ML20151X260
| ML20151X260 | |
| Person / Time | |
|---|---|
| Site: | Fermi  |
| Issue date: | 12/31/1987 |
| From: | Grove E, Heidel C, Mccarthy W DETROIT EDISON CO. |
| To: | |
| Shared Package | |
| ML20151X239 | List: |
| References | |
| NUDOCS 8805040097 | |
| Download: ML20151X260 (48) | |
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"A n t i e i p a t i n g l
l 19 8 7 A-N N U A L R E P O R T. _
change
- in our marketplace is one of our greatest ,
challenges. Responding
- to change requires our greatest vision, l
creativity, productivity and c o m mit m e n t."
l Detroit Edison ,
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To Our Shareho1ders: l l
The list of accomplishments of Detroit Edison and its employes in 1987 is matched only by the list of challenges still facing the company. Yet, the accomplishments-coupled with years of extensive planning and preparation-now l
make the company better positioned for, and able to focus on, the critical financial, I
competitive and regulatory issues ahead.
Common stock earnings set a record in 1987, increasing 26 percent to
$476.7 million from $378.3 million in 1986. Per-share earnings were a new high of l 1
$3.25, up 67 cents from $2.58 for 1986. During the past 10 years, earnings have l
1 increased 332 percent, with earnings per share rising 63 percent in the same period ;
despite a 166-percent increase in the average number of shares outstanding. In spite of significantly higher kilowatthour sales, operating revenues declined 0.4 percent to
$2.857 billion in 1987, compared with $2.869 billion in 1986. The decline was due primarily to substantially lower fuel and purchased power costs which were passed along to customers through a rate-adjustment procedure. Kilowatthour sales to a record 1,856,968 customers reached a new high of 39.5 billion, up 3.8 percent from 1986 sales of 38-billion kilowatthours. 1 However, this impressive earnings record will be interrupted in 1988. As i announced in January 1988, the company expects to report a loss in the first quarter of 1988 and anticipates that financial performance fu the remainder of the year will !
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. be under seve:e pressure. Contributing to the depressed financial outlook are several ommon stock earnings' factors, including the end of capitalization
.were a record v of Fermi 2 construction and financing costs, l
$476:7 million in 1987.
I the need for unusual write-offs required by new standards issued by the Financial Accounting Standards Board (FASB), and other financial uncertainties outlined more fully later in this report.
The company has been working hard in many areas to minimize the extent l and duration of this earnings decline. The programs are many and comprehensive, but progress on three major corporate goals - bringing Fermi 2 into commercial operation, increasing sales and cutting costs -is particularly notewerthy.
The Fermi 2 power plant was placed in commercial operation January 23, 1988, and on January 24 the company began collecting the first of five annual phased-in rate increases authorized by the Michigan Public Service Commission (MPSC). These rate increases, however, represent only partial recovery of the company's investment in Ferm; 2. i 1
l In accordance with the new FASB standard effective January 1,1988, the company wrote off $420 million in January, reflecting disallowances by the MPSC of some Fermi 2 construction costs and removal from the rate base of the company's l oil fired Greenwood power plant.
Additional write-offs may be Maintaining the dividend necessary and may occur in 1988. The size and timing of these write-offs will is an imperative objective.
depend on the MPSC's response to the company's pending request for an additional $298-million rate increase related largely to Fermi 2 costs. The current rate request re flects $1.7 billion in Fermi 2 costs not considered in the last rate case.
Because of a generally healthy and increasingly diversified economy, unusual weather conditions and aggressive marketing, both sales and peak Jemand reached record levels in 1987. The July 20 record summer q l peak, which exceeded loads projected for the early 1990s, was 8.4-million kilowatts, while the record winter peak set on December 15 was 6.4-million kilowatts. Fermi 2 generated about ,
. . ~ j, 1.2-billion kilowat' hours in 1957 to help meet that demand. 'p,f<'
During the year, the price of electricity to customers fell an .. 7 average of 3.9 percent due to lower fuel and purchased power costs and ieduced federalincome taxes. Holding the line on the price of ,[ electricity is a major company commitment. In fact, the new rate increase of about 2.5 percent - the first since 1985 -is stilllower ,
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than the 1987 Southeastern Michigan rate of inflation and the rate forecast for 1988. ,, 4W~ ' l The company's continuing extensive cost reduction program \ , resulted in cost savings in 1987 which will continue into 1980 and - beyond - and ultimately will further lower the price of electricity for ,r customers. Budgets have been reduced, salary increases delayed, a l selective hiring freeze instituted, and salary levels and pay increases ! restructured for some employe groups. l Maintaining the dividend remains an imperative objective I toward which every one of our programs and plans and all of our employes' commitment and efforts are directed. l l l 2
l Our planning elfort is broad and deep. A new Corporate Strategic Plan is in place and working -involving all employes. That plan led to a comprehensive 1987 study of the competitive forces at work in the company's marketplace. Responding to these forces will require broad corporate initiatives being developed in four key areas-improving effectiveness in cost-control, marketing, human resources and the company's organization. The cover of our annual report notes that "Anticipating change in our marketplace is one of our greatest challenges. Responding to change requires our greatest vision, creativity, productivity and commitment." We believe we are developing the strategies and action plans to meet the challenges and help weather the short-term finantial pressures ahead. With the support of our employes and shareholders, we know we will be successful. February 22,1988 1' h; l m _: .y
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Ernest L Grm c. Jr Charles Si lleidel \\ alter J AfcCarthy Jr Vice Chartman of the Hoard anct thesident and Chairman of the Bow d and Chief Financtal :)fhccr Chici Operating Ofhccr Chu i Executn e Offu er 3
\ l Detroit Edison marked several milestones in 1987. The company and its employes provided more electricity to more customers in 1987 than ever before in Detroit Edison's 85-year history. This was accomplished i while lowering the cost of producing the electricity-in part by increasing power i plant availability- and at the same time surpassing government standards for l environmental protection. The company generated and distributed this energy through a modern bulk power system that is basically complete for the foreseeable future, which means substantially reduced capital spending in the years ahead. Finally, the employes responsible for these accomplishments and other activities essential to operating the company's complex business were supportive, loyal and dedicated - challenging the company to be even better! j Detroit Edison will continue to need this spirit and determination, because the list of external challenges facing electric utilities is long. It includes accelerating competition from other increasingly aggressive energy suppliers, higher customer expectations, a possible economic slowdown, and current or prospective regulatory changes that could affect both the structure of the electric utility industry and the financial stability of many individual utility companies. W , s 3
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y , c' . p' ' q q.y'c ( 1 , ,. M _ l Customers generally are attempting to lower their energy costs by using , energy more efficiently. While Detroit Edison views this as an effective use of resources - good for both individual customers and the nation's competitiveness - the company also recognizes it will hold down the growth of electricity sales. At the sanic time, natural gas utilities - supported by ine current oversupply which results in lower prices - are aggressively courting conimercial and industrial ,
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customers by promoting natural gas as an alternative to traditional uses of electricity for process heating, space conditioning, water heating and cooking. These l competitors also are promoting use of natural gas to produce electricity
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through cogeneration projects. g; , Following on the heels of
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deregulation in the railroad, airline, x
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= " dustries are increasing calls for f
< f . 'i P> , deregulating the electric utility
}' 7, h -N industry.Some regulato y agencies and a growing number of commercial ,
and industrial customers are proposing changes that would impact the fundamental t tenets of electric utilities- their obligation to serve, reliability and non-discrimmatory customer practices. l l I roponents of leregulation would permit large customers to buy their energy from other utilities ar d then require the local utility to use its own lines to deliver that ; energy in a process called wheeling. They would also permit cogenerators to require utilities to wheel power to other facilities owned by the ifficult challenges
/FCe the co'gMPany cogenerator or to other customers of the utility company. Because these proposals could have an in theyears ahead.
adverse impact on the company and its smaller . customers Detroit Edison is actively involved in trying to help shape the regulatory format in order to protect the interests of the company and allof its customers. The prospect of slower national economic growth during the next few years, according to some econonusts, will apply further pressures on sales gains by electric , I utilities. Thus, with increases in electriaty sales resulting less f rom traditional ' external factors - population and economic growth, along with lifestyle changes - ) and with some traditional markets reduced by competitive forces and governmental initiatives, growth will have to come more from the company's own marketing efforts. l (left) The company :s apandedS,utem Opt rations Crater wing state of-the-art compukr technnhigy helped meri record electricay Jemands by a rerord numh r of wtomm (A bore) Customer offre rcprm ntatu e Abm:da lh nd< rson points out the many fwnefits of home security hgHm2 5
l At the same time, demands on electric companies continue to come from many directions. Shareholders properly look to their companies for increasing value and a fair return on their investments. Customers expect more reliable electric service - at the lowest a w% l reasonable price-and faster svaue kE9PON S131Lity N OMER restoration of service after muctuam sisterreston POWER storms and other emergencies. 2nz g Communities expect utilities to most 1, m ,asaws comeyn*t is respond positively to local social 10ui and economic conditions, as j'0[,*C*
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l well as to the energy needs of rzuroux ame l their residents. And, of course, utilities responsible for completing and . operating nuclear power plants y face an additional set of operat-ing, regulatory, financial and public relations challenges. All of these challenges demand the intensive attention that Detroit Edison management has devoted to them - and the thoughtful decisions which have been made and will continue to be made to meet them successfully. At the same time, the company is highly sensitive to these challenges and their potentially adverse impact on its business. At Detroit Edison, existing programs to meet the company's many challenges ! were strengthened and extended during 1987, and new programs were initiated. Significantly, the company put its new Corporate Strategic Plan to work in 1987. Guided by the company's mission statement - to prosper as a financially sound business by meeting the energy and related service needs of our customers- l employes set out to achieve several key objectives. These included strengthening the i company's financial position, achieving corporate growth, increasing sales and I customer satisfaction, improving human resource performance, better managing physical resources, operating Fermi 2 safely and etliciently, and meeting the company's public responsibilities. l To enhance employe understanding and support of - and involvement in - j the Corporate Strategic Plan, a teleconference was held with employe groups at i various company locations. This was followed by meetings in which every work group mapped out its own objectives and action plans to support company goals. 6 i
Another direct result of the new plan was a comprehensive study of all the competitive forces at work in the company's energy marketpiace. This work better defined and quantified these forces, as well as the threats and opportunities they present. With this information in hand, senior management undertook em rates became e/Tective , initiatives to identify and prioritize the steps needed when Fermi 2 reached for aggressive response. The four initiatives - t r a @ era # m ,
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improve cost control, marketing, human resources . and organizational effectiveness -involve every member of senior management, as well as employes throughout the company. On schedule for mid-1988 completion, this work is intended to help shape and position the company to cope with its changing environment and marketplace over the next 5 to 10 years. At the same time it was positioning itself for the future, Detroit Edison also was tending to the present-day needs of the most customers it has ever served-totaling 1,856,968 individuals, families, businesses, hospitals, schools and other institutions. , Meeting their needs required supplying a record summer peak load of 8.4-million ! kilowatts - a 4.7-percent increase over the previous record set in 1986 - as well as a record winter peak load of 6.4-million kilowatts. Those increases resulted not only from unusual weather conditions and from aggressive marketing, but also from a generally improved economy in Southeastern Michigan - the fif th successive year of expansion of the area's economy. This helped boost sales N 23 percent during the same five years. ' 4- . i Important in meeting these growing customer , needs was Fermi 2, which generated about 1.2-billion .. kilowatthours in its 1987 testing program. Commercial
- operation was achieved January 23,1988.
With this success at Fermi 2, however, came the z onset of severe financial strains on the company-the end of the large non-cash accounting credit which - helped support earnings during the plant's construction and testing, the need for unusual write-offs- because of a new accounting standard-of power plant costs (Leit) Cwtruction superintendent J>hn P Xuctine pieces together the nac Corparate Strategic Plan with emplo)es as part of a company wide communication program (Abore) Technician Ibtricia Brunson records data from hand-held electronic meter reading dwices which help eruure fwl, accurate buling for customers. 7
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l disallowed for ratemaking purposes by the Michigan Public Service Commission (MPSC), and the need to phase in over five years the rate increases currently authorized for Fermi 2 to help recover the company's investment in the plant. However, with Fermi 2 in commercial operation, Detroit Edison now has one of the most modern generating and transmission systems in the country-a system that includes, among others,its huge Monroe and state-of-the-art Belle River coal-
; . fired power plants. With this modern
-. generating system in place and using a l
'obalgenemting capacity d '"* " d '" " ' * ' " ' "' " * " d I '
low-sulfur eastern and western coal, wo
- ' e* needed before mid-1990s.
. the company does not expect additional capacity to be needed until the mid 1990s. As that time approaches, the company will consider a wide variety of options to meet future energy needs, including cogeneration, long-term contracts with other utilities or other power suppliers, conservation, and customer based demand-control options, as well as traditional central-station generating plants.
The transmisMon system will be enhanced by a final major link - a 22-mile, 345,000-volt line to improve service reliability from the Belle River plant. This major power line will be completed in 1990. Extensive modernization was completed during l the year on the company's System Operations Center in Detroit and at the energy management system and power pool control facility in Ann Arbor, the latter operated jointly with Consumers Power Company. These improvements will result in better reliability of electric service at lower cost to a growing number of customers who are using increasing amounts of electricity. Also in
, y . 1987, the company neared the $2-billion mark in capital expenditures over the past 17 years to
/_Y help protect the environment.
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4 c 7 The average price of a kilowatthour of p electricity sold was reduced from 7.36 cents in N 1986 to 7.07 cents in 1987, a 3.9-percent savings 2 4 s . 4 for customers. Total fuel ard other power 3
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J supply costs actually were lower than in 1986, even though the company delivered more electricity in 1987. The company's cost reduction was achieved by timely and economical fuel purchases, economical power purchases from other utilities, and passing along to customers savings resulting from changes in federalincome tax laws. 8
Completion of the Fermi 2 and Belle River power plants, coupled with moder nization of other facilities, now permits the company to close some older plants. Most have served well beyond their originally projected usefullives of about 10 years, primarily as a result of expensive renovations and extensive maintenance in f p-
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recent years. The Delray plant, one of the company's oldest. was closed in January 1988. Two other plants more than 65 years old - Conners Creek and Marysville - will be placed in reserve in 1988. Responding to current financial pressures caused by the delays and cost increases at Fermi 2, the company is in the midst of the most extensive cost reduction program in its history-an intensification of efforts started several years ago. Operation and maintenance budgets will be severely restricted for at least the next 1 j two years.1. ate in 1987, the company initiated a selective hiring freeze which. combined with retirements and other voluntary separations, will reduce the number of full time employes by 300 in 1988. These and other actions will result in substantial additional savings in 1988 and beyond. (itft) .\!+ h r h s:o r (%e ikre i b one vf more' than 7 th 6 e m;>hry a ' Gate kop, ri trame J to tw ah ?! to the sfwal no Js of u cv.r uh: ens (4twr) \fmh rn eIn'trtc he at (' ump sp?rms for ho ativ2 and o .hre are reak:ng that mark - et, a l l in turn vf-the-it nlar; bu:h! met such as lh tro,t ' se le gunt H hang to r!aurant
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l l l l In addition to cutting costs and bringmg Fermi 2 into conunercial operation. the company significantly expanded it.s marketmg activities in 19X7 and undertook the largest financing program in its history. These strategic measures are designed to l improve the company's financial position and increase shareholder value. Despite t he competitive fort es discussed pres 'ously, sales of ele ( tricity in 196 l l increased to all categories of 1)ctroit Edison customers - residential. commercial and mdustrial- with total consumption up 1X percent. New residential customers added in 19s7 totaled 33.lm, compared wit h increases of 21.215 in 19S6 and 13.313 in 19S1 Part of the 19S, mcrease m customers ~sulted from the company's purchase ' rom
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existing natural gas energy for productivity, cost-effectiveness and quality. Other marketing ef forts were directed toward increasing use of electricity in new office buildings, hotels, department stores, restaurants and other commercial structures. Closed-loop water-source electric heat pumps were installed successfully and have proved their efficiency in buildings with a variety of energy i needs. This will result in additional sales of 12.3 million kilowatthours per year for heating alone. Residentiallighting, also a marketing target, has increased as the result of continued promotion of securitylighting. _
~
The company has moved aggressively to f counteract possible loss of business to prospective cogenerators. For example, The Detroit Medical Center-a large and long-time user of Detroit Edison steam - was considering its own % cogeneration facility. The company developed a z proposalin conjunction with the City of Detroit public lighting department, which supplies the center's electricity. When final negotiations are completed between the city and medical center, this first of-its-kind long-term contract will ensure continued and reliable business from an important ; customer for at least the next 21 years. l A continuing and important marketing program is devoted to attracting new companies to Southeastern Michigan, as well as keeping existing companies in the area and helping them expand and diversify. This means more business T' he cost of electricity to customers and jobs for the service area and, therefore, more sales for Detroit fell 3.9 percent m. 1987. l Edison. In 1987, the company's I economic development team helped 193 companies locate, relocate, expand. modernize or diversify in Southeastern Michigan, up substantially from 125 companies in 1986. (1 sit) Iktroit division manager Ronald L Alinect and dicision director Helen E Zdeba play key roles. trith a strong supporting staff in managing restoration of electric sertice to customers after storms (Aboce) Afectmg a customer) grotting ntYds mean, fnal touches on a nar substation by Electricians Anthnny Hoffman. left and Theodore Aohler l 11
The ever-increasing link between good service and increased sales has been clearly identified through customer surveys which provide continuing insights into customer needs. Currently being explored to help meet some of these needs are pilot
~
electric equipment leasing programs
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for manufacturers, economic development and other special rates, em 8trale#i e Pl ans are in place i 1 and additional bill-paying help for low- to meet compel ///re challenges. I income customers. In addition to . Detroit Edison's sales of electricity, the company's SYNDECO subsidiary is marketing i a number of energy-related services to businesses in Michigan and elsewhere throughout the United States. i Despite 1987 records,1988 will be a challenging year. , While record earnings were reported in 1987, they were supported substantially by a non-cash accounting credit. As reported previously, the company expects to report a loss in the first quarter of 1988 and anticipates that financia; performance for the remainder of the year will be under severe pressure because of the end of capitalization of Fermi 2 construction and financing costs, the need for unusual write-offs, and continuation of other financial uncertainties.
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hh l" Chairman Hhitcr J .\kCarthy. Jr and Group iice President B Ralph Sylcia. in the fermi 2pourt plant control room, celebrate the moment of commercial operatim trhich the plant achiard on January 23 IN 12
.__.- .-.- . _ _ . - .- =
1 t Total 1987 earnings for common stock were a record $476.7 million, up 26 percent from $378.3 million in 1986. Earnings per share of common stock also set a record at $3.25, compared with $2.58 for 1986. n oper.uon esenoe. v.tr-, Return on common equity also reached a new high of [, 16.69 percent, up from 14.09 percent in 1986. Total m s revenues of $2.857 billion declined 0.4 percent from [ . 1986's $2.869 billion, primarily because of lower fuel and n.., purchased power costs which were passed along to
~ " " " " " ' "
customers. Sales increased 3.8 percent from 38-billion kilowatthours of electricity in 1986 to 39.5 billion in 1987. '""2"8""C""""a"""'"~~ Effective January 1,1988, the accounting credit , v. resulting from capitalization of Fermi 2 financing costs no l longer could be taken. In 1987, this accounted for about [ 57 percent of earnings. In addition, a new ruling by the a Financial Accounting Standards Board requires the (( company to write off as a loss power plant construction m costs for which rate relief was requested but denied, a
. m y u n u o c j even though the company is appealing the disallowance in the Michigan courts. Accordingly, the company an. r.roion. per sa.,, am,~
nounced a $420-million write-off in January for Fermi 2 l l
~
and for other power plant disallowances required by an
~
April 1986 order by the MPSC. More write-offs may be n necessary and may occur in 1988 because of possible - disallowances of additional Fermi 2 costs included a ' ,, n e n ~ r, . c in a rate case pending before the MPSC. Taking advantage of lower interest rates in 1987, the company completed more than $1.8 billion of debt financing, the highest levelin its history. Included were
$1.3 billion of mortgage bonds, $7.7 million of pollution control refunding bonds, and
$525 million of bank borrowing. This financing-when combined with internally .
I generated funds-covered capiial expenditures of $709.1 million and permitted total prepayment of the balance of the $1.2 billion project financing for the Belle River l power plant, which went into commercial operation in 1985, and the repayment of l maturing debt. In addition, strategic timing of financing enabled the company to redeem high-cost preferred and preference stock, resulting in substantial savings. 13 r
l Financing in 1988 is expected to be substantially lower. Capital spending also will I continue to be modest for a number of years. c.,,,,3 t, ,,,ai,,,,, , .
"^""*""'
The company currently has a request for increased annual rates of $298 million ,o pending before the MPSC. This covers higher operation and maintenance [ expenses, as well as additional capital costs a c ll for Fermi 2. In January 1988, as noted earlier, the company began collecting the first phase of increased rates when Fermi 2 went into commercial operation. This covers a portion of the plant's capital costs, along with some operation and maintenance expenses. Another major accomplishment in 1987 was completion of the agreement to purchase from Wolverine Power Supply Cooperative,Inc. its remaining ownership interest in Fermi 2. The $550-million transaction - to be completed in January 1990- and the accompanying long-term power supply agreement will benefit both Detroit Edison and Wolverine. Problems and challenges notwithstanding, Detroit Edison's management is confident it has done the right planning, made the right decisions and initiated elfective sales, operating and cost-containment programs to keep the company on the right track for the future. Fermi 2 inst Flanacing is operating successiully. Other
$$[Y S#*" o ni My generating and transmission facilities
"
- are modern and adequate for years to February $ 300 9.27 % come. The Detroit Edison work force April 400 9.49 August 400 9.82 is talented and is dedicated to December 200 10.04 Pollution Control achieving the goals the company has Refunding Bonds May and September 7.7 9.12 set for itself in every area of activity.
l'nsecured Term Notes . 525 8.19 And desp.tei compelling f.inancial October and December tow $1,832.7 problems, the company expects to remain profitable - except for the interruption in 1988 caused by the power plant write-offs- while making every effort to maintain dividends for shareholders and quality service for customers. 11 1
Responsibility for Finandal Stateinents The consolidated financial statements of The Detroit Edison Company and subsidiary companies have been prepared by management in conformity with generally accepted accounting principles, based upon currently available facts and circumstances and management's best estimates and judgments of known conditions. It is the responsibility of management to assure the integrity and objectivity of such financial statements and to assure that these statements fairly report the Company's financial position and the results of its operations. To meet this responsibility, management maintains a high standard of record keeping and an effectise system of internal controls, induding an extensive program of internal audits, written administratise policies and procedures, and programs to assure the selection and training of qualified personnel. These financial statements hase been examined by the Company's independent accountants, Price Waterhouse, whose report appears on this page. Their examination was conducted in accordance with generally accepted auditing standards. Such standards indude the evaluation of internal accounting controls to establish a basis for deseloping the scope of the examination, as well as such other procedures they deem necessary for expressing an opinion as to whether the financial statements are presented fairly. The Board of Directors, through its Audit Committee consisting solely of outside directors, meets with Price Waterhouse, representatives of management and the internal auditors to resiew the activities of each and to discuss accounting, auditing and financial matters and the carrying out of responsibilities and duties of each group. Price Waterhouse has full and free access to meet with the Audit Committee to discuss its examination results and opinions, without management representatives present, to allow for complete independence. I ' h ' Ernest L Gree, Jr. Walter 1 McCarthy, Jr. Vn chairman of the Board and Chairman of the Board and chief Financialofixer Chief Executive ofncer Report of ladependent Accountants 200 RENAtSSANCE CESTER DETROIT, MICHIGAN 48243 O'[CP If[llPIYlOll#P February 12,1988 To the Board of Directors and Shareholders of The Detroit Edison Company We have examined the consolidated financial statements of The Detroit Edison Company and its subsidiary companies appearing on pages 16 through 35 of this report. Our examinations were made in accordance with generally accepted aiditing standards and accordingly induded such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. As discussed in Note 4, the Financial Accounting Standards Board in December 1986 issued Statement of Financial Accounting Standards No. 90 which amends an earlier statement and, among other things, requires losses to be recognized as a result of utility plant cost disallowances and abandonments. The Company plans to adopt this Statement in the first quarter of 1988, effectise January 1,1988. As described more fully in Note 3, there are continuing uncertainties regarding the recosery of the Company's insestment in Fermi 2. The extent of recosery of the Company's insestment will not be determinable until all appropriate proceedings (induding court reviews) hase occurred, induding the pending appeal of the April 1986 rate order and the final resolution of the Company's 1987 rate case. The Company is unable to determine the effects,if any, that the resolution of these uncertainties may have on its 1987 and 1986 consolidated financial statements. In our opinion, subject to the effects on the 1987 and 1986 consolidated financial statemeats of such adjustments,if any, as might base been required had the outcome of the uncertainties referred to in the preceding paragraph been known, the consolidated financial statements examined by us present fairly the financial position of The Detroit Edison Company and its subsidiary companies at December 31,1987 and 1986, and the results of their operations and the changes in their financial position for each of the three years in the period ended December 31,1987, in conformity with generally accepted accounting principles consistently applied. Su Ua~Gu 15
Dw Struit Edm Gmpany and mbsdary mmpana ConsolidatedStatement lncome of Year Ended December 31(Thousands) 1987 1986 1985 Operating Revenues Electric (Note 1) $2,825,910 $2,832,945 $2,738,356 Steam 30,821 36,339 49,801 Total 0perating Revenues $2,856,731 $2,869,284 $2,788,157 Operating Expenses Operation Fuel 8 813,376 $ 741,206 $ 785,110 Other power supply 47,814 191,126 196,918 Other operation 441,046 459,534 422,133 Maintenance 245,736 258,655 250,798 Depreciation (Note 1) 237,325 232,240 218,502 Taxes other than income 179,308 177,381 175,556 159,488 126,596 124,939 locome taxes (Notes I and 6) Tota 10perating Expenses $2,124,093 $2,186,738 $2,173,956 Operating income $ 732,638 $ 682,546 3 614.201 Other income and Deductions Allowance for other funds used during construction (Note 1) $ 136,452 $ 117,069 $ 113,225 Other income and deductions (3,435) (16,869) (5,240) 663 8.827 1,642 Income taxes (Note 6) Net Other income and Deductions $ 133,680 $ 109,027 $ 109,627 Income Before Interest Charges 8 866,318 8 791,573 $ 723,828 1 Interest Charges long-term debt $ 417,474 $ 399,429 $ 401,272 Amortization of debt discount, premium and expense (Note 1) 3,626 2,721 2,502 Other 23,459 41,410 15,642 Allowance for borrowed funds used during construction (credit)(Note 1) (133,215) (129,082) (133,103) Net interest Charges $ 311,344 $ 314,478 $ 286,313 Net income $ 554,974 $ 477,095 $ 437,515 Preferred and Preference Stock Dividend Requirements 78,240 98,803 103,264 Earnings for Common Stock 8 476,734 8 378,292 5 334,251 Common Shares Outstanding- Average 146,729,292 146,643,377 143,183,133 Earnings Per Share $ 3.25 $ 2.58 $ 2.33 l (See anompnymg %tes to Omsoleed fmanoa! Statements ) 16
ne avoit sibon owynny amt subssary anun+s ons<didated Statement af Changes in FinancialPosition Year Ended December 31 (Thousands) 1987 1986* 1985* Financial Resources Provided Operations Net Income $ 554,974 $ 477,095 5 437,515 Items not affecting working capital Depreciatwn 237,325 232,240 218,502 Deferred incorne taxes and investment tax credit - net 99,050 104,430 110,778 Amortization of extraordinary property losses and unrecovered plant costs (Note 8) 9,708 12,231 12,231 Allowance for other funds used during construction (Note 1) (136,452) (117,069) (113.225) Other (762) (1,999) 2,385 Financial resources prosided by operations S 763,843 $ 706.928 $ 668,186 External Financing Sale of common stock $ -
$ - $ 113,683 Issuance of common stock on conwrsion of conwrtible cumulatiw preferred stock,5% % series 912 2,139 1,538 Sale of general and refunding mortgage bonds 1,282,005 491,696 84,728 Funds receiwd from Trustees: Installment sales contracts and loan agreements 7,374 16,591 187,091 issuance of unsecured promissory notes 524,172 99,988 309,870 increase (dectease)in short term borrowings (l04,656) 104,656 (2,000)
$1,709,807 $ 715,070 $ 694.910 Other Sources Change in obligations under capital leases (Note 12) $ 14,708 $ 15,329 $ 113,344 Increase (decrease)in accumulated rate refunds, with interest (15,939) 12,345 (43,975)
Other - net 26,054 10.223 (4,224) Total $2,498,473 $1,459,895 $1,428,241 Financial Resources Used Plant and equipment expenditures S 709,084 5 645,196 $ 710,699 Purchase from Cooperatin - Fermi 2 (Note 2) 78,514 83,512 40,479 Allowance for other funds used during construction (Note 1) (136,452) (117,069) (113,225)
$ 651,146 $ 611,639 $ 637,953 Change in net property under c;pitalleases (Note 12) 14,708 15,329 113,344 Dividends on common, preferred and preference stock 324,035 344,767 344,621 Conversion of conwrtible cumulatin preferred stock,5% % series 913 2,140 1,540 Repayment of long-term debt 1,256,590 485,975 376,185 Redemption of redeemable preferred and preference stock (Note 10) 122,986 79,613 10,015 Increase (decrease)in working capital" 128.095 (79,568) (55,417)
Total $2,498,473 $1,459,895 $1,428,241 changes la Worklag Capital Cash and temporary cash inwstments $ 136,692 $411.980) $ 3.030 Accounts recm able (3,194) (12.297) 10.069 lawatores I,,535 20.520 (75.179) Accounts papble 12,578 (14361) 37.572 Property, general and income taxes l15,H8) (19.595) (34 220) Interest (14.232) 3.027 5,134 Other 10,764 (44.3A2) [1323) Increase (decease)in morking capital" $I28,035 $(79.56A) $(55.417)
- Changes in obliganons and net property under capital leases restated for 19*6 and 1985 (see Note 121
)
* *Enduding short-term borromings, current maturites c4 Long terr debt, rvrent obhgahons under capitallears and preferred and preference stock due within one year
($ce anunpannng Wes to Convadated fmancal statements ) 17 1
-\
The Detrc Eduon Cantuny wuf subsdary avnpana Consolidated
. Balance Sheet December 31 (Thousands) 1987 1986*
Assets Utility Properties (Notes 1,2,4,5 and 12) Plant in service Electric $ 7,406,432 $ 7,230,676 Steam 59,249 58,816
$ 7,465,681 $ 7,289,492 less: Accumulated depreciation (2,210,543) (2,027,733)
$ 5,255,138 $ 5,261,759 Construction work in progress (primarily Fermi 2) 4,420,920 3,772,957 Nudear fuel 6,817 -
Net utility properties $ 9,682,875 $ 9,034,716 Property under capitalleases $ 256,994 $ 245,699 Nudear fuel under capitalleases 324,774 286.397
$ 581,768 $ 532,096 less: Accumulated amortization (108,485) (73,521)
Net property under capitalleases 8 473,283 $ 458,575 Total owned and leased properties $10,156,158 $ 9,493,291 Other Property and investments Non-utility property 8 8,845 $ 12,098 investments and special funds Oess allowance for dedine in value of investments of $4,400,000) 26,781 24,543
$ 35,626 8 36,641 Current Assets Cash $ 4,829 8 2,769 Temporar / cash innstments (at cost, appror' mating market value) 134,632 -
Customer accounts receivable Oess allowance for uncollectible accounts of $36,000,000 and $32,000,000, respectively) 203,716 220,293 Other accounts receivable 42,580 29,297 inwntories(at awrage cost) Fuel 238,678 246,474 Materials and supplies 141,591 132,260 Prepayments 7,869 9,957 Other 2,548 - 8 776,443 $ 641,050 Deferred Debits Unamortized debt expense (Note 1) $ 47,318 8 38,408 Accumulated deferred income taxes (Note 1) 100,603 20,850 Extraordinary property losses and unrecowred plar.t costs (Note 8) 37,423 47,131 Other (Note 2) 4,643 99,754
$ 189,987 $ 206,143 Total $11,158,214 $10,377.125
' Net property coder capital leaies restged for 19% (see Nde 121 (See amwnpanymg %tes to CrewMerd haannal Steements )
1M
The lktroit Edhan Cornpany and asbsnistry awnpannes
\ onsolidated %! & dance Sheet December 31(Thousands) 1987 1986*
Liabilities Capitalization Common stock - $10 par value,160,000,000 shares authorized; 146,751,865 and 146,699,431 shares outstanding, respectively (630,298 and 682,766 shares, respectively, resened for conwrsion of preferred stock)(Note 9) $ 1,467,519 $ 1,466,994 Premium on common stock 551,662 551,254 Common stock expense (47,700) (47,680) Retained eanings used in the business 948,504 745,835 Total common shareholders' equity $ 2,919,985 $ 2,716,403 Non-redeemable preferred stock (Note 9) 241,370 242,284 Redeemable preferred stock (Note 10) 98,777 124,885 Non-redeemable preference stock (Note 9) 137,406 287,406 Redeemable preference stock (Note 10) 44,34I 87,698 fong-term debt (Note 11) 4,693,687 3,656,569 Total C:,italization 8 8,135,566 $ 7,115,245 Other Non Current Liabilities Obligations under capital leases (Note 12) $ 153,623 $ 155,823 Accumulated rate refunds, with interest 10,839 26,778
$ 164,462 $ 182,601 Current Liabilities Short term borrowings(Note 7)
Bankloans $ -
$ 19,000 Bankers acceptances - 18,905 Commercial paper - 56,751 Trust demand notes - 10,000 Amounts due within one year long-term debt (Note 11) 178,825 646,440 Preferred and preference stock, including redemption premium of $14,647,500 in 1987 (Notes 9 and 10) 195,398 70,648 Obligations under capital leases (Note 12) 319,660 302,752 Accounts payable 184,670 197,248 Property and general taxes 288,770 273,624 income taxes 11,455 10,713 Interest 99,909 85,617 Dividends payable 80,448 84,764 Payrolls 55,406 50,504 MPSC ordered refunds, with interest 33,319 10,631 Other 39,324 72,902 l
$ 1,487,184 $ 1,910,499 l
Deferred Credits l Accumulated deferred income taxes (Note 1) $ 972,551 $ 821,224 Accumulated defeved investment tax credits (Note 1) 349,769 322,293 Other 48,682 25,263
$ 1,371,002 $ 1,168,780 Commitments and Contingencies (Notes 2,3,4,5,12 and 13)
Total $_11,158,214 $10.377,125
*0bhgams under capital leases restated for 19s6 (see %te 12t (See anornpanymg %tes to ConmMmed Fmancal Staements )
19
ne nova ison canpany and adaray ampana ConsolidatedStatement Common Shareholders' Equity of Premium Retained Common Stock on Common Earnings
$10 Pat Common Stock (Jsed in the Shares Value Stock Expense Business (Dollars in Thousands)
Balance at December 31,1984 139,081,562 $1,390,816 $512 401 $(47,370) $524,151 issuance of common stock Dividend Reinestment and Common Share Parchase Plan 6,307,762 $ 63,077 5 33,409 $ (227) $ , Employes' Savings Plans 1,098,764 10,988 6,436 Conversion of convertible cumulative preferred stock,5%% series 88,408 884 689 (35) Experm associated with preferred and preference stock redeemed (Notes I and 10) (88) Net income 437,515 Cash dividends declared Common stock-$1.68 per share (241,397) Cumulatin preferred and preference stock * (103,224) Balance at December 31,1985 146,576,496 $1,465,765 $552,847 $(47,632) $617.045 issuance of common stock on conwrsion of comtrtible cumulative preferred stock, 5%% series 122,935 $ 1,229 $ U8 $ (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) Cumulatin preferred and preference stock * (98,378) Balance at December 31,1986 146,699,431 $1,466,994 $551,254 ${47,680) $745,835 i Issuance of common stock on conversion of convertible cumulatin preferred stock, 5%% series 52,434 $ 525 $ 408 $ (20) $ Premium and expense associated with preferred and preference stock redeemed (Notes I and 10) (28,270) Net income 554,974 Cash dividends declared Common stock-51,68 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
' At established rate for each series.
(See accompanying Notes to cons (Added Finannal Stmements ) 20
ne Sovir Mison Caremy auf a:bsniary awrpums Consolidated
,, Preferred and Preference Stock Statement ~ of Cumulatier 1 l
Date of issuance December 31 (Thousands) 1987 1986 Cumulative Preferred Stock - $100 Par hloe Author! zed - 9,000,000 shares; Outstanding - 3,693,710 and 3,844,524 shares, respectively (3,539,827 shares unissued) Non Redeemable Preferred Stock (Note 9) 5% % consertible series,112,130 and 121,464 shares, respecthely October 1967 $ 11,213 $ 12,146 9.32 % series,499,080 shares October 1970 49,sG9 49,908 7.68% series,500,000 shares March 1971 50,000 50,000 7.45% series,600,000 shares November 1971 60,000 60,000 7.36% series,750,000 shares December 1972 75,000 75,000 Non-redeemable preferred stock expense (4,751) (4,770) Total Non-Redeemable Preferred Stock $241,370 $242,284 Redeemable Preferred Stock (Note 10) 9.72 % series,400,000 and 449,150 shares, respectively December 1978 $ 40,000 $ 44,915 9.72 % series,80,000 and 89,830 shares, respectively January 1979 8,000 8,983 9.60% series,301,750 and 319,500 shares, respecthely October 1979 30,175 31,950 9.60 % series,250,750 and 265,500 shares, respectively January 1980 25,075 26,550 13.50% series,200,000 and 250,000 shares, respecthely December 1980 20,000 25,000 Redeemable preferred stock due within one year (23,250) (11,148) Redeemable preferred stock expense (1,223) (1,365) Total Redeemable Preferred Stock $ 98,777 $124,885 Cumulative Preference Stock - $1 Par Wlue Author 2ed - 30,000,000 shares; Outstanding - 8 14,180,180 and 18,180,180 shares, respectively (15,819,820 shares unissued) Non Redeem:.ble Preference Stock (Note 9) 82.28 series,2,000,000 sWes December 1977 $ 2,000 $ 2,000
$3.42 series,3,000,000 shares October 1982 3,000 3,000
$3.40 series,2,250,000 shares December 1982 2,250 2,250
$3.12 series,750,000 shares February 1983 750 750
$3.13 series,2,600,000 shares May 1983 2,600 2,600
$3.24 series, 1,400,000 shares September 1983 1,400 1,400 Premium on non-redeemable preference stock 288,000 288,000 Non-redeemable preference stock due within one year (150,000) -
Non-redeemable preference stock expense (12,594) (12,594) l Total Non Redeemable Preference Stock $137,406 $287,406 Redeemable Preference Stock (Note 10) l
$2.75 series,980,180 and 1,180,180 shares, respecthely July 1975 $ 980 $ 1,180
$2.75 series B, 1,200,000 and 1,400,000 shares, respecthely December 1975 1,200 1,400
$4.12 series,2.000,000 shares (redeemed January 1987) January 1982 - 2,000
$4.00 series,1,600,000 shares (redeemed April 1987) April 1932 - 1,600 Premium on redeemable preference stock 52,324 148,324 Redeemable preference stock due within one year (7,500) (59,500)
, Redeemable preference stock expense (2,663) (7,306) Total Redeemable Preference Stock $ 44,341 $ 87,69[ l l (See aerompanying htes to conddated Fmannal Statew ats ) 21
7he Moit &t Carputy arntsukakuy cornanies ConsolidatedStatement Long-lerm Debt of i Interest Rate
- December 31 (Thocands) 1987 1986 General and Refunding Mortgage bonds Series P due 8/15/87 4%% $ - 8 66,325 Series Q, due 6/1/89 4% 37,695 37,695 Series R, due 12/1/96 6 100,000 100,000 Series S, due 10/1/98 6.4 150,000 150,000 Series 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 i Series Y, due 11/15/01 7% 60,000 60,000 Series Z, /cce 1/15/03 7% 100,000 100,000 .
Series AA, due 5/1/04 9% 100,000 100,000 Series EE, due 12/15/99 11 % 3C,000 35,000 Series HH, due 7/15/06 10 % 50,000 50,WO 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 3/15/99 10 % 120,000 130,0M Series UU, due 9/15/09 10 % 100,000 100,000 1980 Series B, due 4/1/99 12 % 73,400 86,700 1985 Series A, due 5/1/92 11.9 35,000 35,000 1985 Series B, due 6/1/92 11.25 50,000 50,000 1986 Series A, due 4/15/16 9% 200,004 200,000 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 - l 1987 Serin B, due 4/15/97 8% 175,000 - 1987 Series C, due 4/15/14 9% 225,000 - 587 Series D, due 8/15/92 9% 250,000 - 1987 Series E, d'Je 8/15/96 10 % 150,000 - 1987 Series F, due 6/15/93 9% 200,000 - less: Unamortized net discount (12,050) (5,372) : (85,475) ' Amount due within one year (19,150)
$3,264,895 51,999,873 Tax Exempt Pwenne Bond Obligations lostallment sales Contracts (Secured by corresponding amounts d General and Munding Mortgage Bonds)
City of Detroit, due 3/1/S8 - 6/1/94 6.95 % $ 15,295 8 17,545 City d Harbor Beach, due 3/1/88 - 3/I/05 6.98 3,340 3,415 ! City d River Rouge, due 2/15/88 - 10/1/02 6.93 48,030 49,500 . City d Superior, due 2/1/88 - 2/1/01 8.09 41,200 41,900 I City of Trenton, due 3/l/88 - 3/1/05 7.04 6,080 6.215 9.36 59,030 60,310 County d Monroe, due 3/1/88 - 10/1/14 County d St. Clair, due 6/15/88 - 5/1/22 10.22 210,150 213.265 less: Unamortized net discount (498) (537) Funds on deposit with Trustee (105) (97) Amount due within one par (8,735) (9,025)
$ 373,787 8 382,491 Icstallment Sales Contracts County d Monroe, due 5/1/88 - 12/1/16 10.68 $ 315,170 $ 318.110 less: Amount due witbin one par (940) (1,940)
$ 314,230 $ 516,170 -
Loan Agreements Pollution Bond Refunding Projects, due 2/15/94 - 9/15/07 9.05 8 35,775 5 28,035 l
$ 723,792 8 726,696 Unsecured Promissory Notes Belle Riwr Project Financing (retired during 1987) -% $ - $ 825,000
- Variable interest rates, due 3/18/B8 - 1/15/90 8.34 625,000 125,000 l Fixed interest rate, due 7/9/87 10.05 - 250,000 l Fixed it.terest rates, due 3/14/88 - 4/25/91 12.05 230,000 280,000 l less
- Amount due within one year (150,000) (550.000)
$ 705,000 $ 930.000
$4,693,687 l Totallong-Term Debt (Note 11) $3.65g
%ghted awrage mterest rue d Decemtier 31.1987 for Tax Laempt Reweve Bond Otegahons and Unsecured Prorpssory Notes (See aanmpanying Notes to Consoladded Fmancal StWements )
22
ne turit Mson Comparty and subsniay awnpanes N. ote to Corgolidated
- FinancialStatemerJls Note 1 Significant Accounting Policies equity) funds applicable to the cost of construction are IndustrySegment - The Detroit F2ison Comtany transferred from the incone statement to construction work in
("Company")is a public utility engaged in the generation, progress in the balam sheet. This accounting procedure is purchase, transmission, distribution and sale of electric intended to remme the effect of the cost of financing energy. construction activity from the income statement. Under Regulation - The Company is subject to regulation by the current ratemaking practice, the cash recmery of AFUDC, as Michigan Public Senice Commission ("MPSC") and the well as other costs of construction, occurs only when Federal Energy Regulatory Commission ("FERC") with completed projects are placed in service and related respect to accounting matters and maintains its accounts in depreciation is authorized to be recmered through customer accordance with Uniform Systems of Accounts prescribed by rates. (See Notes 3 and 4 for information regarding pending these agencies. rate matters, MPSC-ordered disallowances, and new accounting standards.) Principles Appliedin Consolidation - The Consolidated The Company capitalized AFUDC at 10.73 % through July Financial Statements indude the accounts of all subsidiary 16,1985 and 10.3 % thereafter. In accordance with MPSC companies, all of which are whouy owned. requirements, these composite AFUDC rates are equal to the Ravnues - Rewnues are recorded when customers are blued merau rate of return authorized in electric rate orders. on a monthly cyde basis. Revenues indude the recovery of in accordance with FERC accounting requirements, the fuel and purchased power costs, subjed to annual Power Consolidated Statement of Changes in Financial Position is not Supply Cost Reccwry ("PSCR") rea>nciliation hearings adjusted to remove the borrowed funds component of AFUDC conducted by the MPSC. Any mer or under recovery of these of $133.2 million, $129.1 million and $ 33.1 rniuion for 1987, costs is recorded in the Consolid3ted Balance Sheet pending 1986 and 1985, respectively. Total AFUDC for both borrowed the results of such hearings. and other funds amounted to $269.7 million, $246.2 million Property: Depreciatior:, Retirement andMaintenance - and $246.3 million for l987, l986 and 1985, respectiwly. Utility properties are recorded at original cost. The annual AFUDC amounted to 57 %,65% and 74 % of Earnings for provision for depreciation is calculated on the straight-line Common Stock for 1987,1986 and 1985, respectiwly. remaining life method by applying annual rates approved by /ncome Tues - For federal income tax purposes, the the MPSC to the average of year-beginning and year ending Company computes depreciation using accelerated methods balances of depreciable property by primary plant accouats. and shorter depreciable lives. Deferred income taxes are for majcr generating units, the first year's depreciation prmided for timing differences between book and taxable expense is calculated on a monthly basis commencing with the income to the extent authorized by the MPSC. Investment tax month in w hich the unit is placed into commercial operation. credits utilized are deferred and amortized mer the estimated Annual depreciation provisions expressed as a percent of composite senice life of the related property. (See Note 6.) average depreciable property were approximately 3.3 % for Copitali:ation - Discount, Premium and Erpense - The 1987,1986 and 1985 In general, the cost of properties discount, premium and expense related to the issuance of retired in the normal course of busmess is charged t long-term debt are anutized mer the life of each issue. accumulated deprecation. Expenditures for maintenance and g repairs are charged to expense, and the cost of new property mstalled, which replaces property retired, is charged t net gain on reaccuired capital stock induded in premium on Property accounts. g ; Allowance for funds Used During Construction ('AFUDC")- used in the business. AFUDC, a non<>perating non cash item, is defined in the l Extraordinary Property Losses and Unrecurred Plant 1 FERC Uniform System of Accounts to indode the net cost for osts - e 8. the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds leases- See Note 12. when so used." AFUDC invohts an accounting procedure Employes' Retirement Plan and Other Ibstretirement whereby the approximate interest expense and the cost of Benents -See Note 14. other (common, preferred and preference shareholders' 23
neDwrwn canpary misasury unpanas
, utes to Consolidated finyncialStaternents in c. April 1,1986 order, the MPSC imposed the Note 2 requirement that Fermi 2 could be deda ed to be in FW 2 commercial operation nly when a 90 % power level for 100 Project Costs - Fermi 2, a nudear generating unit having a continu us hours ("100 hour run") had been achieved. The nominal capability rating af 1,100 MW, was placed into ur run was compW on Jamary 23, H83 and, as commercial operation on January 23,1988. In 19U, the authon.zed, on January 24,1988 the Company bagan Company sold a 20% undivided ownership interest in Fermi 2 collecting rates for a portion of the Ferm: 2 investment.
to Woherine Power Supply Cooperatin, Inc. ("Cooperative") Testing and Licensing - The Company is subject to the Under the terms of a Participation Agreement providing for jurisdir at of he Nudear Regulatory Commission ("NRC") ( the Cooperadve's purchase 20% of all costs associated with with upact S construction, licensing and operation of Fermi the construction and operation of Fermi 2 were to be paid by
- 2. Fra ', ; to time the NRC may consider taking the Cooperatin. The Participation Agreement os later t enforcement or other action against the Company as a result amended to limit the Cooperadw's Fermi 2 investment to of alleged technical and procedurahiolations at the plant. Any
$426.9 million for plant (exduding other costs capitalized by enforcement action may result in fines levied against the the Cooperatin), $24.3 million for nuden fuel and $10 Company.
million for materials and supplies. In 1984, the investment In July 1985, the NRC granted the Company a full power limitation was reached and the Company began funding all operating license for Fermi 2, which the NRC subsequently subsequent fermi 2 project costs and the Cooperative's Fermi made subject to administratin restrictions requiring NRC 2 ownership interest began to dedine. approval of test completion and power a<rension at increasing in 1985 snd 1986, the Participation Agreement was again lewis. On January 15,1988 the Company received NRC amended to prmide for quarterly purchases of portions of the approval to increase power to 100 % and on January 23,1988 Cooperative's Fermi 2 ownership interest. Such quarterly the unit was dedared to be in commercial operation. purchases continued for the period conunencing July 1985 through the commercial operation of Fermi 2. These quarterly Purchase o/ Cooperative ) Ownership /nterest - in 1985, the purchases, as well as the Company's planned January 1990 Company commenced quarterly purchase payments equal te purchase of the Cooperatiw's remaining Fermi 2 ownership the Cooperative's quarterly interest payments on indebtedness interest, are discussed below. related to its investment. A dispute arose be+ ween the ' Prcject costs at December 31,1987 of both the Company Company and the Cooperatin relating to whether payments made after December 31,1985 would reduce the Cooperatiw's and Cooperative are shown below: ownership interest Accordir. gly, title documentation for payments for the quarters ended March 31,1986 and June 30,1986 were placed in escrow pending resolution of the Fenal 2 Pro}ect Costs N *V dispute. In March 1986, the Company and the Cooperatin Add uei w further agreed that the Company would make quarterly y, cogm c Cost Coopergiw(2) Cd purchases of an additional portion of the Cooperative's CostO) Porten ownership interest in Fermi 2, equal to the Cooperatht's nue :)09 5 s40s 4 s2.630 i s192.2 s2.s72.3 to 3 t4u g_ quarterly principal payments on indebtedness related to its Ansc i.m o 1s 5 L4ss 5 inwstment. In September 1986, because of the dispute, w s4.565 5 s426.9 s4.111 6 s202.5 $4.34 L1 quarterly purchase payments were deferred upon agreemer.t Cooper cht's Ou seeship laterest of the parties. P" d On December 14,1987, the Company and the Cooperatin
, g executed an amendment to the Partiapation Agreement which cost resu rest 8i33.7 Prmides for the terms of a January 1990 purchase (estimated s426 9 $306 8 at $550 million: $513 million for plant, $35 million for nudear 0; see wie 4 for informsoon on steement a riaancial Accoanting Sundares rsFAS~)M 90,1trgulged Faterpri.ses- Acanhngfor Abandonmenu fuel and $2 million for materials and supplies) by the Company ome Cooperative's remaining undivided ownership (2) Qwt pu s ny from the coopersne from July nterest in Ferm,2. Thts amendment resohts the dispute as to i
m3 throogt Decemter 19siascePurttee d cooperswo o nership quarlerly payments and provides that title documentation for , Interest." hereir..) the quarterly purchase payments made after December 31, 1985, equal to the Cooperatht's interest on indebtedness related to its investment in Fermi 2, will remain ia escrow until the completion of the scheduled January 1990 purchase. 24
{ i t Payment of deferred and current quarterly purchases of Note 3 j $117.3 million to the Cooperative was made in December Rate Matters 1987. Quarterly pu chases from the Cooperative totaled
$213.3 million ($202.5 million for plant, $10 million for General- The Company is subject to the general regulatory nuclear fuel and $0.8 million for materials and supplies) jurisdiction of the MPSC, which, from time to time, issues its through Decembe .1,1987. Of this amount, $147.1 million orders pertaining to the Company's conditions of senice, rates represents purchases for which title documentation was placed and recmtry of certain costs. Orders of the MPSC are in escrow and will not be released until the scheduled final generally appealed and as such are often subject to judicial purchase in January 1990. rniew mer protracted periods i time and such matters are As of December 31,1986, $79.3 million of quarterly often remanded to the MPSC for additional proceedings.
f parchases of the Cooperatie's ewnership interest in Fermi 2 Tar Re/orm Act o/1986- On September 1,1987, the MPSC were recorded as Other Deferred Debits in the Censolidated ordered the Company to reduce ds electn.e rates based on a Balance Sheet because of the dispute noted abow. At Decen'ber 31,1987, due to the resolution of the dispute, 1986 test period by $66 million annually to reflect the effects quarterly purchase payments are recorded as Utility f the federal Tax Reform Act of 1986 ("TRA") This order Properties in the Consolidated Balance Sheet. reduced rates effectie September 2,1987 by approximately At December 31,1987, the Cooperatiw's adjusted 2.45 % for allclasses of customers. participation interest in Fermi 2 was 11.282 %. Prio ifPSCBectric Rate Case Orders - In 1983, the in January 1990, the Company expects to issue Company filed an electric rate case with the MPSC requesting approximately $550 million in General and Refunding an annual rewnue increase of wroximately $969 million for Mortgage Bonds ("Mortgage Bonds") as payment for the general cost increases for the 1984 tesuear and for rewoues Cooperative's remaining ownership interest. Such Mortgage coincident with the commercial operation of Belle Rint Unit Bonds will bear the same interest rates as the Cooperatin's Nos. I and 2 and Fermi 2. On August 1,1984, Belle River Unit Fermi 2 related indebtedness and will be assigned by the No. I commenced commercial operation and the Company Cooperative to the Rural Electrification Administration, began collecting rates designed to poduce annual rewnues in guarantor of the Cooperatiw's Fermi 2 related indebtedness-the amount of $182.9 million. On July 9,1985, Belle River In March 1987, the Company received authorization from the Unit No. 2 commenced commercial operation. On Ju., !6, MPSC for the issuance of such Mortgage Bonds. 1985, the MPSC issued an order designed to produce annual From January 24,1988, the effectiw date of rate relief renoues in the amount cl $99.3 million for the commercial associated with Fermi 2, through the January 1990 planned operation of Belle River Unn No. 2. 0n Apnl 1,1986, the purchase date, the Company will purchase 100 % of the MPSC issued an order for the Corupany's Fermi 2 rate request Cooperatin's fermi 2 capacity and energy entitlenients. The (discussed below) cost for the buyback cf power will be based on the in ts July 16,1985 order, the MPSC allowed rate base Cooperatiw's total debt service (interest and amortization of treatment of the Belle River Project but based on its principal) and certain other costs such as fuel and operation "reasonable and prudent" standard concluded there was an and maintenance expenses. Buyback payments to the u0 reasonable delay in the construction of this project. The Cooperatiw are currently estimated at $87.9 million and MPSC disallowed approximately $96.9 million ($5,.2 million
$97.2 million for 1988 and 1989, respectiwly. In addition. the of w hich is applicable to the Company's rate base) including Cooperatie will continue to purchase capacity and energy
$36.0 million for coal hanaling facilities and boiler plant from the Company and such current purchases of 7.5 MW will equipment and $60.9 million due to what the MPSC termed an increase annually to 135 MW by the year 2010 and continue at impudent delay of twele months. The Company appealed that lewl throgh the year 2025.
and c1 September 17,1985, the Ingham County Circuit Court Decommissioning - The NRC has authority to regulate the issued an injunction which allowed the Company to collect, method by which Fermi 2
- 2 decommissioned. The MPSC subje-t to refund, rates in an amount designed to produce an has jurisdiction over the matters pertaining to the reconry of additional $12.1 million in annual rewnues to compensate for costs of decommissioning nudear power plants in January the $60 9 million of the Belle River disallowance. On 1987, the MPSC issued an order authorizing the establishment December 16,198S, the Court ruled that the MPSC had not of a $100 million External Trust Fund (in 1987 dollars) to met the substantial evidence standard for the $60.9 mi: lion finance the decommissioning of Fermi 2. ine order approves Belle Rint costs disallowed due to imprudent delay and surcharges on customer bills of both the Company and the remanded the case to the MPSC for further proceedi.qs Cooperatin commencing with the commercial operation of consistent with the Court's decision.
Fermi 2 and extending rer the life of the plant. Beginning in The April 1,1986 order prcsided for a rate increase to be 1990 and ewry three years thereafter, there will be a review phased in over a five year period commencing with the of the adequacy of the estimated & commissioning costs and commercial operWon of Fermi 2. On De ember 22,1987, the related surcharge. April 1,1986 phase-in rate increases were restated by the 25
oles to knwhdated finandalStatemtnis MPSC for the effects of a recent Internal Ratnue Senice in July 1985, the MPSC reduced the Company's authorized ("lRS") ruling and the TRA and totaled $404.2 million return on common equity to 14.5% and authorized merall (induding interest) apportioned by year as follows: $68.4 rate of return to 10.3 %, The Fermi 2 order, u amended, million increase in the first year, followed by increases of further reduced the Company's authorized rate of return on
$74.7 million, $76.7 million, $81.9 million and $102.5 common equity to 14.0 % and its authorized mtrall rate of million. Based on current generaDy accepted accounting return to 10.18 %, to be effective when Fermi 2 commenced principles, the phase-in plan, as amended, would be accounted commercial operation. Howewr, such returns are not assured, for by recntding non cash items of income consisting of but rather are dependent upon lotts of sales, rnenues and deferred depreciation and deferred return (at the merall rate expenses, of return of 10.18 %) totaling approximately $475.8 million in its order establishing the 1987 PSCR billing factor, the (annual deferrals for the first four years of Fermi 2's MPSC left unresohtd the issues concerning the amounts that commercial operation of $190.3 million, $142.7 million, $95.2 are recmerab's for reasonable and prudent expenditures for million and $47.6 million, respectively), with these deferred nudear fuel and the buyback from the Cooperathe of capacity amounts amortized to operating expense as the cash recmtry and energy associated with Fermi 2. The Company expects of such deferred amounts is realized through toenues mer that the MP5C may disallow the recmtry of a portion of the life of the plant. Howner, the MPSC order, as amended, nudear fuel and buyback costs in PSCR proceedings.
does not prmide for the recmtry through rotnues of (See Note 2.) deferred depreciation or a portion of deferred retu u, nor a Under generally accepted accounting principles in effect in full return on such deferred amounts, and this prosision of the 1987, a write-off would be required only if, and to the extent order, among others, is the subject of pending appeals. The that, anticipated future rnenues associated with a plant, MPSC authorized phase-in plan does not meet the induding return, are insufficient to reemer current operating requirements of SFAS No. 92 as discussed in Note 4. expenses and depreciation of all of the plant investment, The oder, which disallows $397 million of Fermi 2 project induding the amount disallowed, plus associated ongoing costs, is based upon a 1983 total project cost estimate of interest costs. The Company belines that WiripMed future
$3.075 billion of which $2.648 billion ($2.552 billion MPSC revenues associated with Belle River ar 4 a result jurisdictional and 50.096 billion FERC jurisdictional) relates to of the MPSC's April 1,1986 order, as a- t987 the Company's portion of the plant. The order grants recmrry MPSC Dectric Rate Case Filing and judg. , will be of $2.237 billion in MPSC jurisdictional project costs for sufficient to recmtr total plant costs and expenses.
Ferri 2. Based upon alleged imprudence of certain Accordingly, a write-off in 1987 of MPSC disallowed plant expenditures, no return on or recmtry of $313 million of the costs is not required under generally accepted accounting Company's MPSC jurisdictional project costs were allowed. principles in effect through December 31,1987. Howner. The nrder allows recmtry through depreciation of $2 million until all appropriate proceedings (induding court rniews) of dinilowed project costs, but a return on such costs is not with respect to the Company s appeal of the MF$C Aprit 1, allowed. 1986 rate order, as amended, and with respect to the 1987 The MPSC also ordered that, upon Fermi 2 commercial MPSC Dectric Rate Care FilMg have been completed, an operation, the Comoany was to remove its 795 MW oil-fueled uncertainty exists as to the amount of future retnues Creenwood Unit No. I from rate base untilit is determined in associated with Fermi 2 and as to their sufficiency to recmtr future proceedings to be necessary for reliability or economic total plant costs and expenses, reason On January 24,1988, Greenwood Unit No. I was 1937#PSCDectric Rate Case filing - On June 10,1987, the remowd from rate base. Howner, the Company is permitted Company filed an application with the MPSC requesting to recmtr through rates operating expenses with respect to increased electric rates, which request was amended on Greenwood Unit No.1, induding depreciat9. but may not October 1,1987. The Company has requested increased rates earn a further return on the $283 million ou mestment. of $298 million and proposed modifications to the Fermi 2 The Company has appealed the Fermi 2 project cost phase-in plan which are necessary to b4ng such plan into disallowances and the MPSC-ordered removal of the compliance with the requirements of SFAS No. 92, "Regulated Greenwood un t from rate base as well u other prosisions of Enterprises - Accounting for Pha.se-h. Plans," (discussed in
- he order to the Ingham County Circuit Court. The Michigan Note 4). Tiis rate request addresses additional operation and Attorney General ("AG") has also appealed portions of the maintenance expenses and return on and recmery of MPSUs order, induding placing the MPSC authorized portion additional Fermi 2 project costs of approximately $1.5 billion of Fermi 2 in rate base and allowing a return on the amounts mer the Fermi 2 investment considered in rates in the MPSC's deferred under the phase-in plan. The matter has been April 1,1986 order, as amended. The filing also indades an remanded by the Court to the MPSC where further proceedings are pending.
26
estimated $201 million of expenditures by the Company Ente. prises Acwunting for Abandonments and Disallowances through De< ember 31,1987 for quarterly purchases from the of Plant Cats," w hich is required to be adopted in 1988. Cooperatiw. The filing does not include the Company's SFAS No. 90 requir" the future rewnue that is expected scheduled 1990 purchase for approximately $550 million of to res911 from the regulator's indusion of the cost of an the Coopentiw's remaining undivided ownership interest in abandoned plant in allowable costs for ratemaking purposes to Fermi 2. be reported at its present value when the abandonment The Company's proposed amenced phase in plan for becomes probable. If the carrying amount of the abandoned annual rate increases, as compared with the phase-in plan set plant exceeds that present value, a loss wodd be recognized. forth in the December 22,1987 MPSC order is as follows: SFAS No. 90 also requires any disallowed costs of a recently completed plant to be recognized as a loss when such r be 22 a disallowance becomes probable and a reasonable estimate of w, l{ the disallowance can be made. If part of the cost is disalked rhue-in hes rhue-in tan (nousags; indirectly (such as a disallowance of return on innstment on a i : 70.872 s 68.379 portion of the plant), an equivalent amount of cost shall be 2 sil2.965 s 14.695 deducted from the reported cost of the plant and recognized 3 s 92.112 s 76.756 as a loss. 5 s !! SFAS No. 90 specifies that AFUDC should be capitalized 6 s 35.812 - only if its subsequent inclusion in allowable costs for ratemaking purposes is probable. The Company is required to file proposed rate schedules on The Company plans to adopt SFAS No. 90 in January 1988 an annual basis with rates effectiw upon approval of the rate and will record certain net after tax losses totaling $420 schedules by the MPSC. The first year rates of $68.4 million million ($344 million cumulatiw effect at January 1,1988 and became effective on January 24,1988. $76 million charge to income in 1988) as discussed below. The MPSC authorized phase-in plan does not meet the The cumulatiw effect for years prior to January 1,1988 is requirements under SFAS No. 92. The Company's requested as follows: phase-in rates shown above contain adjustments in the second year which, if adop"d by the MPSC, would bring the phase-in plan into compliance with SFAS No. 92. (See Note 4 ) Defemd The Company intends to seek a rate adjustment from the MPSC to reflect (1) the anticipated January 1990 $550 million
*$d c 'm"'" $
fmjo,uj purchase of the Cooperatiw's remaining ownership interest in 1. MPSC disanomances of Fermi 2 Fermi 2 through the issuance of an equivalent amount of protect costs as set forth in the order daed April 1.1986, as amended. plus Mortgage Bonds and (2) the partial offsets to such rate adjustment by reduced billings through the IWer Supply Cost $37hl*,[**** $446 s'io7) s339 Recowry Claue upon termination of the 100% buyback of the 2. Other - Disanomance of Bene Rher Cooperatiw's fermi 2 capacity aad energy entitlements on January 1,1990, and the effect of additional purchases of 7 ii d wm 02 h 2 ud 3 in 1980(see Notn ! capacity and energy by the Cooperatin from the Compny. 3 and 8) 9 (4) 5 (See Note 2.) Total cumulatre effect for 3 ears prier to January 1,1988 s455 s(lit) s344
'As discussed in hote 6. the Company anticipates adortmg SFAS No. 96 Note 4 xccounting for income mes by 1989. L'pon adoptma or srAs so. 96, the Company is required to ust deferred locome tax balances in accordance l Statements of Financial Accounting Standards Nos,90, mia prowing tu rues. ne compay utunsa ne requird gustmem to 92 and 95 the deferred tues shown in the table above min reduce Earnings for Cammon 1
STASNo. 90-In December 1986, the Financial Accounting M ia S' P"iad al'dopti n by appmims4 529 mmma bued upon a
'""*d 3 "'"*'"'"'"' !
Standards Board ("FASB") issued SFAS No. 90, "Regulated 4 4
ne thvit %on Cantary amisubsafay compaus Notes la Consolidated finant'itdflaternents The following table shows pro forma amounts assuming STASNo. 91 - In August 1987, the FASB issued SFAS No. 92, that the Company had applied SFAS No. 90 retroactively in "Regulated Enterprises Accouat"g for Phase In Plans," 1988 by restatement of financial statements for prior years: w hich permits the capitalization of costs deferred for future y m g % ,3 recmery under a phase in plan if four requirements are met. i937 i9ss i9ss These requirements are: (1) the plan has been agreed to by (mru. cuept per sAare anmunts) the regulator (in this case the MPSC),(2) the plan specifies Net inane 5527 8169 5438 when recmrry will occur, (3) all allowable costs deferred Earniep for Ccernon Sud 5449 5 10 1335 under the plan are scheduled for recmtry within ten years of rarnmp Per share s3.06 so 4s s2.34 the date when deferrals begin, and (4) the percentage increase in rates scheduled for each future year under the plan is not The removal of Greenwood Unit No. I from rate base will 8Mayr an e PeMge berease b rateg scy for be recognized as a loss in accordance with SFAS No. 90 at the
, , each immediately preceding year. The Ferm 2 phase-m plan time Fermi 2 ach,nes i commercial operation (knuary 23, adopted in the April 1,1986 MPSC order, as amended, is not 1988) and it will be accounted for as a charge to income in in comp lance with the requirements of SFAS No. 92. In its 1988 as follows:
October 1,1987 filing with the MPSC, the Company proposed m difications to the Fermi 2 phase-in plan that it belieses will red tm Taxes in 19r bring the plan into cortpliance with SFAS No. 92. See Note 3 (mm) for a discussion of the Company's proposed modifications to ursc remmi of the oa-rueled the phase in plan. Although SFAS No 92 becomes applicable Greenmil'oit No. I frorn rate base on to the Company at the time Fermi 2 achieves commercial s:s operation, the Company will delay adoption, as permitted, a nd e erm e 3) 8115 s{39) because it is reasonably possible that the MPSC will modify the phase-in plan beginning in the second year of the plan to In order to recmtr and earn a return on all Fermi 2 costs comply with the requirements of SFAS No. 92. in excess of $3.075 billion (the project estimate considered by The April 1,1986 order, as amended, provides for non-the MPSC in its April 1,1986 order), the Company must cash income items of deferred depreciation and deferred receise additional rate relief from the MPSC. The Company's return. Ilowever, the order did not provide for the recovery of pending application for a rate increase seeks to recover deferred depreciation or a portion of deferred return nor a full approximately $1.5 billion in Fermi 2 costs plus quarterly return on sich deferred amounts. The Company's October 1, purchases of ownership interests from the Cooperathe of an 1987 filing has made provision for these omissions. estimated $201 million. Under the provisions of SFAS No. 90, in the event the phase in plan is not modified so that it any project costs which are considered probable of complies with SFAS No. 92, the Company would be unable to disallowance must be recognized as a loss at the time such record deferred depreciation and deferred return and may be determination is made if all additional costs for which required to record a net after tax loss of approximately $102 recovery has been requested from the MPSC were disallowed, million to recognize an indirect disallowance of Fermi 2 the Company would be required to recognize an additional net project costs, if this were to occur, earnings would be after tax loss of up to approximately $1.3 billion in the period adversely affected. In addition, the Company would be in which the determination was made. required to restrse the non-cash income items recorded in accordance with SFAS No. 90, the Company ceased during the period of delayed adoption of SFAS No. 92. capitalizing AFUDC on Fermi 2 effecthe January 1,1988. STASN . 95-In N vember 1987, the FASB issued SFAS No. Additional disallowances from rate base for fermi 2 could 95, "Statement of Cash Flows". The statunant, effecthe for hast a material adverse effect on the Company's financial annual financial statements for fiscal years ending after July posP. ion and results of operations. Such disallowances could 15,1988, establishes new standards for casa flow reporting significantly reduce or eliminate retained earnings ($949 and requires a statement of cash flows in place of the current million at December 31,1987) and reduce total common presentation of the Consolidated Statement of Changes in shareholders' equity ($2.920 billion at December 31,1587), financial Position. The Company plans to adopt the standard and accordingly could result in a substantial reduction in the in 1988 and intends to restate prior years for comparathe aggregate amount of funds legally available for the payment of dividends. See Note 11 for a discussion of the impact of the PurP05e8-Fermi 2 disallowance on long-term debt. 1 28
l Note 5 f.udington AunpedStorage-Operation, maintenance and Jointly Owned Utility Plant expenses & Won hmpedorage Mant are The Company's portion of jointly owned utility plant is as mPany ad Gnsumehmmpany g; ( ' Consumers',) la proportion to their respective interen in the plant,(See Note 13.) Ludington 2 Puropd Ferral 2 Bene Rivertl) Storage Note 6 la. service dde 1988 (!) 1973 laeonelhaes
' Total income tax expense as a percent of income before tax vesume tIMN)
Accumuled deprecahon
$ sl$0.3 sifI'4 was le98 than the statutory federal income tax rate for the (Mdlias) Q) 4 111.0 s 47.7 following reasons:
(1)ladudes BeGe IUver Unit k. I, facibties used in coenmon with Unit h,2-Percent oflocome Before ha facihties used jostly by the BeGe Rner and St. Qair tv , %nts and certain transmission lines. Unit b. I and facihties used in cw wi mith IM7 N6 IMS Unit M. 2 were placed in senice on August I,1984. Unit k. 2 m i Stdutory income tax rse 40.0 % 46.0 % 46.0 % placed in service on July 9.1985. Certain coal bandhog facilities used AFLDC (18.I) (22.5) Ql.3) jointly by the BeGe Rner and St. Clair Power Plants were placed in service Indrect castruction costs (2.3) (3.1) (2.7) ! in 1976 and 1977. The transnussion lines mere placed in service in various interest on oudear fuel financing (1.4) (1.7) (1.7) ' years hermeen 1960 and 1981. The Companyi undivided onwrship Depreciation 2.6 3.4 3.6 interest is 62.78% in Unit b. I,81.39% of the portion of the facihties Other-net 1.5 (2.3) 09) apphcable to Belle Itner used jointly by the BeGe River and St. Clair Power IWectne income tax rue 22.3 % 19.8 % 22.0 % Plants,49.59 % in certain transmission lines ad at least 70% in facihties used in coracne with Unit No. 2. (2) See %te 2. Components of income taxes were applicable to the Be#e Riwr-In 1983, the Company sold to Michigan Public following: Power Agency ("MPPA") an undivided ownership interest in Belle River Unit No. I and facilities used in common by Belle Riwr Unit No. I and Belle Riwr Unit No. 2, ed certain other 1987 IM6 IM5 related facilities, At Decernber 31,1987, MPPA's investment (7kusands) consisted of $344.9 million for Unit No. I and common operums expenses facilities, 828 million for certain coal handling and Cunent s 62.267 s 18.304 s 13.549 transmission facilities and $17.4 million for coal inwntories Dd rrd ne,t and other non capitalized costs, uds W dATUDC 0 1.656) C0.609) (6.399) MPPA is entitled to 18.61 % of the capacity and energy of DePreciden 128,185 64.423 62.764
^
7,Qajm tax the entire plant and is responsible for the same percentage oi (69.356) the plant's operation and maintenance expenses and capital labor and eig.cs 42.685 - - impronments. The Company is obligated to preside MPPA todrectconstr etencosts Q.253) 5,819 6.926 with backtp power when either unit is out of service. The Company began contractual purchaws of MPPA's
^"7jg losses and unreco,,,4 capacity e d energy entitlements at the enmmercial operation Pi ard costs Q.671) [4.823) H.823) date of Unit No I and will continue to do so for up to eleven Oder HD) IM 4.122 years, initiaty at 100 % through 1990, with decticing amounts 69 m 45 ms 62,5M tLrreafter th vegh 1994. The cost for the buyback of power is i ,,,t ,e i,, crg,_,,,
based on MPfe plant related investment in the Belle Riwr tthred 36.479 71.790 55.409 project, interest asts incorred by MPPA on their original Amortud 0.w3) (sm) (6.60s) , project financing pNs 2.5 % , and certain other costs such as 27.476 63.283 48.8m I***' lgm 126 w 124 2
, depreciation and operation and maintenance expenses.
i Oth" lame *ad deductan$ Buyback payments to MPPA were $75.3 million, $72.9 million and $73.5 million for 1985,1986 and 1987, respectiwly, and are currently estimated at $71.0 million,571.5 million,870.7 f,',',1 ,, Tu Q Q 0,827) U$ (663) 0 .642)
- million, $62.9 million and $55.2 million for 1988,1989,1990, Totai income tues 's158125 si17.769 123.297 !
e 1991 and 1992, respectinly. 29
The Stroit &fam Canpay and subsdary asnpmus Notes to Consohdated finanaalStaternents in accordance with MPSC requirements, deferred income Note 7 tax accounting is not followed for the berrowed funds Short. Term Credit Arrangements and Borrowings comnonent of AFUDC and indirect construction costs relating As described below, at December 31,1987, the Company had to Fermi 2, interest on nudear fuel financing (see Note 12) and certain other current inc.,me tax dedactions. t tal short-term credit arrangements of $430.6 milhon under which no borrowings were outstanding. lh July 1985, the MPSC ordered that, for accounting and The Company had bank lines of credit of $300.1 million, ratemeking purposes, the accumulated deferred income taxes substantially all of which had commitment fees in lieu of related to indirect construction cosb and the borrowed funds ( mPensating balances. Commitment fees paid in lieu of component of AFUDC for Belle Rher Unit No. I and common compensating bank balances for 1987 were $1.3 milhon. plant be amortized to income mer a fiw-year period rather Substantially all borrowings are at rates below the banks' than over the life of the plant. Such credits to income Prime lending rates. amounted to $24 million for both 1987 and 1986 and $12 The Company has a nudear fuel financing arrangement million for 1985. under which Renaissance Energy Company ("Renaissance"), The cumulathe net amounts of income tax timing an naEated company, raises funds, subject to the differences lor which deferred taxes haw not been prmided at satisfaction of certam coaditions, to purchase nudear fuel and December 31,1987 and 1986 are $2.8 billion and $2.2 billion, to lend to the Company, pursuant to a separate loan respectively. The tax effect of these amounts not prosided for Agreemmt, fw gueral cwp rate pwpows for periods not to currently will be recorded when such taxes become payable exceed 270 days. Renaissance may issue letter of credit-and are recmered from custorners. backed commercial paper (currently limited to 180 days' Innstment tax credit carryforwards of approximately $138 maturity) or borrow from participating banks on the basis of million are available to offset future years' tax liabilities as Promissory notes limited to 270 days' maturity. To the extent permitted by law. This aggregate amount of credits has been the maximum amount of funds available to Renaissance reduced by 35% in accordance with the prmisions of the (currently $409 million)is not needed by Renaissance from TRA. Such credits, if unused, expire owr the period 1998 time to time to purchase nudear fuel, such funds may be through 2002. in December 1987, the FASB issued SFAS No. 96, I aned to the Company pursuant to the loan Agreement. At December 31,1987, $105.5 million was available to the
' Accounting for income Taxes." The Company is currently Company under such loan Agreement. (See Note 12.)
resiewing the statement and, as permitted, anticipates The Company has a $25 million credit arrangement adopting the prmisions of SFAS No. 96 by 1989. SFAS No. 96 restricted to bankers acceptances. est: Pishes financial secounting and reporting standards for the effects of income taxes that result from an enterprise's activities during the current and preceding years. It requires Note 8 an asset and liability approach for financial accounting and Extraordinary Property losses and Unrecovered reporting for income taxes. When SFAS No. 96 is adopted, th? Plant Costs Company will be required to recompute its tu liability at the Amortization of extraordinary property losses and then current tax rate and adjust the Accumulated Deferred unrecmered plant costs commences when reemery of such income Tax asset and liability amounts in the Consolidated costs is authorized by accounting and ratemaking orders of the Balance Sheet. In addition, SFAS No. 96 requires that the MPSC. While a return on investment was prmided for the Company record additional deferred income taxes for unamor'ized extraordinary prcperty losses, no return on temporary differences not presiously recognized. Temporary investment is prmided for unrecmtred plant costs. (See Note differences indude the timing differences discussed above 4.)lnformation relating to these items is as follows: ($2.8 billion and $2.2 billion a', December 31,1987 and 1986, respectinly) and all other existing differences that will result thurumt in taxable or deductible amounts in future years.
~
To the ex.ent Bahna
^="2'*a " 3I that such additional deferred incoae taxes are associated with probable future rewnue from customers, SFAS No. 96 requires the recognition of an asset to the extent of such future revenue.
hh Aprd 1979 Stor n 1982 1987 $12.783 8 - 8 1.492 My 19htm 198219M 9.326 - 1.08A l'ntmwred i'lant Costs Greenw,d imt % 2 and 3 1943 1993 71.2s2 37.423 44.551 l 593 39j_ s37.4233 47131 30 i
Note 9 Note 10 Common Stock and Non Redeemable Cumulative Redeemable Camalative Preferred and Preference Stock Preferred and Preference Stock On August 15,1986, the Company redeemed 360,000 shares The Conwrtible Cumulatin Preferred Stock,5% % Series, is of 12.80 % Series and 250,000 shares of 15.68 % Series, $100 convertible into Common Stock. The conwrsion price was par value Preferred Stock, constituting all of the outstanding $17.79 per share at December 31,1937. The numbers of shares of both issaes, at a price of $108.50 and $105.88 per shares conwrted during 1987,1986 and 1985 were 9,334, share, respectiwly. 21,880 and 15,739, respectiwly. The number of shares of On .lanuary 15,1987, the Company redeemed 2,000,000 Common Stock resened for issuance upon conwrsion and the shares of $4.12 Series, $1 par value Preference Stock, conwrsion price are subject to further adjustment in certain constituting all of the outstanding shares, at a price of $25 per ewnts. The Convertible Cumulative Preferred Stock, 5 A % share for the redemption of 250,000 shares and $27.85 per Series, may be redeemed at any time in whole or in part at the share for the early redemption of 1,750,000 shares, option of the Company at $100 per share, plus accrued On April 15,1987, the Company redeemed 1,600,000 dividends. shares of $4.00 Series, $1 par value Preference Stock, The following series of Preferred and Preference Stock, constituting all of the outstanding shares, at a composite price which are not redeemable pursuant to sinking fund of $27.41 per share, requirements, are redeemable solely at the option of the The following redeemable series of Preferred and Company at stated per share redemption prices, plus accrued Preference Stock are entitled to the benefit of sinking funds dividends: (provided that no dividend arrearages exist) providing for the annual redemption of shares at stated per share prices, plus N*R*emable Dema5ini Prior on and accrued dividends, commencing on dates indicated: Series From To To After Preferred Stock kn. 9.32 % $ - - $101 10 15-86 Cumulative 7.68 % - - 101 41546 Opuon to 7.45 % - - 101 11 1546 Reem 7.36 % - - 101 12 14; Annual Price Addibunal Preference Stock Commencing hmber Per $ bares la 82.28 26.50 1 15-88 25.25 l 15-93 Redeemable Series On of Shares Share Any har 13.42(redeemed 11548) 28.42 11548 25.25 11598 pgg g 83.40(redeemd i 1548) 28.40 11548 25.25 11598 11545 30 000 1100 30.000 33.12(redeemed 11548) 28.00 11548 25.00 11598 9;72 9 60 %
% 10 1585 3i.20 100 32.%0*
.4 1 1 Preference Stock 12.75 7-1540 100.000 25 100.000 None of the shares of the $3.13 Series and $3.24 Series 82.75 seres a 11541 100.000 25 100.000 Preference Stock may be redeemed through certain refunding .% to exceed 220.000 eumuladie ad&uonal shares.
operations prior to July 15,1988 and October 15,1988, respectinly, at an effectin cost less than that indicated by the The following numbers of shares were purchased for original dividend rate. application to sinking fund requirements: On lanuary 15,1988, the Company redeemed all of ;he oustanding shares of certain series of its $1 par value -
,,37 ,,,, ,,33 Preference Stock, as follows: 3,000,000 shares of $3.42 Series at $27,35 per share,2,2%000 shares of $3.40 Series at
[ M',** 58 3$
~
32.2 0
$27.35 per share and 750,000 shares of $3.12 Series at Preferred swk.12 80% seres -
40.000 -
$27.00 per share. A total of $163.8 million has been recorded Preferred stoct.1t50% seres WM - -
in the Company's 1987 Consolidated Balance Sheet as amounts due within one year. [ j2 8 Apart from MPSC approval and the requirement that Common, Preferred and Preference Stock be sold for at least in the ewnt it.at a payment due under requirements of a par valv , there are no legal restrictions on the issuance of sinking fund for acy series of redeemable Preferred or additional authorized shares of such stock. Preference Stock is not made, no dividend shall be paid (other 31
The Ikvoit Libon Canpany and subsdary commuua Notes to Consopdated FinancialStatements than a dividend paid in junior stock) or dedared or other effect to the Fermi 2 disallowance of $446 million (see Note 4), distribution made upon any junior stock (Common and approximately $2.4 billion principal amount of additional Preference Stock in the case of Preferred Stock, and Common Mortgage Bonds could haw been issued on the basis of Stock in the case of Preference Stock) until such payment is property additions or the earnings test prmision of the made. Mortgage, assuming an interest rate of 11.25 % on any such The foDowing series of Preferred and Preference Stock, additional Mortgage Bonds. 0f tiiis amount, $2.1 billion would which are redeemable pursuant to sinking fund requirements, be supported by property additions related to Fermi 2. At may also be redeemed at the option of the Company at stated December 31,1987, approximately $436 million of additional per share redemption prices, plus accrued dividends: bonds could haw been issued on the basis of bond retirements. a remptRarnueBondObligations- Agreements haw RedeemNe Series rom To been signed with certain municipalities, municipal agencies and state authorities under which tax-exempt bonds were 7 s105 80 1 lM9 s101 11594 9 60 % 107.00 10 15-89 101 10 lM4 issued to finance certain Company projects or to refund 13.50% tredeemed 1198) 108.10 1.lus 100 1190 maturing issues. The Company is obligated to make payments Preference swk sufficient to meet the principal and interest due on the bonds. secure h hpags Mgadons under ceMa of he Series B 10 2 5 9 agreements, the Company has issued Mortgage Bonds with principal amounts, interest rates and maturity dates None of the shares of the Cumulatim Preferred Stock, corresponding to those of the tax-exempt bonds. Payments 9.60% Series may be redeemed through certain refunding made on the tax exempt revenue bond obligations secured by operations prior to October 15,1989 at an effective cost less Mortgage Bonds automatically discharge corresponding than that indicated by the original dividend rate. Mortgage Bond obligations. On .lanuary 15,1988, the Company redeemed 200,000 The Company has obtained insurance for certain of its tax. shares of 13.50% Series, $100 par value Preferred Stock, exempt obligations. Such insurance arrangements provide for constituting all of the outstanding shares, at a composite price the funding of escrow accounts in the event certain debt ratios of $104.05 per share. A totalof $20.8 million has been are not maintained. Fermi 2 disallowed project costs (see Note recorded in the Company's 1987 Consolidated Balaace Sheet 3) and associated write cffs (see Note 4) may require the as amounts due withia one year. Company to fund these insurance related escrow accounts in After giving effect to the redemptions on .lanuary 15, an amount of up to $127 million. 1988, the combined aggregate annual amounts of redemption Long. Term Debt Maturities - In 1988,1989,1990,1991 and requirements at December 31,1987 for all series of 1992, long-term debt maturities consist of $178.8 million, redeemable Preferred and Preference Stock are $10.8 million $654.6 million, $92.1 million, $94.0 million and $373.6 for 1988 and $11.3 million for each of the years 1939 through million, respectinly. 1992. Note 12 Note 11 leases Long. Term Debt future minimum lease payments under long term The Company's 1924 Mortgage and Deed of Trust noncarcellable leases, consisting of nudear fuel ($431.2 ("Mortgage"), the lien of w hich cowrs substantially all of the million computed on a projected units of production basis), Company's properties, provides for the issuance of additional lake wssels ($ 90.6 million), locomoties and coal cars ($88.5 bonds based upon property additions, combined with an million), office space ($49.1 million) and computers, vehides earnings test provision, and based upon retirements of and other equipment ($75.5 million) at December 31,1987 previously issued bonds. The MPSC-ordered Fermi 2 are as follows: disallowances of project costs (see Note 3), as well as possible future disallowances, and corresponding write-offs required under SFAS No. 90 (see Note 4) will reduce bondable property y s s under the Mortgage, in addition, such write-offs may limit the 1990 58 0 Remining yers 278.7 amount, if any, of additional bonds that could be issued under Toul s734.9 the earnings test provision. The Company does not anticipate that additional Fermi 2 project cost disallowances would The Company has a heat purchase contract with predude the issuance of additional bonds on the basis of the Renaissance which prosides for the purchase by Renaissance earnings test provision. At December 31,1987, after giving for the Company of up to $409 million of nudear fuel, subject 32
to the continued availability of funds to Renaissance to Michigan against Decker Coal Company ("Decker") seeking purchase such fuel. Title to the nuclear fuel is held by recarry of approximately $39 million of oserpayments of Renaissance. The Company makes quarterly payments under Montana state coal taxes the Company daims were improperly the heat purchase contract based on the consumption of calculated since 1973. On May 9,1986, Decker filed a nudear fuel for the generation of electricity. Renaissance's counterdaim for breach of contract and demand for trial by investment in oudear fuel was $304 million and $285 million jury. On February 5,1988, the Company and Decker reached at December 31,1987 and 1986, respectisely. The increase in an agreement for the settlement of this matter which will 1987 oser 1986 of $19 million indudes additions of $38 result in lower future fuel costs to the Company's customers. million (purchases of $24 million, capitalized interest of $10 The State of Montana has filed assessments daiming that million and other capitalized costs of $4 million)less $19 additional Montana sestrance and related taxes, plus interest, million for the amortization of nudear fuel consumed in 1937. are due for 1980 through 1981 as a result of costs incurred by (See Note 7.) the Company resulting from the renegotiation of a contract At December 31,1986, the Company had recorded assets with Decker. These assessments have been filed against and liabilities for those capital leases for which the inception Decker as the producer, and they base been formally date was subsequent to December 31,1982 as was permitted protested. The 1980 through 1984 assessments could amount by SFAS ho. 71. Effective .lanuary 1,1987, the Company has to as much as $13 million plus interest. If Decker is recorded the remaining capital leases and, accordingly, has unsuccessful in its protest and appeal, the Company may be restated lease assets and obligations for periods prior to 1987 required to reimburse Decker for all or a portion of the on the Consolidated Balance Sheet and the Consolideed assessments. Statement of Changes in Financial Position. On September 4,1986, the AG, asserting a daim as a Under SFAS No. 71, amortization of leased assets is "trustee" on behalf of the people of the State of Michigan and modified so that the total of interest on the obligation and the Michigan Natural Resources Commission, filed a lawsuit amortization of the leased asset is equal to the rental expense agsinst the Company and Consumers, as co-owners of the allowed for ratemaking purposes. For ratemaking purposes, l.udington Pumped Storage Plant. The suit alleged violations the MPSC has treated all leases as operating leases. Net of the Michigan Environmental Protection Act and the income is not affected by capitalization of leases. common law for claimed aquatic losses. The lawsuit daims Rental expenses were $44.6 million, $41.1 million and past damages (indudinginterest)of approximately $148
$39.1 million for 1987,1986 and 1985, respectisely. million and future damages (from the time of the filing of the lawsuit)in the amount of approximately $89,500 per day (of Note 13 which 49% would be applicable to the Company) On Commitments and Contingencies September 25,1986, an answer was filed denying liability. On Commitments - The Company has entered into purchase Nosember 10,1987, the AG filed an additional lawsuit in this commitments of approximately $320 million at December 31, matter seeking to dedare void or voidable the lease ta certain
, 1987. The Company has also entered into substantial long. state owned land on which portions of the plant are l range fuel supply commitments. constructed. Both matters remain pending before the Ingham See Notes 2 and 5 for the Company's obligation to purchase County Circuit Court, capacity and energy entitlements of the Cooperative and the in Nostmber 1985, the National Wildlife Federation filed MPPA, respectistly. suit in the United States District Court for the Western District Combustion Engineering, Inc. ("Combustion") is of Michigan against Consumers contending that the 1,udington constructing the Detroit Resource Recostry facility in the City plant had been illegally discharging pollutants without a of Detroit with an expected commercial operation date in early National Pollutant Discharge Elimination System ("NPDES") 1989. The facility, which will be fueled by municipal solid permit. (The Company is a 49 % co-owner of 1.udington.)ln an waste, will produce steam and electricity. As a result of opinion issued on March 31,1987, Consumers was ordered to statutory and regulatory provisions requiring public utilities, apply for a NPDES permit concerning turbine generation water such as the Company, to offer to purchase electric energy from at the plant. In addition, a five-year statute of limitations (from qualifyt .ogenerators, the Company entered into a 20-year the date of filing of the lawsuit) was found to be applicable in Energy Purchase Agreement with Combustion for the the esent civil penalties (daimed at up to $ 10.000 per day, of purchase of steam and electricity. Payments for the first three which 49 % would be applicable to the Company, if lesied)were years of operation are estimated to aggregate $104 million, found to be appropriate. Consumers appealed and oral The Company is seeking to negotiate an addendum to the argument on the appeal was held by the United States Court of Energy Purchase Agreement to reduce the rate to be paid for Appeals for the Sixth Circuit on Denmber 18,1987. On June steam. 29,1987, Consumers filed a NPDES permit application w hich Contingencies - On March 19,1986, the Company initiated remains Pending. Held in abeyance pending the Sixth Circuit litigation in the U.S. District Court br the Eastern District of appeal is the issue of civil penalties. 33
The atmir Miuwi Ownpurr and stAutav arnpanas N>les financialto Constdtdated Staternents ' in addition to the litigation discussed abose, the Company gog, y,g is invohrd, from time to time,in litigation dealing with the Lnployes' Retirement Plan and Other Postretirement numerous aspects of its business operations. The Company belines that the outcome of all such litigation will not have a Bmfits DnPloF3'Retimnent Plan - The Company has a trusteed material effect on its financial position or results of operations. and noncontributory defined benefit retirement plan ("Plan") Ownership of an operating nudear generating unit subjects cmering all eligible employes w ho have completed six months a company to additional risks. The Company is insured as to of senice. The Plan prmides retirement benefits based on the its interest in Fermi 2 under property damage insurance emnloye's years of benefit senice, average final compensation punided by American Nudear lasurers("AN1")and Nudear and age at retirement. The Company's policy is to fund Dectric lasurance Umited ("NUL") Under the ANIinsurance Pension cost calculated under the projected unit credit policies,3500 million of composite primary cmerage and $250 actuarial cost method, prmided that this amount is at least million of excess cmtrage is prmided for detontamination equal to the minimum funding requirement of the Dnployee costs, debris removal and repair and/or replacement of Retirement Income Security Act of 1974, as amended, and is property. The Company pays annual premiums for this not greater than the maximum amount deductible for federal cmtrage and is not liable for retrospective assessments. Under inc me tax purposes. The Company is L. rating under the IRS the NDL insurance policy, $775 million of excess property full funding limitation and, therefore, did not make a damage insurance is prmided. The combined limits preside contribution to the Plan in 1987 and does not expect to make a total property damage insurance of !1.525 billion ($500 contribution to the Plan in 1938, million of wmposite primary coierage, $250 million of excess Effect" anuary 1, .987, the Company implemented the cmerage and $775 million of additional excess catrage). In prmisions of SFAS No. 87, "Employers' Accounting for addition, the Company will obtain costrage for replacement Pensions." The effect of this change in accounting was to power costs associated with accidental plant outages through reduce net pension cost for 1987 by $18.7 million and NDL Under the NEll coverages, the Company could be liable increase total and per share Earnings for Common Stock by for maximum retrospective assessments of un to
$8.2 million and $0.06, respectively.
approximately $16 million per year if losses were to exceed Net pensi n c st induded the folkming components: accumulated funds available to NEll As required by federal law, the Company maintains public l9g7 liability insurance for a nuckar incident. The current limit of gmg liability is $160 million of private insurance plus deferred service at - benents earned during the penod : 16.%4 premium charges of $5 million which may be le ied against interest at on voicoed beoera otegmen 54.514 each nuclear unit licensed to operate (but not more than $10 Actual return on rian amis (81650 het deferral and arnortaation; million per year per nudear unit) On December 31,198,4, Deferrai d net gaa dunns current period 28.896 there were 111 licensed nudear units in the United States. Amortization of unremgnized net asset ni date of Thus, deferred premium charges in the aggregate amount of I" M *PP k *t"" A het Pensmo at 1 5116
$555 million could be loied against all owners of licensed nudear units in the e ent of a nudear incident. Accordingly, public liability for a single nudear incident is currently limited Assumptions used in determining net pension cost for to $715 million ($160 million of private insurance and $555 1987 indude a discount rate of 9 %, a rate of increase in million of deferred premium chargesk future compensation levels of 6% and an expected long term The Company's total liability under federal law is expected rete of return on Plan assets of 9 %.
to increase as a result of rnisions which are scheduled for Cost to the Company to fund the Plan was $27.0 million 1988. The exact amount of liability has not been determined and $37.9 million for 1986 and 1985, respectistly. Effectist as of December 31,1987. .hnuary 1,1986, the discount rate used in determining net To the extent that insurable claims for replaceinent power, pension cost was changed from 7% to 9 %, and the rate of property damage, decontamination, repair ar.J replacement increase in future compensation levels was changed from 5 % and other costs and expenses arising from a nudear incident to 7%. Cost to the Company to fund the Plan was reduced by at Fermi 2 exceed the policy limits of insurance, or to the approximately $10.6 million in 1986 as a result of these extent such insurance becomes unavailable in the future, the changes. Company will re:ain the risk ofloss. Although the Company has no reason to anticipate a serious nudear incident at Fermi
- 2. if such an incident did happen it could have a material but presently undeterminable adserse impact on the Company's financial position.
See Notes 3 and 4 for a discussion of contingencies related to Fermi 2 and other rate matters. 34
The following table reconciles the funded status of the Plan Note 15 to the liability recorded in the Company's Consolidated Supplementary Quarterly FinancialInformation Balance Sheet: R'nandH@ Decenter 31,1987 1987 Quarter Ended 6h usand;) Sept. 30 Mar. 31 June 30 Dec. 31 Plan assets W lair value, primarily equity secantes 8 746.3A3 ghousands, envprper share amounts) less actuarial present value d benefit obliggions: ()perding itewaves $708,496 $787,157 $672.863 5688.215 Accumulded benerd obbgation, indudmg wsted Operatingincome 192.365 167,411 217.034 155.828 benefits d 1495,378.000 517,920 !!2,644 Net laceme 152.558 17L968 106.804 lacrease in future corr.pensWion newls 103.433 Earnings for Projected benefd obligation 621.353 Common Stock 131.443 103,273 154,040 87.978 Plan assets in excess d projeded benefit obliggion 125.030 kaints hr Share a m 1.05 m l'orecognized net asset at date d initial apptraion (64.837) L'arecognized net gain (66.009) liabihty recorded as Other Deferred Credm in the 1986 Quarter Ended Mar. 31 June 30 Sept. 30 Dec. 31
,, (Thousands, etcept per share amourus)
Assumptions used in determining the projected benefit ,g g , , 3g , obligation at December 31,1987 include a discount rate of opersing income 182 250 153.618 176,975 169,703 9.5% and a rate of increase in future compensation lesels of set hxeme 130.097 108.593 127,099 111.306 e 6%. The unrecognized net asset at date of initial application is Eg" gs stock 104.443 82,954 itz,753 88,142 being amortized over approximately 15.4 years, w hich is the Earnings Per Share 0.71 0.57 030 0 60 average remaining service period of employes at .lanuary 1, 1987, The actuarial present value of accumulated Plan benefits at December 31,1986, based upon a 9 % discount rate, was
$514,181,000, including vested benefits of $491,802,000. Net assets available for Plan benefits at December 31,1986 were $693,384,000.
Other thstretirenem Benefits - The Company prosides certain postretirement health care and life insurance benefits for retired employe2. Substantially all of the Company's employes will become eligible for such benefits if they reach retirement age while still working for the Company. These benefits, as well as similar benefits for active employes, are prosided principally through insurance compuies and other organizations w hose premiums are based on tne benefits paid during the year. The Company recognizes the cost of prosiding then benefits as the premiums are paid. 1987 1986 19A5 Ghousands) Cost to the Company d prmhng bealth care and Ide insurance benefits to employes Actiw empk9es $38.952 $37.678 831.227 ltetired empk9es 13 4 A3 10 26A 6.308 Total 852 435 $47.946 837.535 35
The Detroit Edia Carem and subsi6ary mmparues M}ul&' l'Inuni'iulint'nt CoritlIllon Auntll listNt'%Ulls Ussion of OfWrationsunti Analysis of This discussion and analysis should be read in conjunction Total operating rnenues changed in each year due to the with the Consolidated Financial Statements and accompanying following factors: Notes thereto, contained hereir.. Cencral- Improved business and economic conditions existed Estna:ed locrece throughout the Conipany's service area during the three year p *d [ " *'y , period resulting in higher kilowatthour ("kWh") sales and an ms75 inemse in Stal and per share Earnings for Common Stock in hte changes sa sis 7 each year. Earnings in each year were supported significantly by AFL'DC for Fermi 2.
%'" uNN'~'
j Kammlmr sales e 83 a6j 64 as 32 0 In January 1988, ferm) 2 completed 100 hours of
>ustaired operation at power lesels of 90% or abose and was declared in commercial operation on Janut.ry 23,1988. On January 24,1988, the Company implemented the first year Operating restnues indude an MPSC authorized annual rate increase under a five-year Fermi 2 rate phase-in plan, rate increase of $182.9 million effective with the commercial The April 1,1986 MPSC phase-in rate order, as amended. operation of Belle Rher Unit No.1 in August 1984 and an for Fermi 2 does not provide for the return on and the aJd tional $99.3 million annual rate increase effecthe with the recostry of all Fermi 2 project costs and operating expenses. commercial operation of Belle River Unit No. 2 in July 1985.
(See Note 3.) Therefore,1988 total and per share Earnings for Operating re enues also indude an electric rate surcharge Common Stock are expected to decline significantly from 1987 ordered by the Ingham County Circuit Court effecthe in inels. Further, the Company expects that a loss will be September 1985 in the annual amount of $12.1 million, reported for the first quarter of 1988 as a result of recording collected subject to refund. the write-offs of disallowed plant costs required by SFAS No. In 1986 and 1987, operating revenues indude lower unit 90, w bich became applicable to the Company on January 1. fuel costs and lower net purchased power costs, in addition, 1988. (See Note 4.) The Company has pending before the the MPSC's September 1,1987 order reduced the Company's MPSC a request for increased annual rates in the amount of rates by $66 million annually due to the effects of the TRA.
$298 million for the return on and recovery of $1.7 billion of Operating rnenues realized from rate changes are additional investment in Fermi 2 and for increases in dependent upon actuallevels of kWh sales and billing operation and maintenance expenses. While the Company demands (requirements for electrical power measured in believes that all Fermi 2 costs before the MPSC should be kilowatts) recovered through rates, the Company may be required by Changes in kWh sales were as follows:
SFAS No. 90 to recognize additional net after tax losses of up to $1.3 billion in 1988. inc,,,, (9,c7,,,p,,, p 3,, in testimony filed to support the Company's request for 1987 ms ins increased rates for Fermi 2, the Company advised the MPSC itesdental 6.1 % 4Is (03)x that its financial condition, as measured by earnings coverage of fixed charges, return on common equity, earnings per
$[
Total N 3.8 % N 3.7 % N 2.3 % share, percent of earnings represented by AFUDC, relation of common stock market value to book value, and quality ratings g gg g on its senior securities, is still relathely poor, in its filing, the primarily to improsed business and economic conditions Company noted that it will experience a sharp and continuing , dechne m earmngs, commencing with Fermi 2 commercial to automothe and automNhe.related customers. Sales to ieel operation, until a new rate increase can become effective. The customers decreased in '.J5 and 1986, but increased i 1987. Company filing also states that m view of the sesere impad on The decrease in residential sales in 1985 was due primarily to earnings of Fermi 2 going into senice and the w rite offs .g.g g required in 1988 under SFAS No. 90, the Company ,s i facing a 1986 and 1987 were due to warmer si.mmer weather and ut sciious adstrse change in its financial condition which will increase in the number of customers. On October 2,1987, the threaten its ability to finance and its ability to maintain its C Co m n' W 1 h i & i m i % current common stock dhidend. g; p g g9g ' s ess rme y u ed in sales for resak are now Consolidated Statement of locome induded in the residential, commercial and industrial Operating Renues - Approximately 98% of the Company.s dassifications' l 1987 operating rnenues were subject to the jurisdiction of the ! MPSC, with the remaining 2 % subject to the jurisdiction of Operating Erpenses - Operating expenses increased in 1985 the FERC. and 1986, but decreased in 1987. 1 u
Fuel expense increased in 1985 due primarily to increased Depreciation expense Increased due to increases in electric generation and higher costs of coal. The increase in depreciable property induding the addition of Belle River Unit 1985 was partially offset by a reduction in expense for a Nos. I and 2 in 1984 and 1985, respediwly. redamation settlement with Decker Coal Company. Fuel Taxes other than income tues increased due to higher expense decreased in 1986 due to lower unit fuel costs and Michigan Single Business Tu, higher property taxes in 1985 l lower quantities of stearn sold to other companies, partially and higher payroll taxes in 1985 and 1986. oiket by higher electric generu, ion and a reduction of expense income tues deceased in 1985 due to lower deferred in 1985 for the Decker redamation settlement. Fuel expense tues on the borrowed funds component of AFU00 resuking increased in 1987 due primarily to higher electric generation, from commercial operation of Belle Rhtr Unit No.1, partially partially offset by btr unit fuel costs. The ave..g cost per offset by an increase in pretax income. Income tues increased ton of coal consumed for 1985,1986 and 1987 was $44.34, in 1986 due primarily to higher preta income, partially offset
$41.67 and $38.75, respecthely. Coal as a percent of total fuel by the accelerated feedback of deferred lues related to consumed in 1985,1986 and 1987 was 98.0 %,97.9 % and indirect construction costs and the borrowed funds component 94.9 %, respecthely. of AFUDC for Belle Rher Unit No.1, locome taxes increased Other power supply expense increased in 1985 due in 1987 due primarily to higher pretax income and filed primarily to the purchase of MPPA's capacity and energy return and audit adjustments, partially offset by the effects of entitlements (see Note 5) and lowtr sales of energy to General a lower federal income tax rate under the TRA. (See Notes 1 Public Utilities Corporation, partially offset by her and 6.)
purchases of energy from other electric utilities. Other power Other /ncome and Deductions - Other income and supply expense decreased in 1986 due primarily to purchases deductions, after income tues, deceased in 1985 due of energy from other electne utilities and MPPA at lower unit primarily to a loss on the retirement of the Pennsalt Power costs, partially offset by higher quantities of energy Plant and additional expenses associated with a court ordered purchased. Other power supply expense decreased in 1987 refund of revenues collected in 1976. Other income and due primarily to lower purchases of energy from and higher deductions, after income taxes, decreased in 1986 due sales of energy to other electnc utilities, partially offset by primarily to a contribution to establish a charitable foundation lower unit prices of sales of energy to other electne utilities' and the recording of a reserw for loss on an innstment. Other operation expense increased in 198a and 1986 due Other income and deductions, after income taxes, increased in primarily to higher labor and employe benefit expenses 1987 due primarily to higher interest income on temporary (which for 1986 induded non recurring labor expenses investments, a lowtr contribution in 1987 to the charitable relating to a voluntary separation plan for certain foundation, and the recording in 1986 of a resern for loss on management employes), higher public liability msurance an nyestment which was not required in 1987, expense and the cost of operating Belle Rher Unit Nos. I and 2, which commenced commercial operation in August 1984 Costs o/ Capital- Dividends on common stock remained and July 1985, respecthely. The 1985 increase also induded approximatdy the same because of only slight increases in the participation in the Dectric Power Research institute which number of shares outstanding. Dhidend requirements on was suspended effectiw January 1986, while the 1986 preferred and preference stock decreased due to redemption increase also induded higher uncollectible expense. Other of outstanding shares. Interest expense on long-term debt operation expense decreased in 1987 due primarily to lower increased in 1985 due primarily to the issuance of securities to labor, pension and uncollectible expenses, prtially offset by finance the Company's capital expenditure program and, to a higher health, life and public liability insurance expenses and lesser extent, to refund maturing security issues, partially the write-off of power plant site studies. offset by lower interest rates. Interest expense on long term Maintenance expense increased in 1985 and 1986 due debt decreased in 1986 due to refunding of maturing primarily to higher labor and material costs and continuing securities, early repayment of Belle Rhtr Project Financing efforts to maintain or improve the availability and efficiency of obligations and lower interest rates (principally the Belle Rher all generating equipment. These increases also indude Project Financing), substantially offset by issuance of new expenses associated with the cu.aercial operation of Belle securities. Interest expense on long-term debt increased in Riwr Unit Nos. I and 2, wbile the 1985 increase induded the 1987 due to the issuance of new securities, partially offset by costs of a sewre ice storm in January 1985 and the 1986 refunding of maturing securities and early repayment of Belle increase induded increased production maintenance at Rint Project Financing obligations. Other interest expense Monroe Power Plant. Maintenance expense decreased in 1987 decreased in 1985 due primarily to the accrualin 1984 of as a result of the improved availability of the generating interest on the court ordered refund of rewnues collected in equipment due to the additiond maintenance expense in 1985 1976. Other interest expense it. creased in 1986 due primarily and 1986 (primarily at the Monroe Power Plant), partially to the accrual of additional interest on the deferred fuel cost offset by higher storm expense. refund and on the court ordered refund of rewnues collected 37
neavat& aomatsumuycamames Management k thsrusswn and Analysn of finanaal (hnthllon unti Results of Operatuuss in 1976. Other interest expense decreased in 1987 due Cash requirements for capital expenditures from 1988 to primarily to the recording in 1986 of additional interest on the 1992 are estimated to be approximately $1.3 billion (exduding court ordered refund of restnues collected in 1976 and the approximately $24 million of AFUDC) In 1988, cash deferred fuel cost refund, partially offset by higher short term requirements for capital expenditures are estimated at $247 borrowings. The aserage interest rate for short term million (exduding $4 million of AFUDC) borrowings decreased from 8.8% for 1985 to 6.7 % for 1986, Cash requirements for long term debt maturities and but increased to 7.1 % for 1987. preferred and preference stock redemption and sinking fund Earnings /or Common Stock and Earnings /Fr requirements are approximately $374 million, $666 million, Shore- Farnings for Common Stock and earnings per share $103 million, $105 million, and $385 million for 1988,1989, increased in each year. The increases were due to rate 1990,1991 and 1992, respecthely, increases authorized by the MPSC in 1984 and 1985, higher See Note 2 for information regarding the Company's kWh sales and higher AFUDC for fermi 2. Also, in 1987, obligation to purchase in 1990, for approximately $5N earnings increased due to a reduction in other operation and million, the Cooperathe's remaining ownership interest in maintenance expenses and lower preferred and preference Fermi 2. stock dhidend requirements. Pending the receipt of proceeds from iong-term debt Earnings for Common Stock indude AFUDC, a non. securities, short term borrowings are incurred to finance the operating non-cash item, consisting of the net cost of Company's capital expenditure program, refund maturing borrowed funds used for construction purposes and a long-term debt, redeern securities pursuant to sinking fund reasonable rate on other funde when so med. AFUDC requirements, redeem outstanding securities when economic decreased in 1985 and 1986 due to the commercial operation 'o do so and meet interim cash requirements. The Company of the Belle Rher Power Plant, partially offset by adcional had short term credit arrangements of approximately $430.6 capital expenditures for Fermi 2. AFUDC increased in 1987 million at December 31,1987 under which no borrowings due to additional capital expenditures for Fermi 2. AFUDC were outstanding. Any material disruption in the securities amounted to 74%,65% and 57% of Earnings for Common markets or any other circumstance that might significantly Stock in 1985,1986 and 1987, respecthely. Accordingly, delay or restrict the Company's access to long-term financing earnings available for dividends on Common Stock were would increase reliance on short term borrowings which, dependent in part upon sources other than current operating depending on the circumstances, may not be sufficient and income. (See Note 1.) hence, could adversely affect the Company's financial Return on astrage total common shareholders' equity was condition. (See Note 11.) 13.3 %,14.1 % and 16.7% for 1985,1986 and 1987, The Company's objective has been generally to achiese a respectively, as compared with the 15.0 % return authorized capital structure with a minimum of approximately 35% by the MFSC from April 1983 to July 1985 and 14.5% common shareholders' equity,1015% preferred and j thereafter for the electric business (with a further reduction to preference stock and 50-55 % long-term debt. The ratio of 14.0 %, effecthe January 24,1988 following the commercial common shareholders' equity to total capitalization (exduding operation of Fe mi 2). amounts of long term debt and preferred and preference stock due within one year) decreased from 38.2 % at December 31, Consolidated Balance Sheet 1986 to 35.9% at December 31,1987 due primarily to a Other Deferred Debits and Other Current Uabilities decreased significant increase in long term debt, partially offset by the due primarily to the payment to the Cooperathe of deferreti increase in net income in 1987. The ratio of preferred and fermi 2 quarterly purchases upon execution of the December preference stock to total capitalization decreased from 10.4 % 14,1987 amendment to the Participation Agreement. (See at December 31,1986 to 6.4 % at December 31,1987 due Note 2.) primarily to both early and scheduled redemptions of Accumulated Deferred Income Taxes recorded as Deferred preferred and preference stock. The ratio of long term debt to Debits increased due to the TRA, primarily the deferral of the total capitalization increased from 51.4 % at December 31, higher amounts required to be paid as a result of the 1986 to 57.7 % at December 31,1987 due primarily to the alternathe minimum tax. (See Note 6.) issuance of additional amounts of long-term debt. The Company's capital structure will be adversely impacted in Uquidity and Capital Resources 1988 due to write-offs of disallowed plant costs required undcr Funds generated internally presided 40%,59 % and 70% of SFAS No. 90. Fixed income quality ratings of the Company's capital expenditures (excluding total AFUDC)in 1955,1986 securities might also be adversely affected, and the Company's and 1987, respecthely. The higher lesels of internal ability to obtain long-term funds from the financial markets generation of funds result primarily from increases in net on famrable terms may be adsersely affected. (See Note 4.) mcome. 38
Cettain provisions of the TRA impact the public utility industry. Ahhough there is a reduction in the federalincome tax rate, the cash requirements for the Company's future income tax liabilities are expected to increase significantly owr the next few years principally because of the new alternatiw minimum tax and a reduction in the amount of available inwstment tax credits that the Company can currently utilize. (See Notes 3 and 6.) The MPSC's April 1,1986 crder, as amended, granted
$404.2 million (induding interest) of rate relief for Fermi 2, to be phased into the Company's rates over a fin-year period commericing with commercial operation of the plant. (See Note 3.) Because the order does not provide for the return on i and the recovery (from either current customer rates or
[ phase-in rewnues) of all the project costs and operating expenses (operation, maintenance, depreciation, property and - other taxes) for Fermi 2, future total and per share Earnings ! for Common Stock will be adversely affected. See Note 4 for a discussion of the effects on the Company of SFAS Nos. 90 and 92. See Note 6 for a discussion of SFAS No. 943. See Notes 5,7,12 and 13 for other matters that may affect the Company's liquidity and capital resources. Inflation The Company has been and will continue to be impacted by an inflationary economy. Although the current inflation rate is relatiwly low, its compound effect through time is significant,
~,
primarily in its effect on the Company's ability to replace its inwstment in utility plant. The regulatory process limits the amount of depreciation expense recowrabia throegh revenues to the historical cost of the Company's investeeat in utility plant. Such amount produces cash flows which are inadequate to replace such property in future years or to preserw the purchasing powtr of common equity capitalinwsted. As a result, the Company must rely on the capital markets to prmide necessary financial resources to replace utility plant, thus further exposing the Company to the effects of higher inflation in the form of increased financing costs. The Co:npany, under the circumstances, incurs a significant purchasing power loss which is experienced by the common shareholder and can be overcome only through adequate rate relief in the regulatory process. The cost of fuel used in the generation of electricity, the Company's single largest expense, is subject to increase due to price escalation prmisions in long-term coal contracts. However, the impact on the Company is not expected to be significant, since regulation prmides for the current recovery of fuel and purchased and net interchanged power expense through operation of the Power Supply Cost Recowry Clause. Reconry of increases in other operation and maintenance expense is dependent on timely and adequate rate relief in the regulatory process. 39
, one(Hiralltv Nesults of ^ Hjk'rallons 1987 19s6 1985 19&4 Operating Resenses Occtre 82,825,910 $2.832.945 12.738.356 82.439,835 Sicam 30.821 36.339 49 801 58370 Total 0perating Reenues 82.856,731 $2.869.254 52 3 88 157 52 49x.205 Operating Expenses Operaton Fuel 8 813,376 $ 741.206 $ 785,110 8 700J89 Other pumer supply 47,814 191,126 196.918 184.740 Other operatxe 441,046 459.534 422.133 403.6ii Wintenarxe 245,736 258.655 250J98 203.9M Deprecaton 237,325 232.240 218.502 190.420 Taxes other than inmme 179,308 177.331 175,556 144.471 Income taxes 159,488 126.596 124.939 131.459 __ Total operating Expenses $2124,093 12.156 338 $2,173 956 ll.959.44G Operating income $ 732,638 5 6A2.546 8 614.201 8 53AJ65 Other Income and Deductions A!kmance for other funds used during construction $ 136,452 8 117,069 $ 113.225 8 130.350 Other income and deducuons 13,435) (16.869) (5.240) 1.829 i Income taxes 663 8.827 1.642 (112) Net Other income and Deductions $ 133,680 $ 109.027 $ 109.627 8 132.067 i income Before taterest Charges 8 866,318 8 791,573 $ 723.828 8 670.832 Interest Charges long-term debt $ 417,474 8 399.429 8 401.272 8 399.448 Amortization of debt discount, premium and expense 3,626 2.721 2.502 2.191 Other 23,459 41.410 15.642 30.592 Alkmance for borromed funds used during construction (credit) (133,215) (129.082) (133,103) (163.336) Net tsterest Charges 8 311,344 8 314.478 8 286.313 8 26A.895 l Net income $ 554.974 8 477.095 8 437.515 l 401.937 Preferred and Preference Stock Dividend Requirements 78,240 98.803 103.264 104,159 E snings for Common Stock 6 476,734 8 378.292 5 334.251 8 297J78 1 Common $ bares 0ststanding- Aserage 146,729.292 146.643.377 143.183.133 135.230.827 ' i Farnings Per share 8 3.25 8 2 58 8 2.33 8 2 20 I Disidends Declared Per Share of Common Stock 8 1.68 8 1 68 8 1.68 8 1.68 I Ratio of Earnings to Flaed Charges (%EC Basis) 2.54 2 29 2 28 2.19 Ratio of Earnings to fixed Charges and Preferred and Preference Stock Disidend Requirements (SEC Basis) 2.09 1.81 135 1 67 1 l I I J l l i 40
1983 19A2 1981 19M 1979 1978 1977 (Thousanes) ! 12,260.021 82,078.M5 82,011.217 81,776.364 II,667.679 81,561.296 11,423.909 49,637 44.289 42,840 36,150 30,832 28.546 27,012
$2,309.658 12,123 154 12.054.057 $1,812,514 $1,698.511 81,589.842 $1,450,921 e
f 676,409 8 718,431 5 689,165 8 670,116 8 647,620 8 500,869 8 534.325 128,921 74.654 139,981 107,767 M.502 158.098 . 108.648 374.164 372,767 333.440 290,M6 266,410 235,720 203,300 ! 187,769 170.974 164,978 133.270 128.600 124.804 llo.7M l 171,940 161,430 150.240 141,948 129,644 115,325 102.304 [ 142.743 118,537 117,224 115.520 99.552 91,488 96.597 i 145,559 96,912 64.388 37.012 54,7H M,686 66,717 E $1.827,505 11,713,705 $1.659,416 81.496,199 $1,423,034 11,M2,990 $1,226.627 m 8 482,153 $ 409,549 8 394 641 5 316.315 5 275,477 8 126.852 8 224.294 8 92,750 $ 47,995 8 39.393 8 38,815 8 38.323 8 32.273 8 23,754 7,877 (4.820) (9,501) 692 3,664 2,371 4,821 i y (5.487) 8 95,140 8 44,330 I,155 4,771 (669) (1,5 54) 8 40,433 8 33,416 (1,228) (1,700) 8 26,871 8 34.668 8 38.838 , 8 577,293 8 453,879 8 429,309 8 355.153 8 315.910 8 260,268 8 251,165 i 8 351,854 1 331.469 8 290,045 8 111.857 8 167.585 8 140.288 8 129,078 2,131 2,006 1,853 1,776 1,644 1,403 1,339 . 53,088 59,779 37,025 19,662 13,823 8,298 1,959 (194,402) (IN.076) (133,967) (66.708) (43,171) (33.590) (25,726)
$ 212,676 8 199,l?8 8 194.9M i 166,587 8. 139,881 8 113.399 8 106.650_
$ 364.622 8 254,701 8 234.353 8 188,566 8 176.029 8 146.869 8 144,515 98.614 73.245 57.566 51,037 43,457 38,056 34.095 8 266.008 8 181,456 8 176,787 8 137.529 8 132.572 8 108.813 8 110.420 120,274.269 103,585.915 87,473,581 78,780.863 69.848,484 61,898,763 55,202,974 8 221 8 1 75 8 2.02 8 1.75 8 1.90 8 1.76 8 2 00
$ l.68 8 1.68 8 1.64 8 1.60 $ I 60 5 1.52 8 1.4675 2.22 1.85 1.84 1.90 2.17 2.28 2.48 1.67 1.49 1.53 1.53 1.69 1.71 1.85 t
I i I t i 41 e
Itt lkticil Edlal Coritturry and subsntary corripaws ;,'
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9..- ./ , ' r- e. % ,]/ 1987 19 % 19t5 19&4 r. Operatieg Rewanes (Thousands) ResdentW-Dectne $ 905.208 $ M0205 5 827.210 l 758.124 701,275 693.071 651,559 570.082 Cornmeraal-Dectrie 1,056,906 1.063,551 1.034.374 919.490 IndustrW-Dettne 193,342 232,457 275.014 250.509 Other 6 2,856,731 8 2.869.284 8 2,7 2.157 $2.498,205 Taal Sales (Malons d k%h) ResWential 11,134 10.497 10.077 10.150 7,873 7,501 7,130 6.850 Commeraal todustnal 18,225 17.240 16.413 16.324 2,260 2,807 2.875 2,563 Other Tata! 393h 38.040 36.695 35.887
=
Dectric Customers () ear Fad) 1,697,326 1,664.226 1.642.981 1.629.668 Resdential - Cornmernal 155,216 148.987 144.942 142.395 Industnal 2,507 2.384 2.314 2.246 1,919 1896 1.M3 1.885 Other I,856,968 1.817.493 1,792.120 I,776,194 Total Anrage Anamal Coe Per Residential Customer (1%h) 6,635 6.35f 6.165 6.253 A erage Anasal Bill Per Residential Castemer $539.44 8532.71 5506.06 1467.03 _ . } Average Rewsee Per kh h 8.13e 8.19c 8.21c 7.47c ResMentW 8.9 I 9 24 9 14 8.32 Commeraal -' ladastral 5.80 6 17 6 23 5 63 Capitalization (Thousands) loog-Tem Debt 8 4,693,687 8 3.656 569 5 3.770.863 13.845.!?2 521,894 747,273 879.497 894.168 Preferred / Preference Stuk Common Shareholders' Equity 1,919,985 2.719.403 2.5A8 025 2.379.998 Total 8 8,135,566 8 7.115.245 5 7.238.385 17.119.438 Capitalization (Percent) ,,n . 57,7 $14 52.1 54.0 c Img Term Debt Preferred / Preference Stai 6.4 10 4 12.1 12 6 C# i Common Shucholderi Equity 35.9 38 2 35 8 33 4 100.0 100 0 100 0 100 0 Total Common Mock Data Earamgs Per Shue $ 3.25 12 58 12.33 12.20 Dnidend Paid Per Shue $1.68 11 68 Il 68 81.68 52 % 65 % 72 % 76 % Pamut 146,729,292 146,643.377 143,183,133 135.230.827 shares Outstanding-- Awrage Return on Average Cnmmon Equity 16.69 % 14 09 % 13 31 % 12.87 %
$19.75 118.34 117.47 116.91 ikokialue Per Share Market Prxe H gh $19 819 % i17 % i16 %
tow $12% 315 % lit tilw Miscellaneoas Flaascial Data Average Interest Rate on long. Term Debt 9.5% 92% 99% 99% Awrage Dnidend Rate on Preferred / Preference Stak 10,7 % 11.5 % 11 6 % 116% long Term Debt Obbgatons and Redeemable Preferred and Preferer.ce Stock Outstandmg (Thousands) $ 5,062,9a l 4 600,917 $ 4.552.755 84.343.674 811,158,214 110.377,125* I 9.863.760* 19.276.614' Total Assets (Thousands)
$I1,893,4I8 811.062,449 110.466 039 19,752.346 Gross Ltdity Plant (Thousands)
Net Ltdity Plant (Thousands) $ 9,682,875 1 9.034.116 8 8.612.890 $8.076.168 Capital Eapenditures (Thousands) 8 709,084 8 645,196 8 710.699 8 938.004 Miscellaneous Operating Data 9.164 9.070 9.296 8.898 3-~ t.g.? .e . 5ptern Ca;mbdity at ien End-MW Systern Capabdity at Time d Peak-MW 9,020 9,199 9.367 9.271 j * , .,' 5ptem Peak Demand-MW 6,427 8.050 7.172 7.350 Rescrw Wargin at Time d Peak 7.0 % 143% 3v 6 % 261% v.gf - Sptem load Factor $7.4 % 579% 63 3 % 60.2 % r..* 10.060 10.090 9.990 9 990 ' *i Heat Rate-Btu Per k%) 172Sc 141 !c 202 Oc 190 $c Fuel Cost-c Per M3oe Bis Number d Empkys at ) ear End 11,221 10.967 11 086 11.136 ' %.1 . z .
- Net property under capital leaws restated (see Note 12) 12 0
1943 1942 14A1 19x0 1979 197A H77 5 741.399 I 676.370 1 642.301 8 5A3301 8 524.613 8 497.9 % 5 464 906 513.292 473.498 436.869 382.015 345.576 313.673 291.220 818. % 0 754.234 763.167 65x.051 647.434 611.404 539.469 236 307 219.145 _211321 IKtJ44 14884 166.777 15_51 326 12.309.658 82.123.254 82.054.057 11.81L514 11,699,511 ll.589.M2 51,450.921 10.256 9 940 10.134 10.394 10.274 10.346 10.3A5 6,479 6.252 6.310 6.265 6.251 6.073 6.027 15.162 13.751 15.471 15.472 17.960 18.354 17.015 2.402 2 052 2.104 2,406 2.l_07 2J35 !_.2A7 34,299 31,995 34.022 34,235 36.891 37.148 36.614 =2-1.621 l?! l.619.369 1.624.161 1.623.162 1.622 768 1.600,9A3 1.579.607 140.403 139.376 138,830 136.9%3 135.788 127.634 118.942 2.253 2.239 2.305 2.293 2.264 2.201 2.126 1,878 1.827 1.821 1,750 1.713 1.675 1.648 1.765.706 1J62.811 1J67.117 1.764.188 1,762.533 1.737,498 1J02.323 I 6.332 6.133 6 243 6.403 6.402 6.529 6.616 185734 $417 33 $395 66 $359 86 1326 92 8313 08 1296 20 7.23e 6 koc 6 34c 5 62c 5 lic 419c 4.48c 7 92 7.57 6.92 6.10 5.53 5 16 4.83 1 5 40 5 49 4 93 4 25 3 60 3.33 3 01 33.542.43A 53.218.649 12J53.978 12.450 457 $2.069.518 11.843.036 51J38.185 907.505 802.423 603.161 591.346 510.748 494.691 448.892 2.195.361 1.872.181 1.675.385 1 514.169 1.387JM l.241,401 1.118.065 56.645.304 85.893.253 55,032.524 14.555.972 83.96?,034 83.579.128 83.305.142 53 3 $4 6 54.7 53 8 52 1 51.3 52 6 13 7 13 6 12 0 13 0 12.9 13 8 13 6 33 0 31 8 33 3 33 2 35 0 34 7 33 8 100 0 100 0 100 0 100 0 100 0 100 0 100.0 12.21 81 75 82 C2 $175 11 90 11 76 $2 00 11 68 il 68 il 62 Il 60 81.58 81.52 51 45 76 % 96 % k0 % 91 % 83 % M% 73 % 120.274.269 103.585.915 87,473.581 7832.M3 69.848.4n4 61.898J63 55.202.974 13 03 % 10.14 % 11.12 % 9 47 % 10 01 % 9 26 % 10.50 % ll6 63 816 60 $17 47 517.85 818 46 518 62 818 67 116 113 % 112 % 513 % 115 % $16% lil 113 811 110 % llo $12% $13% 815 % 9.5% 95% 94% 90% 85% 7.7 % 7.5% 11 6 % 11.3 % 98% 9.5% 90% 88% 86% 14.027.029 $ 3.792.982 13.182.033 $2.809.976 12 332.200 12.046.540 ll .ht.740
$ 8.4 77.218' 57.645.856 86.617.903 15151.801 $5.156.138 84 641.602 84 141.713 St.845.779 st252 570 7.134390 $6.213.495 $5.660.023 55 102 843 84.4 tim 5 17.320 570 56 824 05A 45.842.997 55.026.245 54,5 % 829 14.140.521 83.608.509 11.014.568 11.135.045 5 964.261 5 644 540 1 591.3x9 8 642.676 8 283.458 8.162 7J62 8.221 8.234 B.964 8.591 8J45 7.810 8.569 8 454 s.531 8.877 8 934 8351 7.063 6.344 7 171 6103 6 829 7.312 7.381 10 6 % 34 0 % 179% 17.3 % 30 0 % 22 9 % 186%
M 2% 617% 58 1 , 63 1 % 66 2 % 62 3 % 60 7 % 10 040 10.060 10 060 10 140 10 240 10 330 10.360 190 2c 193Ac M0 $c lin 3c 163 4c 149 Oc 130 !c l1.152 II.20A 11 024 10.7H 10.904 10J29 9 953 43
IM t'llallVtIll\ AwA Grptgate lhia Market for the Company's Common Equity and Distribution of Ownership of Detroit Edison Related Shareholder Matters Common Stock erembery mt) The Company's Common Stock is listed only on the New T)pe of 0=ner: Wrk Stock Exchange, w hich is the principal market for such stock. The following table indicates the reported high and low Ow" Sh'#" sales prices of the Company's Common Stock on the Individuals 104,433 28,012,915 Joint Accounts 98,594 33,931,139 Composite Tape and dividends paid per share for each Trust Accounta 7,665 4,069,296 quarterly penod during the past two years: Nominees 208 66,169,267 Da** Insututions and Foundations 255 151,574 I"" Rans' P*'d 510,846 Brokers and Senirity Dealers 36 R*1 barter Hgh to. rer sh*'l Others 1,642 13,906,828 s og $w $$ I! Total 212,833 146,751.865 g g g j State and Country: msrn 19 % 15 % 0.42 ~ Owners Shares snood it4 15 % o 42 98,411 43,421,081 Michigan M M 7 Uj Florida California 15,788 12,899 6,285,124 4,341,115 At December 31,1987,146,751,865 shares of the New York 11,387 60,512,277 Company's Common Stock were outstanding. These shares Illinois 9'961 10,462,310 were held by a total of 212,833 shareholders. Ohio 7 2,211 The amount of future dividends will depend upon the 44 Other States 56l442 199 19,24ll952 649 Company : earnings (w hich in turn are dependent, among 276,357 Foreign Countries 746 other things, upon lewis of kilowatthour sales and timely and Total 212,833 146.751,865 adequate rate relief), capital requirements, financial condition and other factors. Annual Meeting of Shareholders Corporate Address The 1988 Annual Meeting of SIareholders wiu be held at The Detroit Edison Company 10 a m. Detroit time Monday, April 25, at the Henry and Edsel 2000 Second Awnue. Detroit, Michigan 48226 Ford Auditorium, Detroit. Shareholders will be asked to elect Telephone:(313)237 8000 members of the Board of Directors, to ratify the appointment Independent Accountants of Price Waterhouse as independent accountants for the Price Waterhouse Company, and to amer'd the Company's Articles of 200 Renaissance Center, Detroit, Michigan 48243 Incorporation and By laws to limit certain liabilities of the Directors of the Company. Form 10 K At the 1987 meetmg on April 27,1987,14 members were Copies of Form 10-K, Securities and Exchange Commission re elected to the Board of Directors for one year terms. Annual Report, are available, Requests should be directed to: Director Changes Kathryn L Westman Charles T. Fisher Ill, a director since 1961, did not stand Secretary for re-eledion to the Board at the 1987 Annual Meeting. The Detroit Edison Cornpany Terence E. Adderley, President and Chief Executiw Officer, 2000 Second Avenue, Detroit, Michigan 48226 Kelly Semces, Inc., was elected a director by the Board of Directors effediw May 18,1987. Transfer Agents Edward J. Giblin, a director since 1976, will not stand for Melbn Securities Trust Company, New brk re-election at the 1988 Annual Meeting because of the By law 67 Brord Street, New brk, New brk 10004 age restriction. The Detroit Edison Company Charles M. Heidel, President, and a director since 1930, 2000 Second Awnue, Detroit, Michigan 48226 iaas chosen not to stand for re-election at the 1988 Annual Charles A. Babcock Sophia J. Koziatek Meeting <tue to his forthcoming retirement from Detroit Ronald J. Gdowski Kathryn L Westman Edison on May 1,1988, after more than 40 years of service. Elaine M. Godfrey Officer Changes Registrars of Stock Doyd W Coombe, General Auditor, passed away on Meuon Securities Trust Company, New brk March 13,1987. Robert II. Ndtaly was elected Mce President 67 Broad Street, New brk, New York 10004 and General Auditor effectin July 1,1987. (Preferred Preference and Common) Claybourne Mitchell, Jr., Vice President Planning, Comerica Bank Detroit ! Research and Environmental Protection, retired on 2D West Fort Street, Detroit, Michigan 4C231 Tebruary 17,19S8. Ilarry Tauber, Group Vice President, will (Cornmon) l retire from the Company effectiw May 1,1988. Nationa: Bank of Detroit 611 bdward Annue, Detroit, Michigan 4 A232 (Preferred and Preference) Common Stoch Iisted on the Ntw brk Stak Exchange Symbol - DTE 14
tre t fori cine l IJ//tt < n Board of Directors Terence E. Adderley President and Chief Executin Officer, Kelly Sen kes, Inc. (A prwider of temporuy help, business sen kes and home care senices) WendellW. Anderson,Jr. Otairman of the Board and Chief Executne Offker. Bundy Corporation (Manufadurer of steel tubing. fleaible hose and engineered plastic products) tillan Basder President, Canbrook Educational Community Daild Bing Chairman and Chief Executin Offker, Bing Steel, Inc. (A steel senice center) Daild M. Gates Prdessor d Botany, l'aiwrsity d Mkkigan Edward J. Giblin Retired lodustrialist Erant L Groie, Jr. We Chairman d the Boud and Chief Financial 0fficer The Detroit E& son Company Charles M. Heidel President and Chief Operating Officer The Detroit Edison Company Patricia Shont: Longe Economist; Senior Partner, Imeco tonge Cornpany ( An economic and inwstment consulting firm) Walter J. McCarthy, Jr. Chairman d the Board and Cinef Executiw Offker, The Detroit Edison Company Frank Merriman Dairy Fumer Dean E. Richardson Chairman of the Board and President, Manufacturers Ngional Bank d Detroit Lools H. Roddis, Jr. Consulting Engineer Alan E. Schwart Senior Partner, Honigman MiUer Schwutz and Cohn (Attorneys at law) Otis M. Smith Retired Yke President, General Motors Corporation Committees of the Board of Directors Organization and Audit Eaecutive Nominating Compensation Edmud 1 Giblin' Walter 1 McCarthy, Jr.' Alan E. Schwut2' WendellW. Anderson,Jr.* Otis M. Smith" lillian Bauder %endeu W. Anderson, Jr. EdwudJ Giblin" lillian Bauder Ernest L Grev, Jr. David M. Gates Terence E. Adderley David Bing Charles M. Heidel Charles M. Heidel Frank Merriman Patricia Shont longe Frank Merriman Patricia Shontz longe Dean E. Richardson Dean E. Rrharden Dean E. Richardson Frank Merriman Alan E. Schwartz Alan E. Schwartz Otis M. Smith Energy Resources Planning Finance Neeleer Reslew Retirement Fund Review Frank Merriman* Dean E. Rkhudson* louis H. Roddis, Jr.' Patricia Shontz longe
- MdellW. Anderson,Jr" Patricia Shontz longe" Dnid M. Gates" Wendell W. Anderson, Jr."
David Bing Terence E. Adderley Patricia Shonta toege David M. Cates David M. Cates lillian Bauder Frank Merriman FAwud 1 Giblin Charles M. Heidel F4mard 1 Giblin Ernest L Grme, Jr. Louis H. Roddis, Jr Ernest L Grow, Jr. Otis M. Smith Alan E. Schwart
+0armaa "We Charman Officers Walter J. McCarthy, Jr. Chairman d the Bond and Chief Eonall W. Gresens We President and Controller Wi!!ard R. Holland Vice President - Operations Charles M. Heidel President and Chief Operating Officer V Pr h & & &
Ernest L Grove,Jr. Y a t d and J. Philip tenthan We President - Muketing and Customer Relations John E, lobbla Executive Vice Prnident O Ml W H,Jr. We President - Planning, Research lions.Cohan Senior Vice President and General and Environmental Protection
""I Pobert H. Naftaly Vke President and General Au& tor Barkhard H. Schneider Group Vice President James B. Other Vice President - Employt B. Ralph Sphta Group Vice President Reidxms Harry Taeber Group Vice President William S. Oncr Vice President - Nudear Operatxms Frank L Agosti Vice President - Nuclear Engineering Snel J. Maldman Vice President - Publx Affairs
* " ###"#I Malcolm G. Dade, Jr. V Presi e - Community and Coernmental Affairs Lnlie L toomans Treasurer tS
l Detrol,t l 2000 Second Avenue Detro<t. Mchgan 48226 A put ptrt of 3mrlife.
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