and reducing layers of year period of 1981-84. finance the cost of domestic coal ship-management. Early refundings of $279 million of ments by issuing bankers' acceptances Cost savings in 1988 came from many higher-cost debt and preferred and on a continuing basis at a floating different sources: preference stock provided annual sav- rate. This is the lowest floating rate n A $400-million nuclear fuel financing ings of $13 million in financing costs. financing arranged to date and allows arrangement was restr.ictured to save Cash flow wasimproved by an aver- the company to borrow at rates well the company $10.5 million over the age of $1.5 million per day through below the prime rate. next five years. It also willimprove accelerated bill collection procedures More savings-about $3.5 million per cash flow, thus reducing corporate initiated by the Banking and Cash year-will be achieved through a new borrowing needs. Management unit. At the same time, health-care plan for employes. n Capital expenditures have decreased the group implemented product'vity significantly over the years, reflecting improvements that reduced expenses . %, the completion and successful start-up by $250,000 per year. - l of the companyh Belle River coal-fired About $3 million a year was saved
- i and fermi 2 nuclear power plants. In when the State of Montana reduced = VLSr L 19b8 capital expenditures were $235 its severance tax, a move for which m P O 8 R _N R.
to._t.L ._.h 3 _.jd _. W _ [ _.$_ million, compared with an average of the company had lobbied for many o , 9 m a a L* ] ~.--- [.--Q.-- --I y -ypC h- f, - l-- SECURITIES REDEEMED EARLY DURING 1988 .s M U ii 9 M E 9 Pnncipal Effertne lnterent/ . h . [J Amount liiudend Rate 8'
----De.wnpuun 81 82 83 84 e5 06 87 as PREFERRED STOCK 13.5% wries (150,000 shans) 4 15,lH10,000 13.50 %
PREFERENCE STOCK 8 75,000,000 1988 FINANCING 83 42 pries (3,(N10,000 shan5) 13.6x% 3.40 wries (2,250,lNHi shares) 56,250.000 13 60 (;nss cost to 3.24 senes (1,400#10 shares) 35,000A00 12.96 Type of security Amount company 313 series (2$00,000 shares) 65,000,000 12.52 & Month sohl (Milhons) (Aher Expene) 3.12 series ( 750,000 shares) Ih,750,000 12.48 2,500,000 11 00 Pollution Control 2.75 3enes ( 10(UNN) shares) 2 75 senes 11( 1(NU)00 shares) 2.500.000 11.00 Refunding Bonds Total Prefern d and Preferenw stock 4270.WHUNN) April and August 8 7.3 8.57% Unsecured Tenn Notes MORTGAGE BONDS March and June 205 0.00 senes 1980 H, due 4 'Im 8 6 S50.000 12.75 % senes EE, due 12/1518 2RNU100 11 875 Total 8212.3 Total Mortgage Honcis 4 0,150,000 _ Tota [ sect 3n ie.gMh_meqE_adC _,._ _,_ Mip,1.@S00 J 13
s D E i B 0 -1 T E D I 8 0 N MR.ESTONE RATE CASE SETTLEMENT TO SIABILIZE FUTURE PRICES A scttleme ani the companyb 1987 rat: Apre-year moratorium on base rate nAnnmes nossnon common stoca num,,
'* case tras reached in late December and changes no approved shortly thereqller try the Alichigan Afour-yearsuspension of the Power a Public Service Commission. A t issue tras Supply Cost Recovery Clause, ymnitting n
+
the $1. 7 billion of additional investment in recovery offuel a nd purchased-power
!^ , Fermi 2 not included in a n earlier rate case costs above a predehrmined base level.
* ";--- that seas resclued in 1986. A new afjustmentprocedure topmnit m w ;- Vice Chairman Ernest L. Grove, Jr, teho rates to repect the effects ofirflation on m g_, L_; i headed negotiatwnsfor the company, operation and maintenance expenses.
,, n Q _
) ;i ,
described the settlement as "afatr and Based on the Consumer Priceinder, the
; ,; reasonable balance between the tnierests of afjustment teill be in effectfrom 1990
- shareholders and customers, providingfor through1992.
relative price stability over the nextfive tL. 2.--- k-.- L u- L -. s hanga of$159 mHlw.n, effech.t'e Janu- _e._.si ai u i ei d a m years. " The settinnent, according to ami,1989,fmm ute hwaSupply Cost M Grove, "also uillstrengthen the company's Recovery Clause to base rates to cover
# ability to continue the comnwn stock divi-purchases ofgennadngcapacuyfmm dend at its current level. " Wolmine PownSupply Coopwatwe, Forshareholders and management, the EAnn\nos soss) Pen sunnt waa,, Inc, and Gehiichigan Public hwer settlement eliminates many ofIhe uncer-Agenq. M,s unH cause no inwease in se tainties of the lastfew years related to the
'"""A 00'#*
rw - rate-making treatment ofhrmi 2. When Adoption ofa plan tophasein rate y
~ r ~ ,
? combined seith increasing sales and com.
panywide cost reductions, it wiu place the tnereases over afwe-yearpersodin a L M " way that meets the requirements of the LE ,- m_ ; i company in a strong position not only to
' Fin ncialAccountingStandardsBoardb 1*-l% L -- L-- - -. - cover the dicidend but also to meet capitaj Standard No. 92.
..uw :a ._;L_l_ expenditures and debt maturities in the
,i i a g ,' , , , foreseeablefuture. Over the nextfive years, inclusion of$700 miHion of the $1.7 h rates are expected to increase less than the biHion ofadditionalinvestmentin
**"* S cost ofliving. Emni 2 in the rate basefor rate-making News of the settlement apparently tras purposes. Another $300 million win be .
- welcomed by WallStreet, wherepositive amorti:ed over10 years teith no return
, camu txPenoniunts rua ,1 u no i u n w,*
reaction helped increase the agregate mar- on theinvestment. The remaining $700 ket value of the company 's stock by $500 million has been scritten off million during the last quarter of1988. Thepurchase in 1990 of Wolverine's E bQ Keyfeatures of the settlement include: remaining menership interest in Fami 2 R ;W a - A $29.5-million annual rate increase, for $513 million win be recovered over19 2 -- a aw< effective January 1,1989. years trith an associated return related A change in the effective dates ofpre. to the company's assumption of A ;-., 9 , u - . Wolverine debt, o riously authori:ed annual rate phase-in e n u u as a e u a a e a2 e increases. Thefirst phase of$68.4 mil- Agreement that new ccstincreases or lion went into effect on January 24, decreases of$5 minion that resultfrom 1988. The remainingphase-in amounts federalincome tax, acid rain or win be effective on January 1 asfollows: cogeneration legislation will be handled Lowering costs has two immediate 1989- $74.7million through a specialtingle-issueproceeding benefits. It strengthens the company's 1990- $76.8 minion before the hlichigan Public Service Com-financial position and at the same time "'##* "' strengthens the customers' competitive 100I-~ 199 -#024#810 m#1mn "NI( ". Estabushment of a paformancestan-edge by lowering their cost of electric dard-effective January 1,199J-for se7y;ce' operation ofFmni 2. Rate recovery E,ven as the company becomes " leaner penalties willbe and meaner,, it ,s i attempting to main- 19e8 MARKET PRICE PER sHAAE Iwo __m imposed ([the ta,m its substantial commitments to Detrmt Edison and Dow ones 15 Umites* , g g helping communities strengthen their fans below the aver-economic viability, supporting quality ""*""""#"'"*"$N n agerf the top 50 percent ofnuclear education, participating in the fight against drug abuse and conducting
- gr ..
boiling water reac-dozens of other conminity involvement #, tars in the U.S. Withdrawalby all programs. _ V%W %._ parties ofpending
*{hw F,
+ f, ff appeals ofprecious f ,y, w q >( 'O j RIPSC rate orders.
1l
v - -. .- REP 0Irf 0FMANAGEMENT'S-RESPONSIBILITY FOR FINANCIAL STATEMENTS
*he consolidated financial procedures, and programs to assure the review the activities of each and to statements of The Detroit Edison selection and training of qualified discuss accounting, auditing and personnel. financial matters and the carrying out of Company and subsidiary companies have been prepared by management in These financial statements have been responsibilities and duties of each group.
conformity with generally accepted examined by the Companyt independent Price Waterhouse has full and free access accounting principles, based upon accountants, Price Waterhouse, whose to meet with the Audit Committee to currently available facts and report appears on this page. Their discussits examination results and circumstances and management's best examination was conducted in opinions, without management estimates andjudgments of known accordance with generally accepted representatives present, to allow for conditions, it is the responsibility of auditing standards. Such standards complete independence. management to assure the integrity and include the evaluation ofinternal objectivity of such financial statements accounting controls to establish a basis and to assure that these statements fairly report the Company's financial position for developing the scope of the examination, as well as such other f~ 4 Ernest L Grove, Jr. and the results ofits operations. procedures they deem necessary for Vice chairman of the Board and
'Ib meet this responsibility, expressing an opinion as to whether the ""*"****"'
management maintains a high standard financial statements are presented fairly. of record keeping and an effective system The Board of Directors, through its ofinternal controls, including an Audit Committee consisting solely of dp / extensive program of Internal audits, outside directors, meets with Price 9 '. written administrative policies and Waterhouse, representatives of cQ'a r N $ and management and the internal auditors to chief Executive omeer REPOIrl'0 INDEPENDENT A ACCOUNTANTS Ih.eeiIhterlmuse %F 200 RENAISSANCE CENTER DETROIT, MIClllGAN 48243 February 10,1989 To the Board of Directors and Shareholders of The Detroit Edison Company n our opinion, the consolidated express an opinion on these financial accounting principles used and (1 financialstatements appearing statementsonbased on our audits. We significant estimates made by pages 16 through 36 of this report conducted our audits of these statements management, and evaluating the overall present fairly, in all material respects, in accordance with generally accepted financial statement presentation. We the financial position of The Detroit auditing standards which require that we believe that our audits provide a Edison Company and its subsidiary plan and perform the audit to obtain reasonable basis for the opinion companies at December 31,1988 and reasonable assurance about whether the expressed above. 198'i, and the results of their operations financial statements are free of material As discussed in Notes 4 and 5 to the and their cash flows for each of the three misstatement. An audit includes consolidated financial statements, the years in the period ended December 31, examining, on a test basis, evidence Company changed its methods of 1988, in conformity with generally supporting the amounts and disclosures accounting for disallowed plant costs and accepted accounting principles. These in the financial statements, assessing the abandonments, unbilled revenues and financial statements are the property taxesin 1988. responsibility of the Company's management; our responsibility is to ,
^<lt YAXMh7'MLL 15
t a CONSOLIDATED STATEMENT OFINCOME Year Ended December 31 (Thousands) 1988 1987 1986 Operating Revenues Electric (Note 1) $ 3,070,724 8 2,825,910 $2,832,945 _ Steam 31,448 30,821 36,339 Tbtal Operating Revenues 8 3,102,172 $ 2,856,731 8 2,869,284 Operating Expenses Operation Fuel 8 846,678 8 813,376 8 741,206 Other power supply 146,773 47,814 191,126 Other operation 521,152 441,046 459,534 Maintenance 275,610 245,736 258,655 Depreciation (Note 1) 325,423 237,325 232,240 Deferred Perml 2 depreciation (Note 1) (44,143) - - hxes other than income 212,656 179,308 177,381 Income taxes (Notes 1 and 7) 89,944 159,488 126,596 Total Operating Expenses 8 2,374,093 $ 2,124,093 $ 2,186,738 OperatingIncome $ 728,079 8 732,638 8 682,546 OtherIncome and Deductions Allowance for other funds used during construction (Note 1) $ 1,663 $ 136,452 $ 117,069 Deferred Fermi 2 return (Note 1) 134,264 - - Other income and deduct!ons (789) (3,435) (16,869) Income taxes (Note 7) (769) 663 8,827 Current year disallowed plant costs (Note 4) (849,506) - - Income taxes - disallowed plant costs (Note 4) 225,171 - - Net Other income and Deductions $ (489,966) $ 133,680 $ 100,027 Income Before Interest Charges 8 238,113 $ 866,318 8 791,573 Interest Charges Long-term debt 8 451,415 8 417,474 8 399,429 Amortization of debt discount, premium and expense (Note 1) 4,593 3,626 2,721 Other 20,663 23,459 41,410 Allowance for borrowed funds used during construction (credit)(Note 1) (3,224) (133,215) (129,082) Net Interest Charges 8 473,447 8 311,344 8 314,478 Income (Loss) Before Cumulative Effect of Accounting Changes 8 (235,334) $ 554,974 $ 477,095 Cumulative Effect for Years Prior to 1988 of Accounting Changes for (Notes 4 and 5): Disallowed plant costs and abandonments (net of income taxes of $111,257,000) (344,147) - - Unbilled revenues (net ofincome taxes of $40,912,000) 61,367 - - l Property taxes (net of income taxes of $ 101,306,000) 139,288 - - l Net Income (Loss) $ (378,826) $ 554,974 $ 477,095 Preferred and Preference Stock Dividend Requirements 49,757 78,240 98,803 Earnings (Loss) for Common Stock (Note 5) $ (428,583) $ 476,734 8 378,292 Common Shares Outstanding- Average 146,761,458 146,729,292 146,643,377 Earnings (Loss)Per Share Before cumulative effect of accounting changes $(1.95) 83.25 $2.58 Cumulative effect for years prior to 1988 of accounting changes for: Disallowed plant costs and abandonments (2,34) - - Unbilled revenues 0.42 - - Property taxes 0.95 - - Earnings (Loss) Per Share (Note S) $(2.92) $3.25 $2.58 (See anompanying Nous to Consolidated Mnancial Sutements.)
7 CossounATEo STATENIENT of CASil Ftows Year Ended Decemoer 31 (Thousands) 1988 1987 1986 Cash Flows From Operating Activities
$ (378,826) $ 554,974 8 477,095 NetIncome(Loss)
Adjustments to reconcile net income (loss) to net cash from operating activities: Cumulative effect for years prior to 1988 of accounting changes for: Disallowed plant costs and abandonments-net 344,147 - - Unbilled revenues and property taxes-net (200,655) - - Current year disallowed plant costs 849,506 - - 325,423 237,325 232,240 Depreciation Deferred Fermi 2 depreciation and return (178,407) - - (137,522) 99,050 104,430 Deferred income taxes and investment tax credit-net 7,128 9,708 12,231 Amortization of property losses and unrecovered plant costs Allowance for other funds used during construction (Note 1) (1,663) (136,453) (117,069) (26,789) 24,189 19,910 Other Changes in current assets and liabilities:* (60,687) 16,577 7,460 Customer accounts receivable 11,054 (13,283) 4,837 Other accounts receivable 386 2,892 (16,073) inventories (23,080) 22,688 10,631 MPSC ordered refunds, with interest 3,659 (12,028) 13,361 Accounts payable 13,209 16,048 Taxespayable (251) 2,469 14,292 (3,027) Interest payable 12,091 6,746 597 Other 8 547,983 $ 839,887 $ 762,671 Net cash from operating activities Cash Flows From Investing Activities Plant and equipment expenditures 8 (235,127) $ (709,084) $ (645,196) Purchase from Cooperative-Fermi 2 (Note 2) (4,121) (116,173) (45,853) Allowance for other funds used during construction (Note 1) 1,663 136,452 117,069 (8,890) (521) (1,402) Changes in current assets and liabilities * (16,539) (14,955) 845 Other Net cash from investing activities 8 (263,014) $ (704,281) $ (574,537) Cash Flows From Financing Activities issuance of unsecured promissory notes $ 201,924 8 525,000 $ 100,000
- 1,292,812 496,550 Sale of general and refunding mortgage bonds Funds received from Trustees: Installment sales contracts and 7,300 7,740 17,023 loan agreements 229,325 (104,656) 104,656 Increase (decrease) in short-term borrowings Repayment c'long-term debt (247,975) (1,256,427) (485,975)
Redemption of preferred and preference stock (283,250) (114,148) (75,083) Dividends on common, preferred and preference stock (304,106) (328,351) (347,270) (24,001) (20,884) (10,015) Other Net cash from financing activities $ (420,783) $ 1,086 $ (200,114) Net Increase (Decrease) in Cash and Temporary Cash investments $ (135,814) $ 136,692 $ (11,980) 139,461 2,769 14,749 Cash and Temporary Cash Investments at Beginning of the Period 3,647 8 139,461 8 2,769 Cash and Temporary Cash Investments at End of the Period $
*Exdudes cumulative effect for years prior to 1%8 of aerounting changes.
(See accompanying Notes to Consolidated Financial Statemeritx)
p - -- I CONSOUDATED BALANCE SiiEET December 31 (Thousands) ASSETS 1988 1987 Utility Properties (Notes 1, 2, 4, 6 and 12) Plantin service Electric $ 10,611,077 8 7,406,432 Steam 58,999 59,249 8 10,670,076 8 7,465,681 Less: Accumulateddepreciation (2,463,111) (2,210,543) 8 8,206,965 8 5,255,138 Construction work in progress (primarily Fermi 2 in 1987) 89,547 4,420,920 l Nuclear fuel 7,132 6,817 Net utility properties 8 8,303,644 8 9,682,875 Property under capitalleases 8 265,615 8 256,994 Nuclear fuel under capitallease 373,791 324,774 8 639,406 8 581,768 Less: Accumulated amortization (172,916) (108,485) Net property under capitalleases 8 466,490 $ 473,283 lbtal owned and leased properties 8 8,770,134 8 10,156,158 Other Property andInvestments Non-utility property 8 9,557 8 8,845 Investments and special funds (less allowance for decline in value of investments of 84,400,000 in 1987) 33,832 26,781 8 43,389 8 35,626 Current Assets Cash 8 3,647 8 4,829 lbmporary cash investments (at cost, approximating market value) - 134,632 Customer accounts receivable (less allowance for uncollectible accounts of $16,000,000 and $36,000,000, respectively) 235,019 203,716 Other accounts receivable 31,526 42,580 Unbilled revenues (Notes 1 and 5) 131,663 - Inventories (at average cost) Fuel 234,499 238,678 Materials and supplies 149,567 141,591 Prepayments 6,925 7,869 Other - 2,548 8 792,846 8 776,443 Deferred Debits Unamortized debt expense (Note 1) $ 43,988 8 47,318 Accumulated deferred income taxes (Note 1) 192,860 100,603 Unrecovered plant costs (Note 1) 25,332 37,423 Fermi 2 phase-in plan (Notes 1 and 3) 178,407 - Other 13,337 4,643 8 453,924 8 189,987 Total 8 10,060,293 8 11,158,214 (See accompanying Notes to Consolidated Financial Statements.)
~ .
CONSOUDATED BALANCE SIIEET December 31 (Thousands) LIABILITIES 1988 1987 Capitalization (Notes 9,10 and11) Common stock - $10 par value,160,000,000 shares authorized; 146,783,212 and 146,751,865 shares outstanding, respectively (598,926 and 630,298 shares,
$ 1,467,832 $ 1,467,519 respectively, reserved for conversion of preferred stock) 551,907 551,662 Premium on common stock (47,712) (47,700)
Common stock expense 254,922 948,504 Retained earnings used in the business Tbtal common shareholders' equity 8 2,226,949 8 2,919,985 240,824 241,370 Non-redeemable preferred stock 92,667 98,777 Redeemablepreferred stock 47,891 137,406 Non-redeemable preference stock 34,830 44,341 Redeemable preference stock 4,238,536 4,693,687 Long-term debt 8 6,881,697 8 8,135,566
'Ibtal Capitalization Other Non-Current Liabilities 8 139,153 $ 153,623 Obligations under capital leases (Note 12)
- 10,839 Accumulated rate refunds, with interest 8 139,153 $ 164,462 Current Liabilities Short-term borrowings (Note 8) 8 17,000 $ -
Bankloans Commercialpaper 212,325 - Amounts due within one year 595,815 178,825 L ong-term debt (Note 11) Preferred and preference stock, including redemption premium of 13,750 195,398
$14,647,500 in 1987 (Notes 9 and 10) 327,337 319,660 Obligations under capital leases (Note 12) 192,799 184,670 Accounts payable 39,872 288,770 Property and general taxes (Notes 1 and 5) 9,421 11,455 Income taxes 102,378 99,909 Interest 71,193 80,448 Dividendspayable 60,925 55,400 Payrolls 10,239 33,319 MPSC ordered refunds, with interest 43,315 39,324 Other 8 1,696,369 8 1,487,184 Deferred Credits
$ 989,729 8 972,551 Accumulated deferred income taxes (Note 1) 318,674 349,769 Accumulated deferred investment tax credits (Note 1) 34,671 48,682 Other 8 1,343,074 8 1,371,002 Commitments and Contingencies (Notes 2,6,12 and 13) 8 10,060,293 $ 11,158,214
'Ibtal (See accompanying Notes to Consolidated Financial Statements.)
,. 4 CONSOLIDATED STATEMENT OF CO. WON SIIAHEll0LDERS' EqulTv Premium fletained Common Stock on Common Earnings
$10 Par Common Stock Usedin the Shares Value Stock Expense Business (Dollars in Thousands)
Balance at December 31,1985 146,576,496 $ 1,465,765 8 552,847 $ (47,632) $ 617,045 Issuance of common stock on conversion of convertible cumulative preferred stock,5% % series 122,935 1,229 958 (48) Premium and expense associated with preferred and preference stock redeemed (Notes 1 and 10) (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 8 551,254 $ (47,680) $ 745,835 issuance of common stock on conversion of convertible cumulative preferred stock,5% % series 52,434 525 408 (20) Premium and expense associated with preferred and preference stock redeemed (Notes 1, 9 and 10) (28,270) Net income 554,974 Cash dividends declared Common stock - $1.68 per share (246,518) Cumulative preferred and preference stock * (77,517) Balance at December 31,1987 146,751,865 $ 1,467,519 $551,662 $ (47,700) $ 948,504 Issuance of common stock on conversion of convertit.le cumulative preferred sinck,5% % series 31,347 313 245 (12) Premium and expense associated with preferred and preference stock redeemed (Notes 1,9 and 10) (19,005) Net loss (378,826) Cash dividends declared Common stock - $1.68 per share (246,564) Cumulative preferred and preference stock * (48,287) Balance at December 31,1988 146,783.212 $ 1,467,832 8 551,907 8 (47,712) $ 254,922
- At established rate for each series.
(See accompanying Notes to Consolidated Financial Statements.)
$- I CONSOUDATED STATEMENT OF CUMULATIVE PREFERRED AND PREFERENCE STocx Date ofIssuance December 31 (Thousands) 1988 1987 Cumulative Preferred Stock - $100 Par Value Authorized - 9,000,000 shares; Outstanding - 3,455,629 and 3,693,710 shares, respectively (3,539,827 shares unissued)
Non-Redeemable Preferred Stock (Note 9) 5% % convertible series,106,549 and 112,130 shares, respectively October 1967 8 10,655- 8 11,213 9.32% series,499,080 shares October 1970 49,908 49,908 7.68% series,500,000 shares March 1971 in 000 50,000 7.45% series,600,000 shares November 1971 A 000 60,000 7.36% series,750,000 shares December 1972 75,000 75,000 Non-redeemable preferred stock expense (4,739) (4,751) Total Non-Redeemable Preferred Stock $ 240,824 8 241,370 Redeemable Preferred Stock (Note 10) 9.72% series,400,000 shares December 1978 8 40,000 $ 40,000 9.72% series,80,000 shares January 1979 8,000 8,000 9.00% series,284,000 and 301,750 shares, respectively October 1979 28,400 30,175 9.60% series,230,000 and 250,750 shares, respectively January 1980 23,600 25,075 13.50% series,200,000 shares (redeemed January 1988) December 1980 - 20,000 Redeemable preferred stock due within one year (6,250) (23,250) Redeemable preferred stock expense (1,083) (1,223) Total Redeemable Preferred Stock 8 92,667 8 98,777 Cumulative Preference Stock - $1 Par Value Authorized - 30,000,000 shares; Outstanding - 3,780,180 and 14,180,180 shares, respectively (26,219,820 shares unissued) Non-Redeemable Preference Stock (Note 9)
$2.28 series,2,000,000 shares December 1977 8 2,000 $ 2,000
$3.42 series,3,000,000 shares (redeemed January 1988) October 1982 - 3,000
$3.40 series, 2,250,000 shares (redeemed January 1988) December 1982 - 2,250
$3.12 series, 750,000 shares (redeemed January 1988) February 1983 -
750
$3.13 series, 2,000,000 shares (redeemed October 1988) May 1983 - 2,600
$3.24 series,1,400,000 shares (redeemed October 1988) September 1983 - 1,400 Premium on non-redeemable preference stock 48,000 288,000 Non-redeemable preference stock due within one year -
(150,000) Non-redeemable preference stock expense (2,109) (12,594) Total Non-Redeemable Preference Stock 8 47,891 $ 137,406 Redeemable Preference Stock (Note 10)
$2.75 series, 780,180 and 980,180 shares, respectively July 1975 6 780 $ 980
$2.75 series B, 1,000,000 and 1,200,000 shares, respectively December 1975 1,000 1,200 Premium on redeemable preference stock 42,724 52,324 Redeemable preference stock due within one year (7,500) (7,500)
Redeemable preference stock expense (2,174) (2,663)
'Ibtal Redeemable Preference Stock 8 34,830 $ 44,341 U
(see acemnpanying bees to consolidated Financial stater::cota
CONSOLIDATED STATEMENT OF L0so TEau DEBT Interest Rate
- December 31 (Thousands) 1988 1987 General and Refundir,g Mortgage Bonds Series Q, due 6/1/89 4%% 8 37,695 8 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 T, due 12/1/99 9 75,000 75,000 Series U, due 7/1/00 9.15 75,000 75,000 Series V, due 12/15/00 8.15 100,000 100,000 Series X, due 6/15/01 8% 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 5/1/04 9^/s 100,000 100,000 Series EE, due 12/15/98 11 % 25,000 30,000 Series 1111, due 7/15/06 10% 50,000 50,000 Series PP, due 6/15/08 9% 70,000 70,000 Series RR, due 10/15/08 9.8 70,000 70,000 Series SS, due 3/15/09 10% 110,000 120,000 Series UU, due 9/15/09 10% 100,000 100,000 1980 Series B, due 4/1/98 12 % 60,100 73,400 1985 Series A, due 5/1/92 11.9 35,000 35,000 1985 Series B, due 6/1/02 11.25 50,000 60,000 1986 Series A, due 4/15/16 9% 200,000 200,000 1986 Series B, due 8/15/16 9% 100,000 100,000 1986 Series C, due 12/15/16 9% 200,000 200,000 1987 Series A, due 2/15/17 9 300,000 300,000 1987 Series B, due 4/15/97 8% 175,000 175,000 i
1987 Series C, due 4/15/14 9% 225,000 225,000 1987 Series D, due 8/15/02 9% 250,000 250,000 1987 Series E, due 8/15/96 10 % 150,000 150,000 1987 Series F, due 6/15/93 9% 200,000 200,000 Less: Unamortized net discount (11,491) (12,050) Amount due within one year (56.845) (10,150) 83,199,459 $3,264,895 Tax Exempt Revenue Doad Obligations Installment Sales Contracts (Secured by corresponding amounts of General and Refunding Mortgage Bonds) City of Detroit, due 3/1/89- 6/1/94 6.96 % $ 13,335 8 15,295 City of flarbor Beach, due 3/1/89 - 3/1/05 6.90 3,265 3,340 City of River Rouge, due 2/15/89 - 10/1/02 6.94 46,560 48,030 City of Superior, due 2/1/89- 2/1/01 8.10 40,500 41,200 City of Trenton, due 3/1/89 - 3/1/05 7.04 5,945 6,080 County of Monroe, due 3/1/89 - 10/1/14 9.37 57,750 50,030 County of St. Clair, due 6/15/89 - 5/1/22 10.25 207,035 210,150 Less: Unamortized net discount (460) (498) Funds on deposit with Trustee (112) (105) Amount due within one year (11,980) (8,735)
$ 361,838 8 373,787 Installment Sales Contracts County of Monroe, due 5/1/89 - 12/1/16 10/69 8 314,230 8 315,170 Less: Amount due within one year (1,990) (940)
$ 312,240 $ 314,230 Loan Agreements Pollution Bond Refunding Projects, due 2/15/94 - 8/15/08 8.89 8 43,075 8 35,775 8 717,153 $ 723,792 Unsecured Promissory Notes Variable interest rates, due 10/22/89 - 6/8/90 9.10% 8 676,924 8 625,000 Pixed interest rates, due 6/28/90 - 1/13/93 11.13 170,000 230,000 Less: Amount due within one year (525,000) (150,000)
$ 321,924 8 705,000 Total Long 'Ibrm Debt (Note 11) 84.238,536 84,693,687
- Weighted average interest rate at December 31,1988 for Tax Exempt Revenue Bond Obligations and 1:nsecured Promissory Notes.
22 (See accompanying Notes to Consolidated Financial Statements.)
notes TO CONSOLIDATED FINANCIAL STATEMENTS Property, Depreciation, Retirement and Maintenance-Utility NOTE 1 properties are recorded at original cost. The annual provision Significant Accounting Policies for depreciation is calculated on the straight-line remaining life method by applying annual rates approved by the MPSC to the Industry Segment-The Detroit Edison Company (" Company") average of year-beginning and year-ending balances of is a regnlated public utility engaged in the generation, purchase, transmission, distribution and sale of electric energy. depreciable property by primary plant accounts. For major generating units, the first yearb depreciation expense is Regulation-The Company is subject to regulation by the calculated on a monthly basis commencing with the month in Michigan Public Service Commission ("MPSC") and the Federal which the unit is placed into commercial operation. Annual Energy Regulatory Commission ("FERC") with respect t depreciation provisions expressed as a percent of average accounting matters and maintains its accounts in accordance depreciable property were approximately 3.1% for 1988 and with Uniform Systems of Accounts prescribed by these agencies. 3.3% for 1987 and 1986. In general, the cost of properties As a regulated entity, the Company meets the critena of retired in the normal course of business is charged to Statement of Financial Accounting Standards ("SFAS") No. accumulated depreciation. Expenditures for maintenance and 71 " Accounting for the Effects of Certain Types of repairs are charged to expense, and the cost of new property Regulation." This accounting standard recognizes the installed, which replaces property retired, is charged to ratemaking process which results in differences in the property accounts, application of generally accepted accounting principles between Income 7h.res-For federal income tax purposes, the Company regulated and non-regulated businesses. Such differences concern mainly the time at which various items enter into the computes depreciation using accelerated methods and shorter determination of net income in order to follow the prir.ciple of depreciable lives. Deferred income taxes are provided for timing matching costs and revenues. differences between book and taxable income to the extent authorized by the MPSC. Investment tax credits utilized are Principles Applied in Consolidation-The Consolidated deferred and amortized cver the estimated composite service Financial Statements include the accounts of all subsidiary life of the related property. See Note 7. companies, all of which are wholly-owned. AIIowanceforIhnds Used During Construction ('AFUDC")- Revenues-Effective January 1,1988, the Company changed its AFUDC, a non-operating non-cash item, is defined in the FERC method of accounting for revenues to record an estimate of Uniform System of Accounts to include "the net cost for the revenues for electric and steam heating service rendered and period of construction of borrowed funds used for construction unbilled at the end of each month in order to better match purposes and a reasonable rate on other funds when so used." revenues with expenses. Prior to January 1,1988, the Company AFUDC involves an accounting procedure whereby the recorded revenues as customers were billed on a monthly cycle approximate interest expense and the cost of other (common, basis. Under the prior method the unbilled revenues for service preferred and preference shareholders equity) funds applicable rendered to customers after meter reading dates through the to the cost of construction are transferred from the income end of the month became part of operating revenues in the statement to construction work in progress in the balance sheet. following month. See Note 5. This accounting procedure is intended to remove the effect of Revenues for the 1988,1987 and 1986 periods include the the cost of financing construction activity from the income recovery of fuel and purchased power costs, subject to annual statement. The cash recovery of AFUDC, as well as other costs Power Supply Cost Recovery ("PSCR") reconciliation hearings of construction, occurs only when completed projects are placed conducted by the MPSC. Any over or under recovery of these in service and related depreciation is authorized to be recovered costs was recorded in the Consolidated Balance Sheet pending through customer rates. See Note 3. the results of such hearings. The MPSCh order of December 27, The Company capitalized AFUDC at 10.3% in 1986 and 1987, 1988 changed this procedure by temporarily suspending the and 10.18% in 1988. In accordance with MPSC requirements, PSCR Clause effective January 1,1989 through December 31, the composite AFUDC rate is equal to the overall rate of return 1992. authorized b electric rate orders. Effective January 1,1989, IYoperty 7h.res-Effective January 1,1988, the Company the MPSC reduced the overall rate of return to 9.65% . In changed its method of accounting for property taxes so that accordance with FERC accounting requirements, the such taxes are accrued monthly during the fiscal period of the Consolidated Statement of Cash Flows is not adjusted to remove taxing authority for which the taxes are levied. This is the borrowed funds component of AFUDC of $3.2 million,
$133.2 million and $129.1 million for 1988,1987 and 1986, considered the most acceptable basis of providing for property taxes. Prior to January 1,1988, the Company accrued property taxes monthly during the calendar year ending on the assessment date (December 31). See Note 5.
23
NOTES To CoNsouDATED FINANCIAL STATEMENTS respectively. Total APUDC for both borrowed and other funds NOTE 2 amounted to $4.9 million, $269.7 million and $246.2 million for - - 1988,1987 and 1986, respectively. AFUDC amounted to 57% Fenni 2 and 65% of Earnings for Common Stock for 1987 and 1986, Project Costs-Fermi 2, a nuclear generating unit having a respectively. capability rating of 1,093 MW, began commercial operation on January 23,1988. This unit represents approximately 31 % of Deferred fermi 3 Depreciation and Return-An MPSC. the Companyh total assets,15% of total operation and authorized phase-in plan for Ferm12 provides for gradual rate maintenance expenses and 10% of the Companyb summer net increases in the early years of plant operation rather than a one-time substantial rate increase which would be provided by rated capability. conventional ratemaking. In 1988, in accordance with the At December 31,1988, Wolverine Power Supply Cooperative, Ferm12 rate phase-in plan which was effective on January 24, Inc. (" Cooperative") held an 11.198% interest in the facility. 1988, the Company recorded non-cash income items of deferred The Cooperative originally purchased a 20% undivided depreciation of $44.1 million and deferred return of $134.3 ownership interest in Ferm12. Thereafter, the Cooperative million. Deferred depreciation is that portion of depreciation investment in Ferm12 was limited to $426.9 million. During the expense not covered in current rates. Deferred return is the period July 1985 through January 23,1988, the Company accrual of carrying charges on Fermi 2 costs not covered in purchased portions of the Cooperative interest in Fermi 2 for current rates. See Notes 3 and 5. an aggregate price of $206.6 million. Accretion Income-In accordance with SFAS No. 90, the The Company has agreed to purchase the Cooperative Company records a non-cash return (accretion income) on remaining Fermi 2 ownership interest in January 1990. The certain plant costs which have been discounted to recognize an purchase price will equal the amount of the Cooperative Fermi MPSC disallowance of a return on the investment. In 1988, the 2-related debt less $200 million, which amount is expected to Company recorded $17 million of net after-tax accretion aggregate approximately $513 million. The Company expects to income. See Note 4. Issue its General and Refunding Mortgage Bonds as payment of the purchase price, and such Mortgage Bonds will be held by the Capitalization - Discount, Premium and Erpense-The United States Rural Electrification Administration, guarantor of discount, premium and expense related to the issuance of long- the Cooperative Fermi 2-related debt. The Mortgage Bonds will term debt are amortized over the life of each issue. Capital stock bear interest at the rate carried by the Cooperative Fermi 2-premium and expense related to redeemed preferred and related debt, which is approximately 8 % . The MPSC has preference stock is written off first against the accumulated net authorized the issuance of the Mortgage Bonds associated with gain on reacquired capital stock included in premium on the 1990 Fermi 2 purchase. common stock and subsequently against retained earnings used in the business. See Notes 3 and 4 for a discussion of the MPSCh treatment of Fermi 2 project costs of $4.858 billion (including the purchase of Unrecovered Plant Costs-Amortization of unrecovered plant the Cooperative interest in 1990). costs commences when recovery of such costs is authorized by accounting and ratemaking orders of the MPSC. No return on 7Fsting and Licensing-The Nuclear Regulatory Commission investment is provided for unrecovered plant costs. See Note 4. ("NRC") maintainsjurisdiction over the construction, licensing l and operation of Fermi 2. In November 1988, the sixth and final l The Company is amortizing costs of $71.3 million associated with Greenwood Unit Nos. 2 and 3 over the period 1983-1993. test of the required NRC test conditions was satisfactorily The unamortized balances at December 31,1988 and 1987 were completed at Fermi 2.
$25.3 million and $37.4 million, respectively. NRC regulation of nuclear plant licensees includes a Systematic Assessment of Licensee Performance ("SALP")
l Leases-See Note 12.
- under which key areas of nuclear plant performance (both j Employes' Retirement Plan and Other Postretirement mechanical and personnel related) are reviewed annually. In the l Benefits-See Note 14. July 1988 SALP report for Ferm12 (covering the period April 1, l 1987 through March 31,1988), the NRC was critical of the Companyh performance in certain significant areas, but noted improving trends. In this report, the NRC emphasized the need for improved management and personnel performance and 24
. __ -r - ame -
NOTES To CONSOUDATED FINANCIAL STATEMENTS noted that Fermi 2 is classified by the NRC as a plant requiring Decommissioning-The NRC regulates nuclear plant continued close monitoring. The NRC also advised the Company decommissioning. The MPSC hasjurisdiction over the recovery that the next SALP reporting period had been reduced to a nine. of costs of decommissioning nuclear power plants. In January month period ending December 31,1988. It is expected that the 1987, the MPSC issued an order authorizing the establishment of next SALP report will be issued in the first quarter of 1989. a $100 million External Trust Fund (in 1987 dollars) to finance the decommissioning of Fermi 2. The order approves surcharges In addition to the shortened SALP review period, a diagnostic n customer bills commencing with the commercial operation of . , evaluation team from the NRCh Office for Analysis and Fermi 2 and extending over the life of the plant. The Company is Evaluation of Operational Data issued a report on Ferm12 currently collecting estimated Ferm12 decommissioning costs , operations on November 16,1988. The diagnostic evaluation through a rate surcharge under which approximately 82.6 team concluded that the actions being implemented at Fermi 2 nuui n is c llected annually. Effective m July 1990, an NRC rule generally address the causes for performance problems while will require decommissioning funding based upon a site-specific maintaining an acceptable level of operational safety, noted estimate r a predetermined NRC formula. The Company recent improvements in Fermih performance and capabilities believes the currently authorized surcharge will not provide and acknowledged that the essential elements were in place to adequate funding under the new NRC rule and accordingly the achieve future improvements. However, the report detailed the Company will be required to fund additional mimmal amounts, following eight areas as being in need of increased management attention: (1) achieve organizational stability as soon as Nuclear het Disposal Costs-The Company has a contract with possible, (2)!mprove effectWeness of first and second line the l'nited States Department of Energy (" DOE") for the future supervisors, (3) improve organizational climate, (4) fix storage and disposal of spent nuclear fuel from Fermi 2. Under fragmented and overlapping engineering support the terms of the contract, the Company makes quarterly responsibilities, (5) fix known equipment problems, (6) set payments to the DOE based upon a current fee of 1 mill per priorities according to plant needs, (7) allocate resources to kilowatthour applied to the Fermi 2 net generation. The spent selected areas and better utilize existing resources, and (8) nuclear fuel disposal cost is included as a component of the improve effectiveness of operator training programs. The report Companyb nuclear fuel expense. noted that the key elements of the Ferm12 new management Contingencies-Ownership of an operating nuclear generating team are q " }ly in place and that this team has a good unit subjects the Company to significant additional risks. understands he underlying causes of the Fermi 2 Nuclear plants are highly regulated by a number of performa, Mems. As required by the diagnostic governmental agencies concerned with public health and safety evaluation, on January 17,1989, the Company submitted a plan as weH as the environment, and consequent!y, are subject to for improvement at Ferm12 to the NRC. greater risks and scrutiny than conventional fossil-fueled plants. From time to time the NRC considers taking enforcement or The Company is insured as to its interest in Ferm12 under other action against the Company as a result of alleged techmcal elegovided by American Nuclear and procedural violations at the plant. Enforcement action has g g,,,,) and Nuclear Electric Insurance Limited resulted in fines levied against the Company. Through December
.ER"). Under the ANI insurance policies, $500 million of 31,1988 the NRC has levied fines against the Company totaling c mp site primary coverage and $250 million of excess coverage
$800,000 (8200,000 in 1988, $175,000 in 1987 and $425,000 in are pr vided for decontamination costs, debris removal and 1986)' repair and/or replacement of property. The Company pays During the period from commercial operation through annual premiums for this coverage and is not liable for December 31,1988, Fermi 2 has been available for system retrospective assessments. Under the NEIL insurance policy, power generation approximately 57.2% of the time. The planth $825 million of excess property damage insurance is provided.
capacity factor (measured by the amount of power produced as The combined limits provide total property damage insurance of I compared to full power capability) was approximately 45% - $1.575 billion ($500 million of composite primary coverage, Fermi 2 plant availability and capacity were adversely affected $250 million of excess coverage and $825 million of cdditional by both scheduled (7 weeks) and forced (13.8 weeks) shutdowns excess coverage). In addition, the Company has obtained and power level restrictions necessitated by mechanical coverage for replacement power costs associated with accidental difficulties. plant outages through NEIL. Under the NEIL coverages, the Company could be liable for maximum retrospective assessments of up to approximately $12 million per year if losses were to exceed accumulated funds available to NEIL. 25
notes To CONSOLIDATED FIN ANCIAL STATEMENTS As required by federal law, the Company maintains public Details of the MPSCh mq}or electric rate orders during the liability insurance for a nuclear incident. Effective October 1, 1983-1988 period are discussed below. 1988, the Company increased its primary limit of liability 1983 Rate Request-in 1983, the Company requested the MPSC provided by private insurance from $160 million to $200 authorize an annual rate increase of $969 million for general million. Further, under the Price-Anderson Amendments Act of c st increases for the 1984 test year and for revenues coincident 1988, deferred premium charges of $63 million may be levied with the commercial operation of Belle River Unit Nos. I and 2 against each licensed nuclear facility, but not more than $10 and Fermi 2. million per yearper facility. On December 31,1988 there were 113 licensed nuclear facilities in the United States. Thus, On August 1,1984, Belle River Unit No. I commenced deferred premium charges in the aggregate amount of commercial operation and, pursuant to an MPSC order, the approximately $7.1 billion could be levied against all owners of Company began collecting rates designed to produce an increase In annual revenues in the amount of $182.9 million. On July 9, licensed nuclear facilities in the event of a nuclear incident. 1985, Belle River Unit No. 2 commenced commercial operation, Accordingly, public liability for a single nuclear incident is currently limited to approximately $7.3 billion ($200 million of in a July 16,1985 order, the MPSC disallowed $96.9 million of Belle River project costs and granted the Company increased private insurance and $7.1 billion of deferred premium annual revenues in the amount of $99.3 million. On September charges). 17,1985, the Ingham County Circuit Court issued an injunction
'Ib the extent that insurable claims for replacement power, all wing the Company to collect an additional $12.1 million in property damage, decontamination, repair and replacement and annual revenues t c mpensate for $60.9 million of disallowed other costs and expenses arising from a nuclear incident at Belle River project costs.
Permi 2 exceed the policy limits of insurance, or to the extent such insurance becomes unavailable in the future, the Company On April 1,1986, the MPSC issued an order which disallowed will retain the risk ofloss. Although the Company has no reason 8397 million of Ferm12 project costs ($327 million applicable to to anticipate a serious nuclear incident at Fermi 2, if such an the Companyh portion of the plant) Lased on a 1983 cost estimate of $3.075 billion which subsequently increased. This incident did happen it could have a material but presently undeterminable adverse impact on the Companyb financial order established a five-year $404.2 million rate phase-in plan for Fermi 2 which became effective on January 24,1988 position, following attainment of coramercial operation. In addition, the April 1,1986 order required the removal of the Companyb 795 MW oil-fueled Greenwood Unit No. I from rate base, upon the commercial operation of Fermi 2, until the conclusion of NOTE 3 - subsequent proceedings before the MPSC to determine the need Rate Matters for this unit for reliability or economic reasons. General--The Company is subject to the general regulatory See Note 4 for a summary of the manner in which the jurisdiction of the MPSC, which, from time to time, issues la Company accounted for the disallowances discussed above, orders pertaining to the Companyh conditions of service, rates and recovery of certain costs including the costs of generating 7hz Reform Act of1986-On September 1,1987, the MPSC facilities, reduced the Companyb electric rates by $66 million annually (based on a 1986 test period) for the effects of the federal Tax Revenues collected by the Company commencing on January Reform Act of 1986 ("TRA"). 1,1989 are authorized by the MPSCh order of December 27, 1988. The order approved a negotiated settlement entered into 1988 Rate Order-In 1987, the Company requested increased by the Company, the MPSC staff and major interveners rates from the MPSC in the annual amount of $298 million for a (including the Michigan Attorney General)in the Companyb $1.7 billion increase in Fermi 2 project costs from the 1987 request for increased rates. All matters pending with Companyb 1983 rate request. The proceeding also included a respect to costs associated with Belle River Unit Nos. I and 2 request that the MPSC authorized phase-in plan for Fermi 2 be l and Fermi 2, as well as the treatment of the costs of Fermi 2 and modified to comply with SFAS No. 92. Belle River capacity buybacks during tl'e period January 1,1989 On Decen ber 27,1988, the MPSC approved a settlement through December 31,1993, have been aadressed in the agreement negotiated by the Company with the MPSC staff, December 27,1988 order. The order has been appealed by an Michigan Attorney General and other interveners involved in association of community action agencies which has not yet the 1987 proceeding. The settlement agreement as contained in specified its grounds for appeal' the MPSCh December 27,1988 order is discussed below. 26
h - YM notes To CONSOLIDATED FINANCIAL 8TATEMENTS The 1988 order increases the Companyh base rates by $29.5 3. og, .n,w million annually, effective January 1,1989, over the previously Base Rate Rate Annual cumulauve Y I"*** *) Ch*"*04 ^"""" ^"""" approved Ferm! 2 phase-in rate increases. The order indicated that an overall rate of return of 0.65%, which reflects a return s s s on conunon equity of 13% (as compared to the prior 14%) and a $8, 6sj g 9 y ) common equity capital structure ratio of 34% , isjust and 1990 76.8 13.4 90.2 263.3 reasonable. In addition the December 27,1988 MPSC order (1) 1991 81.9 7.7 89.6 352.9 amended the MPSCb authorized phase-in plan for Perm 12 in 1992 102.5 7.6 110.1 463.0 1993 - 39.1 39.1 602.1 order to comply with the provisions of SPAS No. 92, (2)
"" (*) '# I'I (*)
transferred the collection of $150 million of revenue ($151.7 million MPSCjurisdictional) from the PSCR Clause to base rates, (a) The s68.4 million increase became effective on January 24,1988 with other effective January 1,1989, for capacity buybacks from the increases scheduled to become effective on January l of each applicable year as authorized by the MPSCh December 27,1988 order. Companybjointly-owned Fermi 2 and Belle River Power Plants, (b) Principally jurisdictional portion of utilization of Fermi 2 and Beue River capacity (3) transferred the $12.1 million annual surcharge ordered by buybacks. These are known future expense reductions which by themselves would
' d me the Ingham County Circuit Court as a result of the Companyb (,) $8 N*n ,cu ,e {u r heamended e inse-in plan will, under the appeal of the Belle River rate order to base rates effective MPSCh December 27,1988 order, be included as a cost of service component in tt January 1,1989 and (4) suspended the PSCH Clause for the gnauon g ust,mentjn19 t d endi d "
4'"gMtN$aN'!N"tm four-year period January 1,1989 through December 31,1992. The order provides for a five-year moratorium on base rate Under the amended Fermi 2 phase-in plan, the MPSC granted changes, through December 31,1993, with exceptians for $527.1 million of rate increases for Ferm12 to be phased into the previously authorized rate increases and for federal income tax Companyh rates over a seven-year period, commencing with the law or regulation changes, new acid rain legislation and new commercial operation of the unit in 1988. During the phase-in cogeneration legislation that would increase or decrease costs by period, the Company will record related non-cash items of
. 85 million (1988 dollars a@usted by the Consumer Price Index, income consisting of deferred depreciation and deferred return
" CPI") or more annually. A new expense stabilization totaling $500.5 million (annual deferrals for the first five years procedure, applicable to approximately $750 million of of commercial operation of Fermi 2 as follows: $178.4 million in Company operation and maintenance expenses, permits rates to 1988, $142.4 million in 1989, $104.2 million in 1990, $63.2 be a@usted for the effects of inflation. Under this procedure, a million in 1991 and $18.3 million in 1992), with these deferred surcharge or credit will be implemented beginning on January amounts amortized to operating expense as the cash recovery of l 1,1990 to offset annual increases or decreases in operation and the deferred amounts is realized through revenues during the
. maintenance expenses during the first four years of the five- period ending December 31,1998.
year base rate moratorium period ending December 31,1993. The December 27,1988 order provided that $700 million of This surcharge or credit will be a@usted based on the annual Ferm12 costs would be included in rate base for ratemaking change in the CPI for the preceding 12-month period October 1 purposes, $700 million would be written off by the Company, through September 30, as follows: and $300 million would be amortized ratably over 10 years CPI Chenge commencing January 1,1989 with no return on the investment. AWustment to Daae (See Note 4.) 2 8 0 of change in excess of 2% ompa nmMin b Mhed 4M 100% of change in excess of 8% plus 4.8% unMs excM&m radaMW bemM, M More then h% (See Note 4.) The purchase by the Company of the Cooperative ownership Set forth below is a summary of the Companyh scheduled rate interest in Ferm12, estimated at $513 million and which increases and other rate changes for the period 1988-1994. This becomes effective in January 1990, is to be treated as a summary includes the increases authorized as part of the Fermi regulatory asset with a 19-year principal amortization and 2 phase-in plan. associated interest at 8% . The debt incurred in connection with this purchase and the associated interest are to be excluded from the calculation of the Companyb overall return on investment. l l 27 l
I m . 3 i I notes To CONSOLIDATED FINANCIAL STATEMENTS l l i During the period January 1,1989 through December 31, Nors4 2003., the order established a cap on Ferm12 capital additions of Accounting for Disallowances of Plant Costs
$25 million per year, cumulative, adjusted by the CPI, a cap on Ferm12 non-fuel operation and maintenance expenses at the In December 1986, the Financial Accounting Standards Board level presented by the Company in its economic study provided ("FASB") issued SFAS No. 90, " Regulated Enterprises-in the rate case, and a capacity factor performance standard Accounting for Abandonments and Disallowances of Plant I based on a three-year rolling average commencing in 1991. For Costs." Among other things, SFAS No. 90 requires any !
a major capital investment of $200 million or more, the disallowed costs of a recently completed plant to be recognized Company shall apply to the MPSC for prior approval. If as a loss when such a disallowance becomes probable and a approved, and if found to be reasonable and prudent, the major reasonable estimate of the disallowance can be made. If part of investment will be included in rate base. Under the performance the cost is disallowed indirectly (such as a disallowance of standard, effective January 1,1993, a disallowance of net return on investment on a portion of the plant), an equivalent incremental replacement power cost will be imposed for the amount of cost shall be deducted from the reported cost of the amount by which the Fermi 2 three-year rolling average plant and recognized as a loss, capacity factor is less than the greater of either the average of In 1988, the Company adopted SFAS No. 90 and recorded net the top 50% of U. S. boiling water reactors or 50% . after-tax losses totaling $968 million, or $6.60 per share (8344 WM%e order restricts the Company's ability to have million, or $2.34 per share, cumulative effect at January 1, certain future costs reflected in rates, the Company believes it 1988 for years prior to 1988 and a $624 million, or $4.26 per will be able to operate effectively within the constraints of the share, charge to income in 1988). These losses reflect the order without any significant adverse effects on the Company, MPSCh ratemaking treatment for costs incurred in the e nstruction of the Belle River and Permi 2 power plants and the The order also provides that if nuclear operations at Ferm12 removal of Greenwood Unit No. I from rate base, as shown permanently cease, the remaining net rate base investment amount shall be removed from rate base and amortized in rates, without return, over ten years with such amortization not to exceed $290 million per year. In this event, unamortized cost, 7 axe, los, amounts of deferred depreciation and deferred return, recorded (villiou) in the balance sheet under the phase-in plan prior to the Fermi 2-No recove or return, removal of Ferm12 from rate base, will continue to be E','ceMrIN8$s 00Mi$o"n)*0PSC amortized, with a full return on such unamortized balances, so orders 8(1,027) 8242 8(785) that all amounts deferred are recovered during the period Ferm12-Recovery (8300 million) I '*" "'"# ending no later than December 31,1998, Also, amortization in i((s'9 Oi[h n rItIi, perIe"ce*2b i-rates of the $300 million and $513 million investments in Fermi 1988 MPSC order (141) 48 (93) 2, as described in the preceding paragraphs, would continue. t 1-G,reegwd 9 m v,ed A summary of the ratemaking treatment of the Company's gnuary 93 1 l 8No$"br*N'm Fermi 2 project costs (including the purchase of the %86 and December 1988 MPSC Cooperative's interest in 1990) is as follows: orow (153) 52 (101) Other-Belle River Power plant costa disallowedin 1985, the abandonment Fermi 2 Project Costs of Greenwood Nuclear l' nit Nos. 2 (Villiow) and 3in 1980(see Note 1), and In rete base, with recovery and return 43,018 other-net (9) 3 (6) Amortized over 10 years with no return 300 Total 8(1,330) 8345 8(985) Amortize:i over 19 years, with associated interest 513 Less: Accretion income resulting from Written-o'f by the Company (8327 million disallowed les due to discounting 26 (9) 17 in MPSC order of April 1986 and $700 million Net Total 8336 8(1.304) 8(968) disallowed in MPSC order of December 1988) 1,027
'Ibtcl 44,858 Charged to:
Current year 1988 8 (849) 8225 8(624) Cumulative effect foryears prior See Note 4 for a summary of the manner in which the to 1988 (455) 111 (344) Company accounted for the disallowances shown above. Net Total 8(1,304) 8336 8(968) 28
i
$1l k notes To CONSOLIDATED FINANCIAL STATEMENTS l 1
I i Also, in accordance with SFAS No. 90, the Company did not Supplementary cash flow information is set forth below: capitalize $18 million of AFUDC on Fermi 2 during the period , I""" l l* i January 1,1988 through commercial operation an January 23, p IOOO- Interest paid (excluding interest capitalized) 8466,721 8282,451 8281,168 Income taxes paid 10,813 59,757 18,C95 The losses for Greenwood Unit No.1, the abandoned w capaanease sugauons 57,638 4 % 672 22,924 Greenwood Unit Nos. 2 and 3, and for a portion of Fermi 2 are recorded as a discount (reduction) of the Company's investment For purposes of the consolidated financial statements, the in these units. These net after-tax losses, due to discounting, Company considers investments purchased with a maturity of total $198 million and such amount will be restored to net three months or less to be temporary cash investments. Income over the period 1988-1998 as the Company recordt a non-cash return (accretion income) on its investments in these SFASNo. 96-See Note 7.
""It8' Unbilled Revenues- As discussed in Note 1, effective January 1,1988, the Company changed its metho<l of accounting to record an estimate of revenues for electric and steam heating serv!ce rendered and unbilled at the end of each month. The Nors5 effeet of the change in accounting was to increase earnings for Accounting Changes common stock by $82.4 million ($0.56 per share) of which an Increase of $61.4 million (80.42 per share) represents the SFASNo. 87-See Note 14. cumulative effect of the change at January 1,1988, and an SEASNo. 90-See Note 4. Increase of $21.0 million (80.14 per share) represents an increase in earnings for the year 1988.
SEASNo. 93-In August 1987, the FASB issued SFAS No. 92,
" Regulated Enterprises - Accounting for Phase-in Plans," PropertB hres-As discussed in Note 1, effective January 1, which permits the capitalization of costs deferred for future 1988, the Company changed its method of accounting for recovery under a phase-in plan if certain requirunents are met. property taxes so that such taxes are accrued monthly during Although SFAS No. 92 became applicable to the Company at the the fiscal period of the taxing authority for which the taxes are time Fermi 2 achieved commercial operation, the Company levied. The effect of the change in accounting was to increase delayed adoption, as permitted, because of the reasonable earnings for common stock by $165.6 million ($1.13 per share) possibility that the MPSC would modify the phase-in plan of which an increase of $139.3 million (80.95 per share) i beginning in its second year to comply with the requirements of represents the cumulative effect of the change at January 1, SFAS No. 92, IkDecember 1988, the MPSC amended the Fermi 1988, and an increase of $26.3 million (80.18 per share)
( 2 phase-in plan to so comply and the Company then adopted represents an increase in earnings for the year 1988. SFAS No. 92. The Company has recorded non-cash items of
, N fobiWidows pro forma income consisting of deferred Ferm12 depreciation and return amounts assuming that the Company applied accounting commencing with the commercial operation of Fermi 2 and changes for SFAS No. 90, unbilled revenues and property taxes
, continuing under SFAf, No. 92. Accordingly, the adoption of j= '"l' ^* SPAS No. 92 has had no effect on the Company's results of operation in 1988. See Notes 1 and 3. l 1988 1987 1986 STASNo. 95-In November 1987, the FASB issued SFAS No. As naported; frAousands) l l 95, " Statement of Cash Flows." The statement, which is Na Income Gm) $(378,826) 8554,974 8477,M j Earnings Om)Fodommon Stock 8(428,583) 8476,734 8378,292 l effective for 1988, establishes standards for cash flow reporting Earnings (Loss)Per Share 4 (2.92) 8 3.25 4 2.58 and requires a statement of cash flows in place of a statement of changes in financial position. The Company adopted the 1986 i 1988 1987 I standard in 1988 and reclassified certain items in prior years for Pro Forma Amounts: (Thousands) comparallVe purposes- Net income (l.oss) 8(235,334) 8529,414 8175,175 Earnings (Im)For Common Stock $(285,091) 8451,174 8 76,372 Earnings (Im) Per Share 8 (1.95) 8 3.07 8 0.52 29
e 1 y NOTES To CoNsouDATED FINANCIAL STATEMENTS NOTE 6 Emnif-From January 24,1988, the effective date of the rate increase associated with Ferm12, through the January 1990 Jointly-Owned Utility Plant I planned purchase date, the Company will purchase 100% of the The Companyh portion of jointly-owned utility plant is as Cooperative Fermi 2 capacity and energy entitlement. The follows: cost for the buyback of power will be based on the Cooperative total debt service (interest and amortization of principal) and Ludington certain other costs such as fuel and operation and maintenance Pumped expenses. Buyback payments to the Cooperative were $88.8 Fermi 2 Belle River Storage million in 1988 and are currently estimated at $99 million for in-service date 1988 1984-1985 1973 1989. In addition, the Cooperative will continue to purchase Capacity and energy from the Company and such current I vestn ent ( i t on ) 41.015.6 s 68 4 Accumulated depreciation (minions) 8 78.8 8 137? 8 51.0 purchases of 12.5 MW for 1989 will increase annually to 135 (1) The Companyi undivided ownership interest is 62.78% in l' nit No. L 81.39% of the portion of the facilities applicable to Belle River used jointly by the Belle River year 2025. and St. Clair Power Plants,49.59% in certain transmission lines and at least 70% in racilities used in common with t' nit No. 2. Ludington Pumped Storape-Operation, maintenance and other expenses of the Ludington Pumped Storage Plant are shared by the Company and Consumers Power Company Belle River-In 1983, the Company sold to Michigan Public (" Consumers")in proportion to their respective interests in the Power Agency ("MPPA) an undivided ownership interest in plant. (See Note 13.) Belle River Unit No. I and facilities used in common by Belle River Unit No. I and Belle River Unit No. 2, and certain other related facilities. MPPA is entitled to 18.61% of the capacity and energy of the NOTE 7 entire plant and is responsible for the same percentage of the income Taxes planth operation and maintenance expenses and capital improvements. The Company is obligated to provide MPPA with 'Ibtal income tax expense as a percent of income (loss) before backup power when either unit is out of service. tax was less than the statutory federal income tax rate for the f 11 wing reasons: The Company began contractual purchases of MPPAh capacity and energy entitlement at the commercial operation i date of Unit No. I and will continue to do so for up to eleven P" cent ommme clus) Before Tax j I"8 "7 3"' years, initially at 100% through 1990, with declining amounts thereafter through 1994. The cost for the buyback of power is Statutory income tax rate (34.0)% 40.0% 46.0% bar~1 on MPPAh plant-related investment in the Belle River Disallowed plant costs and abandonments 24.2 - - d Fund 2 depweladon and wtm - prc,,oct, interest costs incurred by MPPA on their original g
)
project financing plus 2.5% , and certain other costs such as Indirect construction costs (0.6) (2.3) (3.1) depreciation and operktion and maintenance expenses. Buyback Investment tax credit-amortized (2.0) (1.3) (1.4) payments to MPPA were $72.9 million, $73.5 million and $72.6 Depreciation s.6 2.6 3.4 million for 1986,1937 and 1988, respectively, and are currently other-net o.5 1.4 (2.6) estimated at $72.1 million, $70.1 million, $62.2 million, $54.6 meetiveinmme tax rate (21.5)x 22.3 % 19.8 % ; million and $13.5 million for 1989,1990,1991,1992 and 1993, I l respectively. (See Note 3.) l i l 30
. o j notes To CONSOLIDATED FINANCIAL STATEMENTS I Components of income taxes were applicable to the following: plant be amortized to income over a five-year period rather than over the life of the plant. Such credits to income amounted to
$24 million for each of the years 1988,1987 and 1986.
1988 1987 1986 U'ha3ad3) The amended Fermi 2 phaa-in plan requires the Company to record additional deferred income tax expense related to Iu$rIn! s 39,199 s 62,267 s 18,304 deferred depreciation totaling $33.5 million ($11.8 million in Deferrenet Borrowed funds component of AITDC 21,656) (20,609) 1988, $9.4 million in 1989, $6.9 million in 1990, $4.2 million in {23,868) ' 4'4 1991 and $1.2 million in 1992), with these amounts amortized ke$t es (N N) Unbilled revenues (12,269) (6,790) - to income over the period ending December 31,1998. Alternadve minimum tax 667 (69,356) - Ferm12 capitalized labor and expenses 2,197 42,685 - The cumulative net amounts of income tax timing differences
"'
- I- ) '
for which deferred taxes have not been provided at December No'ruz*ti nIf pIpeEy$osses and unrecovered plant costs (2,464 (3,671) (4,823) 31,1988 and 1987 are $2.2 billion and $2.8 billion, respectively. 67 69 45,X be recorded when such taxes become payable and are recovered jnvestment tax credit-net Utilhed (7,140) 36,479 71,790 from customers. Amortized (0.631) (9,003) (8.507) (16,771) 27,476 63,283 Investment tax credit carryforwards of approximately $138 Estal 89,944 159,488 126,696 million are available to offset future yeard tax liabilities as Otler income and deductions permitted by law. Such credits, if unused, expire over the period b"erNd-net N) ($h hj$ 1998 through 2002. Total 769 (663) (8.827) In December 1987, the FASB issued SFAS No. 96, Current year disallowed plant costs " Accounting for Income Taxes," The Company is currently rbnet Investment tax credit-amorthed ( (14.324) h - I reviewing the statement and, as permitted, anticipates adopting the provisions of SFAS No. 96 in 1990. SFAS No. 96 establishes Total (225,171) - - financial accounting and reporting standards for the effects of Cum uveeffectof accountingchanges income taxes that result from an enterprises activities during j Disallowed plant costs and the current and preceding years. It requires an asset and t nb$b"rIv""nues ji 101,306
- : liability approach for financial accounting and reporting for income taxes. When SPAS No. 96 is adopted, the Company will Property taxes - -
7btal 3M61 - - be required to recompute its tax liability at the then current tax f melincome taxes s(103,497) s158,825 sil7,769 rate and adjust the Accumulated Deferred Income Tax asset and i liability amounts in the Consolidated Balance Sheet. in addition, SFAS No. 96 requires that the Company record in accordance with MPSC requirements, deferred income tax additional deferred income taxes for temporary differences not accounting is not followed for the borrowed funds component of previously recognized. 'lbmporary differences include the timing AFUDC and indirect construction costs relating to Fermi 2, differences discussed above ($2.2 billion and $2.8 billion at interest on nuclear fuel financing (see Note 12) and certain December 31,1988 and 1987, respectively) and all other other current income tax deductions. existing differences that will result in taxable or deductible In July 1985, the MPSC ordered that, for accounting and amounts in future years. SFAS No. 96 requires the recognition ratemaking purposes, the accumulated deferred income taxes of an asset to the e:: tent that such additional deferred income l rehted to indirect construction costs and the borrowed funds taxes are associated with probable future revenue from component of AFUDC for Belle River Unit No. I and common customers. The Company expects that when SFAS No. 96 is l ! adopted, it will not have a material effect on net income. 31
m NOTES To CONSOUDATED FINANCIAL STATEMENTS - Nots 8 On January 15,1988, the Company redeemed til of the Short 'Ibrm Credit Arrangements and Borrowings utstanding shares of certain series ofits 81 par value Preference Stock, as follows: 3,000,000 shares of $3.42 Series As described below, at December 31,1988, the Company had at $27.35 per share,2,250,000 shares of $3.40 Series at 827.35 total short-term credit arrangements of $453.1 million under per share and 750,000 shares of $3.12 Series at $27.00 per chich $229.3 million of borrowings were outstanding. share. A total of $163.8 million was recorded in the Companyb The Company had bank lines of credit of $300.1 million, 1987 Consolidated Balance Sheet as amounts due within one substantially all of which had commitment fees in lieu of year. compensating balances. Commitment fees paid in lieu of On October 15,1988, the Company redeemed 2,600,000 compensating bank balances for 1988 were $1.1 million. shares of $3.13 Series and 1,400,000 shares of $3.24 Serier, $1 Substantially all borrowings are at rates below the banks' prime par value Preference Stock, constituting all of the outstanding lending rates. shares of both issues, at a price of $27.17 and $27.25 per share, The Company has a nuclear fuel financing arrangement under respectively. chich Renaissance Energy Company (" Renaissance"), an The following series of Preferred and Preference Stock, unaffiliated company, raises funds, subject to the satisfaction of which are not redeemable pursuant to sinking fund certain conditions, to purchase nuclear fuel and to lend to the requirements, are redeemable solely at the option of the Company, pursuant to a separate Loan Agreement, for general Company at stated per share redemption prices, plus accrued corporate purposes. Renaissance may issue commercial paper or dividends: borrow from participating banks on the basis of promissory notes. 'Ib the extent the maximum amount of funds available to Renaissance (currently $400 million)is not needed by Non-nedeenable series ProI Y 'n, n" Renaissance from time to time to purchase nuclear fuel, such 8'd
, _ _ ,g3 g funds may be loaned to the Company pursuant to the Loan 7.68 % - -
101 4-Is-u Agreement. At December 31,1988, 868 million was available to 7.4ss - - 101 11-15-8s the Company under such Loan Agreement. (See Note 12.) 7.36 % - - 101 12- 1-87 s$ In addition, the Company has credit arrangements of $60 2s.75 1-15-93 25.25 1 15-93 million restricted to Eurocommercial paper and $25 million restricted to bankers' acceptances. Apart from MPSC approval and the requirement that Common, Preferred and Preference Stock be sold for at least par value, there are no legal restrictions on the issuance of additional authorized shares of such stock. Nots 9 02mmon Stock and Non-Redeemable Cumulative Preferred and Preference Stock Nore10 The Convertible Cumulative Preferred Stock, 51/2 % Series, is convertible into Common Stock. The conversion price was Redeemable Cumulative Preferred and Preference StEk
$17.79 per share at December 31,1988. The numbers of shares On January 15,1987, the Company redeemed 2,000,000 shares converted during 1988,1987 and 1986 were 5,581, 0,334 and of $4.12 Series, $1 par value Preference Stock, constituting all 21,880, respectively. The number of shares of Common Stock of the outstanding shares, at a price of $25 per share for the reserved for issuance upon conversion and the conversion price redemption of 250,000 shares and $27.85 per share for the early are subject to further a4ustment in certain events. The redemption of 1,750,000 shares.
Convertible Cumulative Preferred Stock,51/2 % Series, may be On April 15,1987, the Company redeemed 1,600,000 shares redeemed at any time in whole or in part at the option of the of $4.00 Series, $1 par value Preference Stock, constituting all Company at $100 per share, plus accrued dividends, of the outstanding shares, at a composite price of $27.41 per share. 32
NOTES To CONSOLIDATED FINANDAL STATEMENTS On January 15,1988, the Company redeemed 200,000 shares The following series of Preferred and Preference Stock, of 13.50% Series, $ 100 par value Preferrd Stock, constituting which are redeemable pursuant to sinking fund requirements, all of the outstanding shares, at a composite price of $104.05 may also be redeemed at the option of the Company at stated per share redemption prices, plus accrued dividends: ter share. A total of $20.8 million was recorded in the Companyb 1987 Consolidated Br . . %eet as amounts due within one year. Decreasing Prior on and 8'd"mabwen From W h Ahn The followina redeemable series of Preferred and Preference Stock are entitkui to the benefit of sinking funds (provided that Preferred Stock s105 si no dividend arrearages exist) providing for the annual redemption of shares at stated per share prices, plus accued [7] 9 Preference Stock dividends, commencing on dates indicated: s2.75 9a !" 7 15-90 25.25 7 15-00 s2.75 Series B 26.10 1-15-91 25.25 1-15-91
~
Non-Cumulative Optie to None of the shares of the Cumulative Preferred Pock,9.60% Series nay be redeemed through certain refunding operations Annual Price Ai n Commencing Number Per Shares in prior to October 15,1989 at an effective cost less than that nedeemable Series On ofShares Share Any Year indicated by the original dividend rate. Preferred Stock The comb!ned aggregate annual amounts of redemption requirements at December 31,1988 for all series of redeemable 1 i ! !2 1 Preferred and Preference Stock are $14 million for 1989 and Preference Stock 7-15-80 100,000 25 100,000 $11 million for each of the years 1990 through 1993. s2.75 s2.75 Series B l-15-81 100,000 25 100,000
- Not to exceed 220,000 cumulative additional shares.
NOTE 11 The following numbers of shares were purchased for Long-Term Debt application to smking fund requirements: The Companyb 1924 Mortgage and Deed of Trust (" Mortgage"), 1986 th 3 lien of which covers substantially all of the Companyb 1988 1987 58,980 propds, pdes b b buanM d aMonal bon % Q) PreferredStock,9.72% Series - - ba. sed upon property additions, combined with an earnings test PreferredStock,9.60% Series 32.500 32.500 32.500 Preferred Stock,12.80% Series - - 40.000 provision, or (2) based upon retirements of previously issued Preferred Stock,13.50% Series - 50,000 - bonds. Fermi 2 disallowances (see Notes 3 and 4) reduced Preference Stock, s2.75 Series 260.000 200,000 200.000 bondable property under the Mortgage. At December 31,1988, Preference Stock, s2.75 Series B 200.000 200,000 73,300 after giving effect to the Ferm12 disallowances, aporoxim tely
$2.3 billion priacipal amount of additional Mortgage Bonds could have been issued on the basis of (1) above, assuming an in the event that a payment due under requirements of a interest rate of 11% on any such additional Mortgage Bonds.
sinking fund for any series of redeemable Preferred or Preference Stock is not made, no dividend shall be paid (other The Company does not anticipate that the Fermi 2 disallowances would preclude the issuance of additional bonds on the basis of than a dividend paid in junior stock) or declared or other distribution made upon any junior stock (Common and the earnings test provision. At December 31,1988, Preference Stock in the case of Preferred Stock, and Common approximately $473 million of additional bonds could have been Stock in the case of Preference Stock) until such payment is issued on the basis of bond retirements. made. 33
l NOTES TO CONSOUDATED FINANCIAL STATEMENTS 7h.r-Emnpt Rerenue Bond Obligations-Agreements have The Company has a heat purchase contract with Renaissance been signed with certain municipalities, municipal agencies and which provides for the purchase by Renaissance for the state authorities under which tax-exempt bonds were issued to Company of up to $400 million of nuclear fuel, subject to the finance certain Company projects or to refund maturing issues. continued availability of funds to Renaissance to purchase such The Company is obligated to make payments sufficient to meet fuel. Title to the nuclear fuel is held by Renaissance. The the principal and interest due on the bonds. To secure the Company makes quarterly payments under the heat purchase Company's obligations under certain of these agreements, the contract based on the consumption of nuclear fuel for the l Company has issued Mortgage Bonds with principal amounts, generation of electricity. Renaissance investment in nuclear interest rates and maturity dates corresponding to those of the fuel was $309 milleon and $304 million at December 31,1988 tax-exempt bonds. Payments made on the tax-exempt revenue and 1987, respectively. The increase in 1988 over 1987 of $5 bond obligations secured by Mortgage Bonds automatically million includes additions of $49 million (purchases of $34 dischsrge corresponding Mortgage Bond obligations. million and capitalized interest of $15 million) less $44 million The Company has obtained insurance for certain of its tax, for the amortization of nuclear fuel consumed in 1988. (See exempt obligations. Such insurance arrangements provide for Note 8.) l the funding of escrow accounts in the event certain debt ratios Under SFAS No. 71, amortization of leased assets is modified l are not mainta!ned. Fermi 2 disallowed project costs and so that the total of interest on the obligation and amortizathn of l associated write-offs may require the Company to fund these the leased asset is equal to the rental expense allowed for insurance-related escrow accounts in an amount of up to $124 ratemaking purposes. For ratemaking purposes, the MPSC has million. treated pil leases as operating leases. Net income is not affected y ca$ahaWn oman Long-7km Debt Naturi/ics-In 1989,1990,1991,1992 and 1993, long-term debt maturities consist of $596 million, $197 Rental expenses were $102.8 million (including $57.0 million million, $94 million, $404 million and $310 million, for nuclear fuel), $44.6 million and $41.1 million for 1988,1987 respectively, and 1986, respectively. NOTE 12 NOTE 13 Leases Commitments and Contingencies Future minimum lease payments under long-term commitments-The Company has entered into purchase noncancellable leases, consisting of nuclear fuel ($467.9 million commitments of approximately $33' million at Detember 31, computed on a projected units of production basis), lake vessels 1988. The Company has also entered into substantial long-term ($84.5 million), locomotives and coal cars ($79.1 million), office fuel supply commitments. space ($44.6 millb n) and computers, vehicles and other Combustion Enginecting, Inc. (" Combustion") is equipment ($68.2 million) at December 31,1988 are as follows: cons *ructing the Detroit Resource Recovery Facility in the City of Detroit with an expected commercial operation date in May phnions) stinions) 1989. The facility, which will be fuelal by municipal solid los slo 2.1 1992 s 75.6 waste, wdl produce steam and electricity. The Company has luo 102.6 lua 86.2 entered into a 20-year Energy Purchr.se Agreement with 1991 81.5 kemaining Prs 296.3 Combustion for the purchase of steam and electricity. Payments
**' "* for the first three years of operation are estimated to aggregate
$106 million. The Company is seeking to negotiate an addendum to the Energy Purchase Agreement to reduce the rate to be paid for steam.
See Notr 6 for the Companyh obligation to purchase capacity and energy entitlement of the Cooperative and the MPPA. 34
notes To CONSOLIDATED FINANCIAL STATEMENTS Contingencies-On September 4,1986, the Michigan Attorney NOTE 14 General ("AG"), asserting a claim as a " trustee" on behalf of Employes' Retirement Plan and Other Postretirement the people of the State of Michigan and the Michigan Natural BmMs Resources Commission, filed a lawsuit against the Company and Consumers, as co-owners of the Ludington Pumped Storage Employes' Retirement Plan-The Company has a trusteed and Plant ("Ludin6 n"). The Company is a 49% co-owner of noncontributory defined benefit retirement plan (" Plan") Ludington. The suit alleged violations of the Michigan covering all eligible employes who have completed six months of Environmental Protectien Act and the common law for claimed service. The Plan provides retiremen+. benefits based on the aquatic losses. The lawsuit claims past damages (including employe's years of benefit service, average final compensation interest) of approximately $148 million ano future damages and age at retirement. The Companyh policy is to fund pension (from the time of the filing of the lawsuit)in the amount of cost calculated under the projected unit credit actuarial cost approximatHy $89,500 per day (of which 49% would be method, provided that this amount is at least equal to the applicable to the Company). On September 2G,1986, an answer minimum funding requirement of the Employee Retirement was filed denying liability. On Nc,vember 10,1987 the AG filed income Security Act of 1974, as amended, and is not greater an additional lawsuit in this mitter seeking to declare void or than the maximum amount deductible for federal income tax voidable the lease to certain state-owned land on which purposes. The Company is operating under the IRS full funding portions of the plant are constructed. Both matters remain limitation and, therefore, did not make a contribution to the pending before the Ingham County Circuit Court. Plan in 1987 and 1988 and does not expect to make a contribution to the Plan in 1989, In 1986, two environmental organizations requested FERC to withdraw the Ludington license or provide some mitigation for Effective January 1,1987, the Company implemented the fish mortality. On September 30,1988, FERC ordered provisions of SFAS No. 87, " Employers' Accounting for Consumers and the Company to install a temporary barrier net, Pensions." The effect of this change in accounting was to designed by the Michigan Department of Natural Resources reduce net pension cost for 1987 by $18.7 million, of which $5 ("MDNR"), around the plant to protect fish on an interim basis million was applicable to construction and $13.7 million was until permanent measures can be developed. The MDNR applicable to other operation expense. The decrease in pension estimates its design will cost $550,000 to implement, but the expense resulted in an increase in total and per share Earnings companies believe the actual costs will be higher. The for Common Stock by $8.2 million and $0.06, respectively. companies have agreed to installation of a temporary barrier net Net pension cost included the following components: subject to FERC limiting installation costs to no more than $1.1 million and mainter ance costs to $300,000 annually. A study , released by Consumers on September 8,1988 estimated the g4 costs of permanent fish protection measures to be between $38 Service amt - benefits earned during the period 8 16,032 8 16.564 Interest cost on projected benefit obligation 57,254 54.514 million and $200 million.
' ' " ' " " " ( ' 4} ("* }
The Company believes that the outcome of the litigation , l ud Deterrat or net gain (loss) during current period (14,697) 28,896 discussed above will not have a material effect on its financial Amortization of unrecognized prior nervice mist 65 - position or results of operations, in addition to the matters reported herein, the Company is involved in litigation dealing A*ro 't$"h"c'S'$""iz"d "*t '""t '"""1ti"" m m with the numerous aspects of its business operations and such , , litigation is not expected to have a material effect on the Companyb financial position or results of operation. See Note 2 far a discussicn of contingencies related to Fermi 2. 35
___.f.--- r NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assumptions used in determining net pension cost are as through insurance companies and other organizations whose follows: premiums are based on the benefits paid during the year. The Company recognizes the cost of providing these benefits as the 1988 1987 premiums are paid. Discount rate 9.5% 9.0 % Increase in future compensation levels 6.0 6.0 1988 1987 1986 Expected long-term rate of return on Plan awts 9.5 9.0 (Thmands) and life insurance benefits to employes Cost to the Company to fund the Plan was $27 million for 1986. A 9% discount rate was assumed to determine net pension [,"',l",P Total
, 'f$ 'f$
s51,981 s52,435
'f[2 s47.946 cost and future compensation levels were assumed to increase at a rate of 7%.
The following table reconciles the funded status of the Plan Nors 15 to the liability recorded in the Company's Consolidated Balance Sheet: Supplementary Quarterly FinancialInformation (Unaudited) December 31 1988 1987 1988 Quarter Ended (Thousands) Mar. 31 June 30 Sept. 30 Dec. 31 Plan assets at fair value, primarily equity securities $759,476 8746,383 (Thousands, except per share a mounts) Less actuarial present value of benefit obligations: Operating Revenues 8 751,704 $ 721,853 8 867,917 8 760,698 Accumulated benefit obligation, including vested Operating income 166,076 151,880 225,442 184,6m benefits of 8526,243,000 and $495,378,000 551,433 517,920 income (Loss) Before Increase in future compensation levels 94,172 103.433 Cumulative Effect of Projected benefit obligation 645.605 621,353 Accounting Changen 7,669 73,445 145,948 (462,396) Plan assets in excess of projected benefit obligation i13,871 125,030 Cumulative Effect for Years Unrecognized net asset resulting from initial application (60,330) (64,837) Prior to 1988 of Accounting Unrecognized net gain (62,185) (66,000) Changes (Net oflacome Taxes) (143,492) - - - Unrecognized prior service cost 845 - Net income (Loss) (135,823) 73,445 145,948 (462,396) Liability recorded as Other Deferred Credits in Earnings (Loss) for Common the Consolidated Balance Sheet $ (7,799) 8 (5,816) Stock (149,739) 60,510 133,129 (472,483) Earnings (Loss)Per Share Before Cumulative Effect of Accounting Changes (0.94) 0.41 0.91 (3.22) Assumptions used in determining the projected benefit Cumulative Effect for Years Prior to 1988 obligations are as follows: of AccountingChanges - - - (0.98) Earnings (Loss) Per Share (1.02) 0.41 0.91 (3.22) December 31 1988 1987 The 1988 fourth quarter loss reflects the write-off of Fermi 2 Discount rate 9.5% 0.5% and Greenwood Unit No. I plant costs of $565 million, partially Increase in future compensation levels 5.5 6.0 offset by a decrease in book depreciation expense of $24 million, pursuant to the December 27,1988 MPSC order and in The unrecognized net asset at date of initial application is accordance with SFAS No. 90. See Notes 3 aid 4. being amortized over approximately 15.4 years, which is the average remaining service period of employes at January 1,1987. 1987 Quarter Ended Mar. 31 June 30 Sept.30 Dec.31 Other Pbstretirement Benefits-The Company provides certain (7s,,, ,,cep, p,, ,u,, ,,,,,, postretirement health care and life insurance benefits for s708,496 s688,215 s787,157 ss72,863 operating nevenues retired employes. Substantially all of the Companyb employes operatingIncome 192,365 167,411 217,034 155.828 will become eligible for such benefits if they reach retirement Net Licome 152,558 122,644 172,968 106,804 age while still working for the Company. These benefits, as well Earnings for Common Stwk 131,443 103,273 154,040 87,978 Earnings Per Share 0.90 0.70 1.05 0.60 as similar benefits for active employes, are provided principally 36
_ __ m = MANAGEMENTS DGCUSSION AND ANALYSIS OF FINANCIAL CONDm0N AND RESutTs OF OPERATIONS This discussion and analysis should be read in conjunction with Estimated increase (Decresse) From Pric,r Year the Consolidated Financial Statements and accompanying Notes 1988 7 1986 thereto, contained herein. Base Rate Changes Earnings (loss) for Common Stock and Earnings (Loss) Belle River l' nit No. 2 commercial operation 8- 8- 8 65 Per Share Ferm12 commercial operation so - - Tax Reform Act of 1986 (53) (20) Improved business and economic conditions existed throughout ~ the Ocmpanyb service area during the three-year period $ resulting in higher kilowatthour ("kWh") sales and an increase Power Supply Cost Recovery Clause d power cost) (g) in total and per share Earnings for Common Stock in 1986 and (
,,gej[ngpur 1
(g) 1987. Earnings in 1986 and 1987 were supported significantly by t'nbilled revenue 29 - - AFUDC for Fermi 2 while the unit was under construction. Ind s team and steam heating sales () gt , t flowever, in 1988, the Company recorded a Loss for Common Total s245 s(13) sg Stock for the year of $428.6 million or $2.92 per share. The loss for 1988 resulted from an accounting change and the write-off of See Note 3 for information regarding a five-year moratorium on certain plant costs disallowed by the MPSC. A December 27' base rate changes and a four-year suspension of the Power 1988 MPSC order approved a negotiated settlement of the Supply Cost Recovery Clause, effective January 1,1989. Companyb request for Fermi 2 rate relief. This settlement Increases in iWh sales were as follows: provided for the disallowance of certain plant costs in addition to plant costs previously disallowed by the MPSC. Under SFAS Increase from Prior Year No. 90, adopted by the Company effective January 1,1988, such 1988 1967 1986 disallowances must be written off as a loss. Therefore, in 1988, Residential 6.3% 6.1% 4.1% the Company recordei et after-tax losses totaling $968 million ($344 million cumuh e effect at January 1,1988 and $624 """jh"I y [ N million charge to incoue in 1988), or losses of $6.60 per share, 70 tai 3,7 3.3 3.7 for the write-off of disallowed Fermi 2 and Belle River plant costs and the removal of Greenwood Unit No. I from rate base through December 31,1993. In addition, the Company adopted The increases in residential sales were due to increases in the number of customers and warmer summer weather, resulting in through recognition of the cumulative effect at January 1,1988, higher kilowatthour use per customer. The increases in changes in accounting for unbilled revenues and property tar.es commercial and industrial sales were due primarily to improved which increased total and per share earnings for common stock business and economic conditions throughout the Companyh by $201 million and $1.37, respectively, and partially offset the losses recorded due to the adoption of SFAS No. 90. See Notes 3, service area. Sales to automotive and automotive-related customers increased in each year. Sales to steel customers 4 and 5. decreased in 1986, but increased in 1987 and 1988. On October 2, Consolidated Statement ofIncome 1987, the Company purchased Consumerk retail electric Operating Revenues-- Approximately 99% of the Companyb business within the City of Pontiac; therefore, after the 1988 operating revenues were subject to thejurisdiction of the purchase, sales to that business formerly included in sales for MPSC, with the remaining 1% subject to thejurisdiction of the resale are now included in the residential, commercial and FERC. Industrial classifications. Total operating revenues changed in each year due to the The Company is currently forecasting sales growth between 1 following factors: and 1.5 percent per year. However, the Company faces continuing, and possibly increasing competition from cogenerators and independent power producers. Current laws l require the Company to purchase the electrical output of certain non-utility companies at a standard price determined by the MPSC. New rules proposed by the FERC would further encourage the development of generating facilities by independent power producers. Electric energy eventually produced by these other sotirees could result in displuement or loss of sales made by the Company, however, it could also become a means of providing needed future capacity. 37
MANAGEMENT s DISCUSSION AND ANALYSIS OF FINANCIAL CONDm0N AND REsutTs OP OPERATIONS Operating &penses-Operating expenses increased in 1986 and effects of a lower federal income tax rate under the TRA. 1988, but decreased in 1987. Income taxes decreased in 1988 due primarily to lower pretax income, the effects of a lower federalincome tax rate under the Fuel and other power supply expense changed in each year due to the following factors: TRA and lower filed return and audit adjustments, partially offset by lower income tax deductions for indirect construction coceIS"IrNm"$r'iEear and nuclear fuel costs. (See Notes 1 and 7.) 1988 Iw7 1986 - AFUDC, a norroperating non-cash item, consists of the net MIillio=> cost of borrowed funds used for construction purposes and a Net system output 8 36 4 33 8 23 reasonable rate on other funds when so used. AFUDC decreased Average unit cost 99 (99) (59) in 1986 due to the commercial operation of the Belle River w ant, padah oMy amonaka$ amp 4ms tal s1 ~ 8( 8 for Fermi 2. AFUDC increased in 1987 due to additional capital expenditures for Fermi 2. AFUDC decreased in 1988 when Net system output and average unit costs for the three-year AFUDC for the Ferm12 investment was discontinued effective January 1,1988. AFUDC amounted to 65% and 57% of Earnings period were as follows: for Common Stock in 1986 and 1987, respectively. The level of 188 1987 18 % AFUDC in 1989 and beyond will be significantly reduced from (nonamis ofuegarcatthours, "uwh ") previously reported levels due to the completion of the nd$ti erchange power ) ) mpanNowe@ad mnsMm Nam. @ M.) Net system output 44.251 42, ara 40,818 Deferred Perm 12 depreciation and return, non-cash items of Average l' nit Cost (8/MWh) 821.19 818.05 821.2s income, were recorded beginning with the implementation of the Fermi 2 rate phase-in plan on January 24,1988. (See Note 1.) Average unit costs for 1986 and 1987 reflect declining fuel prices, while the increase for 1988 reflects the buyback of Fermi 2 Other income and deductions, after income taxes, include e ntributions of $10 million and $5 million in 1986 and 1987, generation from the Cooperative. (See Note 6.) respectively, to a charitable foundation established in 1986. Other op< idon and maintenance expenses increased in 1986 and 1988 over the prior year due to the commercial operation of Interest expense on long-term debt decreased in 1986 due to Belle River Unit No. 2 in 1985 and Fermi 2 in V.nuary 1988. The refunding of maturing securities, early repayment of Belle River 1986 increase also included higher uncollectible expense and Project Financing obligations and lower interest rates, expenses related to an early retirement plan for certain substantially offset by the issuance of new securities. Interest management employes. The 1988 increase also included expense on long-term debt increased in 1987 and 1988 due to the expenses related to a voluntary separation plan which provides issuance of new securities, partially offset by refunding of for the early retirement of certain employes. Other operation maturing securities and early repayment of Belle River Project Financing obligations in 1987. expense decreased in 1987 due primarily to lowe< pension and uncollectible expenses. The maintenance expanse decrease in Other interest expense increased in 1986 and decreased in 1987 was due to the additional maintenance performed in 1986 1987 and 1988 primarily as a result of changes in the accrual of (primarily at the Monroe Power Plant) to improve the interest on refunds to customers. The decreases in 1987 and 1988 availability of generating equipment. were partially offset by increased interest due to higher levels of Depreciation expense increased due to increases in short-term borrowings. The average interest rate for short-term depreciable property, including the addition of Belle River Unit borrowings increased from 6.7% for 1986 to 7.1% for 1987, and No. 2 in 1985 and Fermi 2 in 1988. to 7.9% for1988. hxes other than income taxes increased due to higher Preferred and preference stock dividend requirements Michigan Single Business Tax, higher property taxes in 1988 decreased due to optional and mandatory redemptions of resulting from the commercial operation of Ferm12 and higher utstanding shares. payroll taxes in 1986 and 1988. Liquidity and Capital Resources Income taxes increased in 1986 due primarily to higher pretax The Company's liquidity has improved as a result of the income, partially offset by the accelerated feedback of deferred commercial operation of Fermi 2 in January 1988. A rate phase-taxes related to indirect construction costs and the borrowed in plan for this unit became effective on January 24,1988. Also, funds component of AFUDC for Belle River Unit No.1. Income a rate case settlement approved by the MPSC in December 1988 taxes increased in 1987 due primarily to higher pretax income resulted in additional rate increases for Fermi 2, commencing and filed return and audit adjustments, partially offset by the January 1,1989, as described in Note 3. The commercial 38 l ____________
MANAG31ENTSDISCUSSION AND ANAWSIS0r FINANCIAL CONDWON AND ResutTs Or OMATIONS operation of Fermi 2 completes the Company k mWor power As a percent of total capitalization, common shareholders' plant construction program. Therefore, capital expenditures equity decreased and long-term debt increased due to a decreased significantly in 1988. Further, the Company has no significant increase in 1987 in long-term debt financings and the current plans for additional generating plants. write-offs in 1988 of disallowed plant costs, as described in Note
- 4. The ratio of preferred and preference stock to total Funds generated internally provided 59%,70% and 128% of capitalization has decreased due to optional and mandatory capital expenditures (excluding total APUDC)in 1986,1987 and redemptions of outstanding shares.
1988, respectively. The higher levels of Internal generation of funds result primarily from Increases in net income in 1986 and The ratios of earnings to fixed charges for 1988,1987 and 1986 1987 and a decrease in capital expenditures in 1988. were 0.05,2.54 and 2.29, respectively. The ratios of earnings to fixed charges and preferred and preference stock dividend Cash requirements for capital expenditures from 1989 to 1993 requirements for 1988,1987 and 1986 were 0.04,2.09 and 1.81, are estimated to be approximately $1.2 billion (excluding respectively. These ratios increased in 1987 due to an increase in approximately $25 million of total AFUDC). In 1989, cash earnings before taxes based on income, but decreased in 1988 requirements for capital expenditures are estimated at $246 due to the write-offs of disallowed plant costs. million (excluding $4 million of AFUDC). The Company expects to meet the cash requirements for capital expenditures from Although the THA resulted in a reduction in the federal internalcash generation, income tax rate, the cash requirements for the Company's income tax liabilities are expected to increase significantly over Cash requirements for long-term debt maturities and the next few years principa!!y because of the alternative preferred and preference stock redemption and sinking fund minimum tax and a reduction in the amount of available requirements are approximately $610 million ($525 million of investment tax credits that the Company can currently utilize. which can be extended one year under the existing agreement),
$208 million, $105 million, $415 million, and $321 million for (See Notes 3 and 7.)
1989,1990,1991,1992 and 1993, respectively. See Notes 2,3,6,11,12 and 13 for other matters that may affect the Company's liquidity and capital resources. The Company estimates its external financing requirements for 1989 at approximately $710 million. in January 1990, the Inflation Company will purchase, for approximately $550 million ($513 The Company has been and will continue to be impacted by an million f* plant, $35 million for nuclear fuel and $2 million for inflationary economy. Although the current inflation rate is materials and supplies), the Cooperative remaining ownership relatively low, its compound effect through time is significant, interest in Fermi 2 through the issuance of its Mortgage Bonds. primarily in its effect on the Company k ability to replace its See Note 2. Assuming the completion of this program, there investment in utility plant. should be no need for additional external financing in the The regulatory process limits the amount of depreciation foreseeable future, with sufficient internal cash generation to expense recoverable through revenues to the historical cost of meet scheduled long-term debt maturities and preferred and the Companyk investment in utility plant. Such amount preference stock re6mption requirements. produces cash flows which are inadequate to replace such The Company hao ahort-term credit arrangements of property in future years or to preserve the purchasing power of approximately $453.1 n.911on at December 31,1988 under which common equity capitalinvested. 8229.3 million of borrow ings were outstanding. (See Note 8.) Tk e of fel M b umwidhW4 h The Company's objetive is to achieve a capital structure of " npanyk single largest expense, is subject to increase due to approximately 40% ccmmon shareholders' equity,5-10% price escalation provisions in long-term coal contracts. The preferred and preference stock and 50-55% long term debt. MPSCh December 1988 order suspends, for the four-year period Changes in the Company's capital structure ratios (excluding January 1,1989 through December 31,1992, the Power Supply amounts of long-term debt and preferred and preference stock Cost Recovery Clause which provided for the current recovery due within one year) were as follows: of fuel and purchased and net interchanged power expense. However, it is expected that such expenses will be relatively pemnne ai stable during the four-year period. ins tw7 ip6 Pursuant to the MPSCh December 1988 order, a new expense
"" " "# "" " " P"# '"*
rda st k 10 a@usted for the effects of inflation. Under the new procedure, tong Tmn Debt 61.6 s;f r>i 4 which will be implemented on January 1,1990, an imiation 100 ot 100os too os factor will be applied to approximately $750 million of Company operation and maintenance expenses to arrive at an annual rate a4ustment. (See Note 3.) 39
COWARAUVE RESULTS OF OPERATIONS 1988 1987 1986 1985 Operating Revenueb Electric $3,070,724 82,825,910 82,832,945 42,738,356 Steam 31,448 30,821 36,339 49,801 Total operating Revenues 43,102,172 82,856,731 82,869.284 82,788.157 Operating Expenses Operation Fuel 8 846,678 8 813,376 8 741,206 4 785,110 Other power supply 146,773 47,814 191,126 196,918 Other operation 521.152 441,046 459,534 422,133 Maintenance 275,610 245,736 258,655 250,708 Depreciation 325,423 237,325 232,240 218,502 Deferred Fermi 2 depreciation (44,143) - - - Taxes other than income 212,656 179,308 177,381 175,556 Income taxes 89,944 159,488 126,596 124.939 Totaloperating Expenses 82,374,093 82,124.093 82,186,738 42,173,956 Operating Income 8 728,079 8 732,638 8 682,546 8 614,201 Other income and Deductions Allowance for other funds used during construction 8 1,663 8 136,452 8 117,069 8 113,225 Deferred fermi 2 return 134,254 - - - Other income and deductions (789) (3,435) (16,869) (5,240) lacome taxes (769) 663 8,827 1,642 Current year disallowed plant costs (849,506) - - - Income taxes-disallowed plant costa 225,171 - - - Net Otherincome and Deductions 4 (489,966) $ 133,680 8 109.027 8 109,627 Income Before Interest Chargu 8 238,113 4 866,318 8 791,573 4 723,828 Interest Charges long-term debt 8 451,415 8 417,474 8 399,429 8 401,272 Amortization of debt discount, premium and expense 4,593 3,626 2.721 2,502 Other 20,663 23,459 41,410 15,642 Allowance for borrowed funds used during construction (credit) (3,224) (133,215) (129,082) (133,103) Net Intet est Charges 4 473,447 8 311.344 8 314.478 8 286,313 Income (Loss) Before Cumulative Effect of Accounting Changes 8 (235,334) 8 554,974 8 477,095 8 437,515 Cumulative Effect for Years Prior to 1988 of Accounting Changes for: Disallowed plant costs and abandonments (net ofincome taxes of 8111,257,000) (344,147) - - - l'nbilled revenues (net of income taxes of $40,912,000) 61,367 - - - Property taxes (net of income taxes of $101,306,(al0) 139,288 - - - Net laceme (Imss) 8 (378,826) 8 554,974 4 477,095 8 437,515 Preferred and Preference Stock Dividend Requirements 49,757 7a240 98,803 103,264 Earnings (less) for Common Stock 8 (428,583) 4 476,734 4 378,292 8 334,251 Common Shares Outstanding-Average 146,761,458 146,729,292 146,643,377 143,183,133 Earnings (Imss) Per Share Before cumulative effect of accounting changes 8 (1,95) $ 3.25 8 2.58 8 2.33 l Cumulative effect for years prior to 1988 of accounting changes for: Disallowed plant costs and abandonments 8 (2,34) 8 - 8 - 8 - l'nbilled revenues 8 0,42 8 - 4 - 4 - Property taxes 8 0.95 8 - 8 - 8 - Earnings (less) Per Share 8 (2.92) 8 3.25 8 2.58 8 2.33 Dividends Declared Per Share of Common Stock 8 1.68 8 1.68 8 1.68 8 1.68 Ratio of Earnings to l'ixed Charges (SEC Basig 0,05 2.54 2.29 2.28 Ratio of Earnings to fixed Charges and Preferred and Preference Stock Dividend Requirements (SEC Basis) 0.04 2.09 1.81 1.75 40
1982 1981 19M0 1979 197M 19M 1983 (Thouswis) 81,667,679 81,561,296 42,439,835 42,260,021 82,078,965 82,011,217 81,776,364 49,637 41,389 42,840 36,150 30,832 28,546 68,370 82,301),658 82,123,254 82,054,057 81,812,514 81,698,511 81,589,842 82,498,205 4 700,789 4 676,409 4 718,431 8 689,165 8 670,116 4 647,620 8 580,869 184,740 128,921 74,654 139,981 107,767 96,502 158,098 403,616 374,164 372,767 333,440 290,566 266,410 235,720 203,945 187,769 170.974 164M78 133,270 128,600 124,804 190,420 171,940 161,430 150,240 141,948 129di44 115,325 144,471 142,743 118,537 117,224 115.520 99,552 91,488 131,459 145,559 96,912 64,388 37,012 54,706 56,686 81.959,480 81,827,505 41,713 305 41,659,416 41,496.199 $1,423,031 41,362,990 8 482,153 3 409.549 8 394,641 8 316,315 8 275,477 8 226,852 8 538J65 4 130,350 8 92,750 $ 47,995 8 39,398 8 38,815 8 38,323 8 32,273 1,829 7,877 (4,820) (9,501) 692 3,664 2,371 (5,487) 1,155 4,771 (669) (1,554) (1,228) (112) 8 132,067 8 95,140 8 48,330 8 34,668 8 38,838 4 40,433 8 33,416 8 670,832 8 577,2fi3 8 453,879 8 429,309 8 35T3.153 $ 315,910 8 260,268 8 399,448 4 351,854 8 331,469 8 290,045 8 211.857 8 167,585 4 140,288 2,131 2,006 1,853 1,776 1,644 1,403 2,101 30,592 53,088 59,779 37,025 19,662 13,833 5,298 (163,336) (194,402) (194,076) (133,967) (66J08) (43,171) (33,590)
$ 268,895 8 212,671 8 199,178 8 194,956 8 166,587 8 139,881 8 113.399 8 401,937 8 364,622 8 254,701 4 234,353 8 188,566 8 176,029 4 146,869 8 401,937 8 364.622 8 254,701 4 234,353 4 188,566 4 176,029 8 146,869 104,159 98,614 73.245 57,566 51,037 43,457 38,056 8 297,778 8 266,008 8 181,456 8 176,787 8 137,529 8 132.572 4 108,813 135,230,827 120,274,269 103,585,915 87,473,581 78,780,863 69,848,484 61,898,763 8 2.20 8 2,21 4 1.75 8 2.02 8 1JS 8 1.90 4 156 8 - 4 - 4 - 4 -
8 - 4 - 8 8 - 8 - 8 - 8 - 8 - 8 - 8 - 8 - 8 - 8 - 4 - 8 - 4 - 8 - 8 2.20 8 2.21 8 135 8 2.02 4 135 8 1.90 $ 136 8 1.68 8 1,6N 8 148 8 1 64 8 1.60 8 1.60 $ 1.52 2,19 2.22 1.85 1.84 1 90 2 17 2.28 1.67 1.67 1.49 1.53 1,53 1.69 131 41
t , STATISTICAL REVIEW 1988 1987 1986 1985 Operating Revenues (Thousands) Residential-Electric 8 984,689 8 905,208 8 880,205 8 827,210 Commercial-Electric 760,040 701,275 693,071 651,559 Industrial-Electric 1,139,778 1,056,906 1,063,551 1,034,374 Other 217,665 193,342 232,457 275.014 Total 8 3,102,172 8 2.856.731 8 ?,869,281 8 2,788,157 bales (Mittmns of kW h) Residential 11,723 11,134 10,492 10,077 Commercial 8,310 7,873 7,501 7,130 Industrial 19,080 18,225 17,240 16,613 Other 1,84 5 2.260 2,807 2,875 Total 40,958 39,492 38,040 36.695 l Electric Customers Oear End) Residential 1,718,835 1,697,326 1,664.226 1,642,981 Comeletcial 158,850 155,216 148.987 144,942 Industrial 2,592 2,507 2,384 2,314 Other 1,917 1,919 1,896 1,883 Total 1,882,194 1,856.968 1,817,493 1,792.120 Average Annual Lse Per Residential Customer (k% > 6,866 6,h35 ti,%0 ti,165 Average Annual Bill Per Realdential Customer $576.70 8539.44 8532.74 8506.06 Average Revenue Per k% h Residential 8.40C 8,13C 8.39C 8.21C Commercial 9,15 8.91 9.24 9.14 Industrial 5.97 5.80 6.17 6.23 Capitalization (Thousands) 1,ong-Term Debt 8 4,238,536 4 4,693,687 8 3,656,569 8 3,770,863 Preferred Preference Stock 416,212 521,894 742,273 879,497 Common Shareholders Equity 2.226,949 2,919,985 2,716,403 2,588,025 Total 8 6,881,697 8 8.135.566 8 7,115.245 8 7,238,385 Capitalization (Percent) Long-Term Debt 61,6 57.7 51.4 52.1 Preferred' Preference Stock 6.0 6.4 10.4 12.1 Common Shareholders Equity 32.- 35.9 38.2 35.8 Total 100.. 100 0 100.0 100.0 Common Stock Data Earnings (Loss) Per Share $(2,92) 83.25 82.58 82,33 Dividend Paid Per Share 8 1.68 $1.68 81.68 81.68 Payout -% 52 % 65 % 72 % Shares 0utstanding-Average 146,761,458 146,729,292 146,643,377 143,183,133 Return on Average Common Equity (15,91)% 16 69 % 14.09 % 13.31 % Book Value Per Share 815.10 819.75 818.34 $17.47 Market Price High 817 % $19 819h $17% Low $12 812 % $15% $14 Miscellaneous Financial Data Average Interest Rate on Long-Term Debt 9.6% 9.5% 0.2% 9.9% Average Dividend Rate on Preferred' Preference Stock 8.9 % 10.7 % 11.5 % 11.6 % Long. Term Debt Obligations and Redeemable Preferred and Preference Stock Outstanding (Thousands) 4 5,148,498 8 5,232,662 8 4,774,495 8 4,731,589 Total Assets (Thousands) 810,060,293 811,158,214 810,377,125 8 9,863,760 Gross Ctility Plant (Thousands) 810,766,755 811,893,418 811,062,449 810,466,030 Net Ctility Plant (Thousands) 8 8,303,644 8 9.682,875 8 9,034,716 8 8,612,890 Capital Expenditures (Thousands) 8 235,127 8 709.084 8 M5.196 8 710,699 Miscellarms Operating Data System Capability at Year End-MW 10,004 9,164 9.070 9,296 System Capability at Time of Peak-MW 10,038 9,020 9,199 9,367 System Peak Demand-MW 9,133 8,427 8,050 7,172 Reserve Margin at Time of Peak 9.9 % 7.0% 14.3 % 30.6 % System Load Factor 55,2 % 57.4 % 57.9% 63.3 % Heat Rate-Btu Per kWh 9,990 10,060 10,090 9,990 Fuel Cost-C Per Million Btu 173.8C 172 9C 189.2C 202.0c Number of Employes at Year End 10,614 11,221 10.967 11,086 42
1964 1983 1983 1981 1950 1979 1978 8 758,124 8 741,399 8 676,370 $ 642,301 8 583,701 8 524,613 4 497,988 570,082 513,292 473,498 436,868 382,018 345,576 313,673 919,490 818,660 754,238 763,167 658,051 647,438 611,404 250,509 236,307 219,148 211,721 188,744 180,884 166,777 82,498,205 82,309.658 82.123,254 82,054.057 81.812,514 81.698,511 81.589,842 10,150 10,256 0,940 10,134 10,394 10.274 10,386 6,850 6,479 6,252 6,310 6,265 6,251 6,073 16,324 15,162 13,751 15,471 15,472 17,960 18,354 2,563 2,402 2.052 2,107 2,104 2,406 2,335 34,299 31,995 34,022 34,235 36,891 37,148 35.887 1,629,668 1,621,172 1,619,369 1,624,161 1,623,162 1,622,768 1,600,988 142,395 140,403 139,376 138,830 136,983 135,788 127,634 2,246 2,253 2,239 2,305 2,293 2,264 2,201 1,885 1.878 1,827 1,821 1,750 1,713 1,675 1,776.194 1,765,706 1,762.811 1,767,117 1,764,188 1,762,533 1,732,498 6,353 6,
- 12 6,131 6,243 6,406 6,403 6,529
$467.03 8457.74 8417.33 4395.66 $359.86 8326.92 8313.08 7.47c 7.23c 6.80c 6.34c 5.62c 5.lle 4.79c 8.32 7.92 7.57 6.92 6.10 5.53 5.16 5.63 5.40 5.49 4.93 4.25 3.b0 3.33 83,845,272 542,438 83,218,649 82,753,978 82,450,457 82,069,518 81,843,036 894,168 802,423 603,161 591,346 510,748 494,691 907J75 2,379,998 2,195,361 1.872,181 1,675 385 1,514,169 1,387,768 1,241,401 87,119,438 86,645,304 85,893.253 85,032,524 84,555,972 $3,968.034 83,579,128 54.0 53.3 54.6 54.7 53.8 52.1 51.5 12.6 13.7 13.6 12.0 13.0 12.9 13.8 33.4 33.0 31.8 33.3 33.2 35.0 34.7 100.0 100.0 100.0 100.0 100.0 100.0 100.0 42.20 $2.21 81.75 82.02 81.75 $1.90 $1.76 41,68 81.( 8 81.68 81.62 81.60 81,58 81,52 76% Th e 96 % 80 % 91% 83 % 86 %
135,230,827 120,274,269 103,585,915 87,473,581 78,780,863 69,848,484 61,898,763 12.87 % 13.03 % 10.14 % 11.12 % 9.47% 10.01% 9.26%
$16.01 816.63 816.60 $17.47 417.85 818a6 818.62 816 % $16 $13% 812 % $13% $15% $16%
$11% $13 811 810 % $10 $12W $13h 9.9 % 9.5% 9.5% 9.4 % 9.0% 8.5% 7.7%
11.6 % 11.6 % 11.3 % 0.8% 9.5 % 9.0% k 8%
$4,460,381 $4,155,329 $3,792,982 83,182,033 82.809,976 $2,332,200 82,096,540 49.276,614 88,477,218 87,645,856 86.617,903 85,751,801 85,156,138 84,641,602 89,752,346 48,845,779 $8.252,570 87,139,790 86,213,495 85.660,023 85.102,843 88,076,168 87,320,570 $6,824.058 85.842,997 85,026,245 84,500,829 84,140,521 8 938,004 81,014.568 81,135,045 4 964.261 8 641.540 $ 591,389 8 642,676 8.898 8,162 7,762 8,221 8,234 8,964 8,591 9,271 7,810 8,569 8,438 8,531 8,877 8,9s4 7,350 7,063 6.394 7,171 6,703 6,829 7,312 26.1% 10.6 % 34.0 % 17.9 % 27.3% 30.0% 22.9 %
60.2 % 60.2 % 61,7 % M.4 % 63.1 % 66.2% 62.3 % 9,990 10,040 10,060 10,060 10,140 10,280 10,330 190.6c 190 2C 193Mc 190.5c 178.3c 163 4c 149.0c l ! 11,136 11,152 11,208 11.024 10,789 10.908 10,729 i 43
'D-E t- A- 9.lm ? R D 1 8. O.N-MISCELLANEOUS CORPORATE DATA Market for the Company's Distribution of Ownership of Officer Resignations and Retirements Common Equity and Related Detroit Edison Common Stock Since the 1988 Annual Meeting, the Shareholder Matters (December 31,1988) following officers have retired: Charles M.
The Companyb Common Stock is listed Type of owner: Heidel, President; Harry huber, Group Vice only on the New York Stock Exchange, which Owners Shares President; and J. Philip Lenihan, Vice is the principal market for such stock. The Individuals 99,962 26,963,493 President-Marketing and Customer following table indicates the reported high Joint Accounts 03,886 33,051,422 Relati-qs. and low sales prices of the Companyh Trust Accounts 7,541 4,020,531 Robert H. Naftaly, Vice President and N minees 142 68,304,639 Common Stock on the Composite hpe and General Auditor, resigned effecth e August 1, dividends paid per share for each quarterly N*nd ons 239 126,448 1988. In anticipation of his retirement in period during the past two years: Brokers and April 1989, James B. Oliver resigned as Vice
#"I ** * ' President-Employe Relations effective Dividends Others 1,486 14,292,175 Price Range Paid February 1,1989.
'Ibtal 203,281 146.783,"12 Calendar Quarter fligh Low Per Share
$15% $12% $0.4 State and Country:
1988 First Second 14 % 12 0.4 Owners Shares 2000 Second Avenue Third 15 % 13 0.42 M chigan 93,296 42,722,040 Detroit, Michigan 48226 Fourth 17% 14 % 0.4 - Florida 14,578 5,885,831 Telephone:(313) 237-8000 1987 First 19 16% 0.42 California 12,387 4,176,666 Second 17% 15 % 0.42 New York 10,794 68,887,320 Independent Accountants Third 16 % 14 % 0.42 Illinois 9,442 4,573,410 Price Waterhouse Fourth 14 % 12 % 0.42 Ohio 7,154 2,200,576 200 Renaissance Center 44 other States 54,892 18,127,083 Detroit, Michigan 48243 At December 31,1988,146,783,212 Foreign Countries 7M shares of the Companyt Common Stock were outstanding. These shares were held by :. Copies of Form 10-K, Securities and totalof 203,281 shareholders. Exchange Commission Annual Report, are The amount of future dividenas M" available. depend upon the Companyh earnings, Requests should be directed to: financial condition and other factors. Annual Meeting of Shareholders Susan M. Beale The 1989 Annual Meeting of Shareholders Secretary will be held at 10 a.m. Detroit time Monday, The Detroit Edison Company April 24, at the Henry and Edsel Ford 2000 Second Avenue Detroit, Michigan 48226 Auditorium, Detroit. Shareholders will be asked to elect members of the Board of Transler Agents Directors, to ratify the appointment of Price The Detroit Edison Company Waterhouse as independent accountants for 2000 Second Avenue Detroit, Michigan 48226 the Company and to consider a shareholder Charles A. Babcock Elaine M. Godfrey proposal regarding nuclear waste disposal. Susan M. Beale Sophie J. Koziatek At the April 25,1988, AnnualMeeting,13 Ronald J. Gdowski Jack L. Somers members were re-elected to the Board of Directors. In addition, John E. Lobbia was Registrar of Stock elected to the Board. All directors were The Detroit Edison Company elected to one-year terms. Shareholders 2000 Second Avenue voted to amend the Companyh Restated Detroit, Michigan 48226 (Preferred, Preference and Common Stock) Articles of Incorporation so as to adopt the Michigan statute on limitation of liability for Common Stock officers and directors. Shareholders also Listed on the New York Stock Exchange overwhelmingly defeated a proposal Symbol- DTE regarding director share ownership and a proposal regarding nuclear waste disposal. 44
v5E:T'R 0 I of E EB I E'B Mi DIRECTORS AND OmCERS Bo rd of Directors Committees of the Board of Directors Officers Terence E. Adderley Audit Energy Resources Walter J. McCarthy, Jr. lWident and Ch!ef Executive Officer, Kelly Planning Chairman of the Board and Chief Executive Otis M. Smith. Services, Inc. (A provider of temporary help. Lillian Bauder Frank Merriman* Omcer David Bing WendellW. Anderson,Jr.** business services and home care services) John E. Lobbia Patricia Shontz Longe David Bing WendellW. Anderson,Jr. President and Chief Operating Omcer Dean E. Richardson David i G Chairman of the Board and Chief Executive Omcer, Bundy Corporation (Manufacturer of Vice Chairman of the Board and Chief Louis 11. Roddis' Jr' steel tubing, flexible hose and engineered F nancialOmcer plastic products) Executive Finance Leon S. Cohan Lillian Bauder Walter J. McCarthy, Jr
- Dean E. Richardson
- Senior Vice Presilent and General Counsel President, Cranbrook Educational Community Lillian Bauder Patricia Shontz Longe" Willard R. Holland D2vid Bing Ernest L. Grove, Jr. Terence E. Adderley Senior Vice President Chairman and Chief Executive Officer, Bing John E. Lobbia Lillian Bauder Burkhard H. Schneider Steel,Inc. (A steel service center) Frank Merriman Ernest L. Grove, Jr. .
David M. Gates Dean E. Richardson Alan E. Schwartz - Alan E. Schwartz IPhS Professor of Botany, University of Michigan Ernest L. Grove, Jr. Nominating Nuclear Review Frank E. Agostl Vice Chairman of the Board and Chief Alan E. Schwartz
- Louis H. Roddis, Jr
- Vice President- Power Generation Financial Omcer, The Detroit Edison Company WendellW. Anderson,Jr. David M. Gates" Stanley G. Catola John E. Lobbia David M. Gates Patricia Shontz Longe Vice President - Nuclear Engineering and President and Chief Operating Officer, The Patricia Shontz Longe Frank Merriman Servims Detroit Edison Company Frank Merriman Malcolm G, Dade, Jr.
Pstricia Shontz Longe Otis M. Smith res ent-EmployeReladons Economist; Senior Partner, The Longe Organization and Retirement Fund Review Ronald W. Gresens Company (An economic and investment "P'R58 " Patricia Shontz Longe
- Vice President and Controller consulting firm) e A n. Jr
- WendellW. Anderson, Jr." M. Jaae Kay Walter J. McCarthy, Jr.
Terence E. Adderley" David M. Gates Vice President- Administration Chairman of the Board and Chief Executive Frank Merriman ErnestL Grove Jr Officer, The Detroit Edison Company " Dean E. Richardson Otis M Smith Vice President- Nuclear Operations Frank Merriman Alan E. Schwartz Dairy Farmer S. Martin Taylor Vice President- Community and Dean E. Richardson Governmental Affairs Chairman of the Board and Chief Executive Omccr, Manufacturers National Corporation Saul J. Waldman louls H. Roddis, Jr. Vice President- Public Affairs Consulting Engineer Susan M. Beale Alan E. Schwartz Secretary Senior Partner, !!onigman Miller Schwartz and Leslie L. Loomans Cohn(Attorneys at law) Treasurer Otis M. Smith Retired Vice President, General Motors Corporation
' Chairman "Vice Chairman 45
h 1 e,% A n 2000 Second Avenue
%'J%#I I Detroit, Michigan 48226 A good part of parlife, i
l
t a n r n e - .1-
- r a a " n .s m e~u-DIRECTORS AND OmceRs Board of Directors Committees of the Board of Directors Officers Terence E. Adderley Audit Energy Resources Walter J. McCarthy, Jr.
President and Chief Executive Officer, Kelly Otis M. Smith
- Planning Chairman of the Ik>ard and Chief Executive Services, Inc. (A provider of temporary help, Lillian Bauder Frank Merriman* Omcer David Bing WendellW. Anderson,Jr.**
business services and home care services) John E. Lobbia Patricia Shontz Longe David Bing WendellW. Anderson,Jr. President and Chief Operating Officer Dean E. Richardson David i Chairman of the Board and Chief Executive Ernest L. Grove, Jr. Officer, Bundy Corporation (Manufacturer of Vice Chairman of the Board and Chief Louis H. Roddis' Jr. steel tubing, flexible hose and engineered Financial Officer Pl astic products) Executive Finance Leon S. Cohan Lillir.n Bauder Walter J. McCarthy, Jr.* Dean E. Richardson
- Senior Vice .' resident and General Counsel President, Cranbrook Educational Community Lillian Bauder Patricia Shontz Longe" Willard R. Holland David Bing Ernest L. Grove, Jr. 'RrenceE. Adderley Senior Vice President Chairman and Chief Executive Omcer, Bing John E. Lobbia Lillian Bauder Burkhard H. Schneider Steel, Inc. (A steel service center) Frank Merriman Ernest L. Grove, Jr.
Senior Vice President Dean E. Richardson Alan E. Schwartz David M. Gates B Ralph IV Professor of Botany, l'niversity of Michigan Alan E. Schwartz Ernest L. Grove, Jr. Nominating Nuclear Review Frank E. Agostl Vice Chairman of the Board and Chief Alan E. Schwartz
- Louis H. Roddis, Jr.* Y ce President- Power Generation Financial 0meer, The Detroit Edison Company WendellW. Anderson,Jr. David M. Gates" Stanley G. Catola John E. Lobbla David M. Gates Patricia Shontz Longe Vice President - Nuclear Engineering and President and Chief Operating Omcer, The Patricia Shontz Longe Frank Merriman Detroit Edison Company Frank Merriman Malcolm G. Dade, Jr.
Patricia Shontz Longe Otis M. Smith ce PresMent 4mploye Rdadons Economist; Senior Partner, The Longe Organization and Retirement Fund Review Ronald W. Gresens Company (An economic andinvestment Compensation Patricia Shontz Longe
- Vi " President and Controller consulting firm)
Wendell W. Arierson, Jr.* WendellW. Anderson, Jr " meKay Walter J. McCarthy, Jr. E TerenceE. Adderley" David M. Gates Vice President- Administration Chairman of the Board and Chief Executive Frank Merriman Ernest L Grove Jr Omcer, The Detroit Edison Company ** ' #' Dean E. Richardson Otis M. Smith Vice President- Nuclear Operations Frank Merriman Alan E. Schwartz Dairy Farmer S. Martin Taylor Vice President- Community and Dean E. Richardson Governmental Affairs Chairman of the Board and Chief Executive Omcer, Manufacturers National Corporation Saul J. Waldman Louis H. Roddis, Jr. Vice President- Public Affairs Consulting Engineer Susan M. Beale Secretary Alan E. Schwartz Senior Partner, lionigman Miller Schwartz and Leslie L. Loomans Cohn(Attorneys at law) Treasurer Otis M. Smith Retired Vice President, General Motors Corporation
- Chairman "Vice Chairman 45
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. k.
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, M c gan 4b26 A good part of yxirlife.
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