ITEM 3 - LEGAL PROCEEDINGS.
The Company in the ordinary course of its business, is involved in a number of suits and controversies including claims for personal injuries and property damage and matters involving zoning ordinances and other regulatory matters. As of December 31, 1994, the Company was named as defendant in 194 lawsuits involving claims for personal injuries and property damage and had been advised of 22 other potential claims not evidenced by lawsuits.
From time to time the Company has paid nominal penalties which were administratively assessed by the United States Coast Guard, United States Department of Transportation under the Federal Water Pollution Control Act, as amended, with respect to minor accidental oil spills at the Company's power plants into navigable waters of the United States. Payment of such penalties represents full disposition of these matters.
The Company in its 1982 main electric rate case requested the MPSC to recognize the costs associated with the abandoned Greenwood Unit Nos. 2 and 3 for ratemaking purposes. In March 1983, the MPSC, consistent with past precedent, granted the Company authority to defer, amortize and recover these costs (over a period of 10 years) through the ratemaking process. The Michigan Attorney General appealed the MPSC's order. In August 1990, the Ingham County Circuit Court remanded this matter to the MPSC for additional findings of fact. On November 1, 1991, the MPSC issued its final order on remand affirming the earlier decision to allow rate recovery of the costs. The Ingham County Circuit Court has ordered that supplemental briefs be filed. The Company has amortized the costs associated with the abandoned Greenwood Unit Nos. 2 and 3 in accordance with the MPSC's order. The amortization was completed in 1993.
The Company has announced its plans to form a holding company. The holding company format is subject to approval by Common Stock Shareholders, FERC and the NRC. The Company expects that the holding company structure will be in place by year-end 1995 and that the new holding company will be exempt from the practices of the federal Public Utility Holding Company Act of 1935.
See Note 12.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange, which is the principal market for such stock, and the Chicago Stock Exchange. The following table indicates the reported high and low sales prices of the Company's Common Stock on the Composite Tape of the New York Stock Exchange and dividends paid per share for each quarterly period during the past two years:
At December 31, 1994, there were 144,863,447 shares of the Company's Common Stock outstanding. These shares were held by a total of 151,077 shareholders.
The Company's By-Laws provide that Chapter 7B of the Michigan Business Corporation Act ("Act") does not apply to the Company. The Act regulates shareholder rights when an individual's stock ownership reaches at least 20 percent of a Michigan corporation's outstanding shares. As a result of the amendment, a shareholder seeking control of the Company cannot require the Company's Board of Directors to call a meeting to vote on issues related to corporate control within 10 days, as stipulated by the Act.
The level of dividends is dependent on earnings and other business conditions, each of which is periodically reviewed by the Company's Board of Directors.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA.
THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and accompanying Notes thereto, contained herein.
RESULTS OF OPERATIONS
In 1994, the Company's earnings for common stock were $390.3 million, or $2.67 per share, a decrease of 20.5% from the $491.1 million, or $3.34 per share earned in 1993. The earnings decrease was due in part to a January 21, 1994 order by the Michigan Public Service Commission ("MPSC"), which reduced rates by $78 million annually and increased depreciation and operation expenses by $84 million annually. In addition, accretion income decreased and amortization of the Fermi 2 nuclear power plant phase-in plan increased significantly in 1994. Also, the Company incurred additional one-time charges at the Fermi 2 nuclear power plant, which was out of service in 1994 due to equipment failure, for maintenance expenses and the establishment of a reserve for estimated Fermi 2 performance in 1995-1997. The earnings decrease was limited by higher system sales and lower interest expense due to the early redemption and refinancing of higher cost debt and the redemption of maturing debt.
At December 31, 1994, the book value of the Company's common stock was $22.89 per share, an increase of 2.5% since December 31, 1993. Return on average total common shareholders' equity was 11.6% in 1994, 15.2% in 1993 and 18.6% in 1992.
The ratio of earnings to fixed charges for 1994, 1993 and 1992 was 3.13, 3.25 and 3.09, respectively. The ratio of earnings to fixed charges and preferred and preference stock dividend requirements for 1994, 1993 and 1992 was 2.73, 2.88 and 2.79, respectively.
OPERATING REVENUES
Total operating revenues increased (decreased) due to the following factors:
Rate Changes
The January 21, 1994 MPSC rate order reduced the Company's rates by $78 million annually. In keeping with the MPSC's recognition of the need for industrial customers to be competitive, the January 1994 rate reduction was allocated among the various classes of customers approximately as follows: Industrial-$43 million, Commercial-$24 million, Residential-$10 million and Governmental-$1 million.
A December 1988 MPSC rate order provided for a moratorium on base rate changes for the five-year period 1989 - 1993, an expense stabilization procedure ("ESP") surcharge, which provided annual revenues of $63 million in 1992 for the effects of inflation, and a suspension of the Power Supply Cost Recovery ("PSCR") Clause for the four-year period 1989 - 1992. The ESP surcharge expired for service rendered on or after January 1, 1993, and the PSCR Clause was reinstated in 1993. As a result of these two items, 1993 operating revenues were reduced by approximately $169 million.
Kilowatthour Sales
Kilowatthour sales increased (decreased) as follows:
Residential sales increased due to substantially warmer weather in the second quarter resulting in increased air conditioning and cooling-related loads, partially offset by lower cooling-related loads in the third quarter. The increased heating-related loads in the first quarter were offset by decreased heating-related loads in the fourth quarter. Commercial sales increased due primarily to improved economic conditions and increased cooling-related loads. Industrial sales increased as a result of higher sales to automotive, steel and other manufacturing customers reflecting the improvement in the economy. The decreased sales to other customers reflect lower sales to wholesale for resale customers.
Residential and commercial sales increased due primarily to substantially warmer summer weather resulting in increased air conditioning and cooling-related loads, partially offset by warmer winter weather reducing heating-related sales. Industrial sales increased due to higher automotive and steel production and improved economic conditions. The increased sales to other customers reflect increased load requirements of wholesale for resale customers.
Interconnection Sales
Interconnection sales represent sales between utilities to meet energy needs as a result of demand and/or generating unit availability.
Interconnection sales decreased due to the reduced availability of energy for sale as a result of the Fermi 2 outage and lower sales to Consumers Power Company.
Interconnection sales increased due primarily to increased sales to Consumers Power Company, partially offset by a decrease in sales to Ontario Hydro.
OPERATING EXPENSES
Fuel and Purchased Power
Fuel and purchased power expenses increased (decreased) due to the following factors:
Net system output and average unit costs were as follows:
The increase in average unit cost resulted from replacing lower-cost nuclear generation with higher-cost fossil generation and purchased power due to the Fermi 2 outage in 1994 as a result of a turbine-generator failure on December 25, 1993. This increase was offset by the receipt of Fermi 2 business interruption insurance proceeds.
The decrease in average unit cost was due to declining fuel prices resulting from greater use of lower-cost Western low-sulfur coal, increases in lower-cost nuclear generation and decreases in the buyback of Belle River Power Plant capacity and energy from the Michigan Public Power Agency.
Other Operation
Other operation expense increased due primarily to other postretirement health care and life insurance benefits expense, service quality claims expense and higher nuclear plant, transmission and distribution and demand-side management expenses. These increases were partially offset by lower incentive award expenses related to a shareholder value improvement plan, expenses recorded in the year-earlier period for the write-off of obsolete and excess stock material and a reserve for steam purchases under the agreement with the Greater Detroit Resource Recovery Authority, lower uncollectible and employee reorganization expenses and lower injuries and damages expense.
Other operation expense increased due primarily to the write-off of obsolete and excess stock material, higher injuries and damages expenses, a provision for employee reorganization expenses, a reserve for steam purchases under the agreement with the Greater Detroit Resource Recovery Authority, incentive award expenses related to a shareholder value improvement plan and expenses related to the new collective bargaining agreement with employees represented by the Utility Workers Union of America - Local 223. These increases were partially offset by lower uncollectible expenses and a 1992 accrual for low-level nuclear waste disposal.
Maintenance
Maintenance expense increased due primarily to higher nuclear plant and storm expenses, partially offset by lower fossil plant and line clearance expenses. Since Fermi 2 was down for repair in 1994, the Company elected to upgrade various plant facilities which resulted in higher nuclear plant maintenance expense.
Maintenance expense decreased due primarily to lower line clearance and storm expenses, partially offset by expenses related to the new collective bargaining agreement with employees represented by the Utility Workers Union of America - Local 223.
Depreciation and Amortization
1994 and 1993
Depreciation and amortization expense increased due to increases in plant in service and, for 1994, to increased Fermi 2 decommissioning costs authorized by the January 21, 1994 MPSC rate order.
Deferred Fermi 2 Depreciation and Amortization
1994 and 1993
Deferred Fermi 2 depreciation, a non-cash item of income, was recorded beginning with the implementation of the Fermi 2 rate phase-in plan in January 1988. The annual amount deferred decreased each year through 1992. Beginning in 1993 and continuing through 1998, these deferred amounts are amortized to operating expense as the cash recovery is realized
through revenues. Deferred Fermi 2 amortization, also a non-cash item of income, was recorded beginning with the Company's purchase of the Wolverine Power Supply Cooperative, Inc.'s ownership interest in Fermi 2 in February 1990. The annual amount deferred decreases each year through 1999.
Amortization of Deferred Fermi 2 Depreciation and Return
1994 and 1993
Beginning in 1993, the Company began amortizing to operating expense deferred Fermi 2 depreciation and return as discussed herein.
Taxes Other Than Income Taxes
Taxes other than income taxes decreased due primarily to lower property taxes, partially offset by higher Michigan Single Business Tax ("MSBT").
Taxes other than income taxes increased due primarily to higher MSBT expense and higher property taxes.
Income Taxes
Income taxes decreased due primarily to lower pretax income, partially offset by higher prior years' federal income tax accrual. In March 1994, the Company and the Internal Revenue Service ("IRS") reached a settlement of the Company's income tax returns for the years 1987 and 1988.
Income taxes decreased due primarily to lower pretax income and prior years' federal income tax accrual, partially offset by an increase in the federal corporate income tax rate from 34% to 35% retroactive to January 1, 1993 and higher taxes due to the reduction of deferred Fermi 2 depreciation, amortization and return.
Deferred Fermi 2 Return
Deferred Fermi 2 return, a non-cash item of income, was recorded beginning with the implementation of the Fermi 2 rate phase-in plan in January 1988. The annual amount deferred decreased each year through 1992. Beginning in 1993 and continuing through 1998, these deferred amounts are amortized to operating expense as the cash recovery is realized through revenues.
Other Income and Deductions
Other deductions increased slightly due primarily to the write-off of premiums and expenses related to the $50 million portion of 1989 Series A Mortgage Bonds not refinanced and an accrual for a contribution to the Detroit Edison Foundation.
Other deductions increased due primarily to an increase in the accrual for decommissioning expenses for Fermi 1, an experimental nuclear unit that has been shut down since 1972.
Accretion Income
1994 and 1993
Accretion income, a non-cash item of income, was recorded beginning in January 1988 to restore to income, over the period 1988-1998, losses recorded due to discounting indirect disallowances of plant costs. The annual amount of accretion income recorded decreases each year through 1998. Also, effective in January 1994, accretion income decreased due to the return to rate base of Greenwood Unit No. 1.
Long-Term Debt Interest Charges
1994 and 1993
Long-term debt interest charges decreased due to the early redemption and refinancing of securities when economic and the redemption of maturing securities.
Other Interest Charges
Other interest charges increased due to higher levels of short-term borrowings, accruals for prior years' MSBT audits and the settlement of 1987 and 1988 IRS audits.
Preferred and Preference Stock Dividend Requirements
Preferred and preference stock dividend requirements decreased slightly due to the optional and mandatory redemption of outstanding shares in 1993.
Preferred and preference stock dividend requirements increased slightly due to issuance of cumulative preferred stock, partially offset by optional and mandatory redemption of outstanding shares.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity has improved since the 1988 commercial operation of Fermi 2, a nuclear generating unit comprising 28% of the Company's total assets and 11% of the Company's summer net rated capability, and lower levels of capital expenditures.
Fermi 2
The commercial operation of Fermi 2 completed the Company's power plant construction program. The Company has no current plans for additional generating plants. Ownership of an operating nuclear generating unit such as Fermi 2 subjects the Company to significant additional risks. Nuclear plants are highly regulated by a number of governmental agencies concerned with public health and safety as well as the environment, and consequently, are subject to greater risks and scrutiny than conventional fossil-fueled plants.
Fermi 2 was out of service in 1994. On December 25, 1993, the reactor automatically shut down following a turbine-generator failure. Safety systems responded within design and regulatory specifications. The turbine suffered mechanical damage, the exciter and generator incurred mechanical and
fire damage, and the condenser had some internal damage. The fire was contained in the turbine building, and there was no release of radioactive contaminants during the event. The nuclear part of the plant was not damaged.
Major repairs have been completed and tests are continuing to balance and synchronize the unit. The Company expects that most repair costs related to returning the Fermi 2 turbine-generator to service will be covered by insurance. These costs are estimated to be in the $70 million to $80 million range. The Company has received partial insurance payments of $25 million for property damage. In addition, the Company has received insurance payments of $66 million for replacement power costs. As a result of an investigation as to the cause of the December 1993 mechanical failure, the Company will replace major Fermi 2 turbine components. Installation of new low-pressure turbine sections is expected to add about 20 megawatts ("MW") of generating capacity to the plant, which would expand the plant's capability by about 2%.
In the interim period the Company will operate Fermi 2 without the large seventh and eighth stage turbine blades until the next refueling, which will reduce the Fermi 2 power output to a range of about 800 MW to 900 MW. During the lower output period, new turbine shafts and blades will be manufactured for the plant's three low-pressure turbines. These major components will be installed during the next refueling outage in 1996.
Replacing the major turbine components in 1996 is expected to cost between $30 million and $40 million. These costs will not be covered by insurance. These costs will be capitalized and are expected to be recovered in rates because such costs are less than the cumulative amount available under the cap on Fermi 2 capital expenditures, a provision of the MPSC's December 1988 order.
At December 31, 1994, Fermi 2 was insured for property damage in the amount of $2.75 billion and the Company had available approximately $8.5 billion in public liability insurance. To the extent that insurable claims for replacement power, property damage, decontamination, repair and replacement and other costs arising from a nuclear incident at Fermi 2 exceed the policy limits of insurance, or to the extent that such insurance becomes unavailable in the future, the Company will retain the risk of loss.
Cash Generation and Cash Requirements
Consolidated Statement of Cash Flows
The Company generates substantial cash flows from operating activities as shown in the Consolidated Statement of Cash Flows. Net cash from operating activities, which is the Company's primary source of liquidity, was $1,063 million in 1992, $1,141 million in 1993 and $953 million in 1994. Net cash from operating activities decreased in 1994 due to lower net income and changes in current assets and liabilities, partially offset by higher non-cash charges to income for the Fermi 2 phase-in plan and depreciation and amortization. Net cash from operating activities increased in 1993 due to lower non-cash items of income for the Fermi 2 phase-in plan, higher depreciation and amortization, and changes in current assets and liabilities, partially offset by lower net income and deferred income taxes.
Net cash used for investing activities increased in 1994 due primarily to increased funding of nuclear decommissioning trust funds, the purchase of leased equipment and non-utility investments, partially offset by lower plant and equipment expenditures. Net cash used for investing activities decreased in 1993 due primarily to lower plant and equipment expenditures.
During the period 1992-1994, the Company has engaged in an extensive debt refinancing program. Assuming favorable economic conditions, the Company expects that it will continue to refinance existing higher-cost debt and equity securities. Also, in 1994, as a result of a plan change, the Company entered into the one-time purchase of common stock from the trustee of the Detroit Edison Savings & Investment Plans.
Additional Information
An MPSC order permits the Company to issue approximately $3.5 billion of securities for the purpose of refinancing debt and preferred and/or preference stock (issued prior to 1993) prior to maturity (when economic) and at maturity, and to replace funds used for those purposes. The Company also has MPSC authority to refinance substantially all non-taxable debt obligations.
Cash requirements for scheduled long-term debt redemptions are expected to be $19 million, $119 million, $144 million, $169 million and $219 million for 1995, 1996, 1997, 1998 and 1999, respectively.
Cash requirements for capital expenditures were $363 million in 1994 and are expected to be approximately $1.9 billion for the period 1995 through 1999. In 1995, cash requirements for capital expenditures are estimated at $394 million. Environmental expenditures are expected to approximate $79 million for the period 1995 through 1999, including expenditures for Clean Air Act compliance requirements. See "Environmental Matters" herein.
The Company's internal cash generation is expected to be sufficient to meet cash requirements for capital expenditures as well as scheduled long-term debt redemption requirements.
In May 1993, the Federal Energy Regulatory Commission ("FERC") issued its order authorizing the continuation of the Company's $1 billion of short-term borrowing authority. This authority will be in effect through May 31, 1995.
The Company had total short-term credit arrangements of approximately $405 million at December 31, 1994, under which $39.5 million of borrowings were outstanding.
Capitalization
The Company's capital structure ratios (excluding amounts of long-term debt and preferred and preference stock due within one year) were as follows:
Competition
An electric public utility must compete with other energy suppliers to meet its customers' energy needs. Serious issues facing the entire electric utility industry include deregulation, municipalization, cogeneration, independent power production, open access to transmission lines and a more competitive bulk power supply market. Utility customers have the option of self-generation or cogeneration and, depending on the extent of future deregulation, may be able to enter into contracts with other power suppliers. In the future, electric utilities may be required to unbundle their products and services to accommodate emerging competitive alternatives brought about by possible industry restructuring due to deregulation.
On December 5, 1994, the Company's Board of Directors approved the formation of a holding company. The Company's shareholders will be asked to approve this organizational structure at the Company's April 24, 1995 Annual Meeting of Common Shareholders. This organizational structure will be subject to receipt of a number of regulatory approvals.
A holding-company structure will provide greater financial flexibility to develop and operate new non-utility businesses. It also will offer a mechanism for better defining and separating the Company's regulated and unregulated businesses, and for protecting the Company's utility business and customers from any risks that may be involved in non-utility ventures.
When all approvals are in place, the Company's common stock will be exchanged share-for-share for the common stock of the holding company. The holding-company structure could be in place before the end of 1995.
As a result of the Energy Policy Act of 1992, the Company expects that, over time, non-utility generation resources will be developed which will result in greater competition for power sales. In addition, in April 1994, the MPSC issued an interim order setting forth a framework for a retail wheeling experiment. The 90 MW experiment would last five years commencing with the need for additional capacity, which is expected to be approximately the year 2000, and would be implemented concurrently with the Company's next Request for Proposal case under the MPSC's capacity solicitation process. The Company has appealed the MPSC's interim order with the U.S. District Court for the Western District of Michigan claiming that the MPSC does not have the authority to order the Company to participate in retail wheeling, and that the jurisdiction over transmission rates for wheeling resides with the FERC. The MPSC is expected to issue a final order by the end of April 1995.
In response to the changing market for electricity, the Company has developed a number of programs designed to increase its efficiency and competitive status and address customer needs. An aggressive demand-side management program has been developed, an integral part of which is an interruptible rate for large industrial customers. This rate, commonly referred to as R-10 and approved by the MPSC, permits its customers to achieve economic benefits while enabling the Company to reduce its peak demand requirements. The January 21, 1994 MPSC rate order increased the 400 MW available under the R-10 rate to 525 MW in 1994 and 650 MW in 1995, with the Company absorbing revenue losses associated with the additional 250 MW made available under this rate.
As part of a continuing response to the challenge of competition, the Company has executed 10-year special manufacturing contracts with Chrysler Corporation, Ford Motor Company and General Motors Corporation, covering 54 of the Big Three automakers' largest manufacturing locations in Southeastern Michigan. On August 3, 1994, the Company filed the executed special manufacturing contracts with the MPSC. The MPSC must approve these contracts before they can become effective. An order approving these long-term contracts is expected to be issued in March 1995.
The special manufacturing contracts are available to customers with a total connected load of 100 MW or more for specific locations of 5 MW and over. Service under the special manufacturing contracts will include both firm and interruptible service, which is priced to provide customers with competitively-based electric rates.
A major feature of the special manufacturing contracts will be the establishment of a long-term, 10-year relationships with these customers during which the Company will be the customers' sole supplier of electricity through the year 2000. The customers may reduce their purchases by 20% annually during the last four years of the contracts. The special manufacturing contracts provide that the customers' existing self-generation will only be used for emergency back-up. It is anticipated that this will result in additional sales and revenue for the Company. The contracts also provide for a corporate minimum take-or-pay provision for 1995 through 1999 with specified price reductions for 1995 through 2000. Through these agreements, the customers will be assured of both a more competitive and predictable price for electric energy. Detroit Edison will be assured that the customers will purchase their electric requirements from the Company.
Pursuant to the terms of the special manufacturing contracts, the customers will be able to designate a percentage of their load at each facility as interruptible. The customers will also have the ability to designate interruptions on a corporate basis with the flexibility to shift interruptible load among separate facilities. In total, approximately 160 MW of interruptible capacity is expected.
In order to forge an energy partnership with these customers, the Company will provide service delivery quality guarantees and on-site engineering expertise to implement better service, identify energy conservation efficiency improvement opportunities and achieve valuable energy savings for each customer. The goal of these provisions of the special manufacturing contracts is to combine the customers' energy conservation efforts with the knowledge and skills provided by the Company. The Company also may invest in energy saving projects with these customers.
The Company will serve the special manufacturing contract customers at rates above its marginal cost. Further, at this time the Company is not requesting a change in electric rates charged to other customers. As a result, annual revenue reductions will range in amounts from about $30 million in 1995 to $50 million for 1999 through 2004. The Company expects to offset these reductions by further reducing operating expenses.
In 1994, the Company completed its accelerated reliability improvement program which upgraded its transmission and distribution system. This program has helped reduce interruptions and the duration of outages thus increasing customer satisfaction.
The Company is reviewing potential energy services as a method of remaining competitive while diversifying within the scope of its core business.
Meeting Energy Demands
Since 1980, the compound annual sales growth was 1.8% and peak demand growth was 2.4% (after adjusting for the effects of unusual weather). System sales and demand are expected to grow at a compound annual rate of about 1.5% per year for the next 15 years.
Sales to the non-manufacturing segment, which include customers such as agribusiness, grocery stores, restaurants and government, are projected to grow at a strong pace in the next 15 years, a compound annual increase of 1.9% per year. This projected increase indicates the Company's customer base is becoming more diverse and less dependent on the manufacturing segment.
The Company expects to meet its near-term demand for energy by the return to service, subject to environmental regulations, of power plant units currently in economy reserve status when energy demand and consumption requirements provide economic justification. The return to service of these units is conditioned upon the outcome of a competitive bidding process which was established by an MPSC order issued in July 1992. The Company will submit a new plan to the MPSC detailing its proposed method of meeting energy demands on or before May 1, 1995.
Inflation
Inflation is a measure of the purchasing power of the dollar. In 1994, the inflation rate, as defined by the Consumer Price Index, was 2.7%. Although the current inflation rate is relatively low, its compound effect through time can be significant, primarily in its effect on the Company's ability to replace its investment in utility plant.
The regulatory process limits the amount of depreciation expense recoverable through revenues to the historical cost of the Company's investment in utility plant. Such amount produces cash flows which are inadequate to replace such property in future years. However, the Company believes that it will be able to recover the increased cost of replacement facilities when, and if, replacement occurs.
Regulation and Rates
The Company has no plans to seek increased rates for electric service from the MPSC in the near future.
Environmental Matters
Protecting the environment from damage, as well as correcting past environmental damage, continues to be the focus of state and federal regulators. Committees at both the state and federal level are studying the effects of a wide array of chemicals and electromagnetic fields as well as global warming (as potentially affected by carbon dioxide emissions). Legislation and/or rulemaking resulting from these and any future studies could further impact the electric utility industry including the Company.
The Environmental Protection Agency ("EPA") and the Michigan Department of Natural Resources have aggressive programs regarding the cleanup of contaminated property. The Company anticipates that it will be periodically included in these types of environmental proceedings. Further, additional environmental expenditures, although difficult to quantify, will be necessary as the Company prepares to comply with the phase-in of the 1990 Amendments to the federal Clean Air Act. The Company currently meets the first phase of sulfur dioxide emissions and nitrogen oxides emissions requirements. The second phase begins in the year 2000. The Company currently burns low-sulfur coal (less than 1% sulfur) at all its coal-fired units and believes it can meet the second phase sulfur dioxide emission requirements through additional blending of coals. Current projections indicate that annual fuel costs may increase by $13-20 million in the period 2000-2009 in order to comply with new sulfur dioxide emissions requirements. In addition, approximately $59 million in capital expenditures may be necessary for nitrogen oxides emissions requirements.
The Company expects that substantially all of the costs of environmental compliance will be recovered through the ratemaking process.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements and schedules are included herein.
Note: All other schedules and portions of included schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
The Company's individual financial statements have been omitted since the Company is primarily an operating company and all subsidiaries included in the consolidated financial statements being filed, in the aggregate, do not have minority equity interests and/or indebtedness to any person other than the Company or its consolidated subsidiaries in amounts which together exceed 5 percent of the total assets as shown in the December 31, 1994 Consolidated Balance Sheet.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of The Detroit Edison Company
In our opinion, the consolidated financial statements listed in the index on page 30 present fairly, in all material respects, the financial position of The Detroit Edison Company and its subsidiary companies at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Detroit, Michigan January 23, 1995
The Detroit Edison Company and Subsidiary Companies CONSOLIDATED STATEMENT OF INCOME (Dollars in Thousands)
(See accompanying Notes to Consolidated Financial Statements.)
The Detroit Edison Company and Subsidiary Companies CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Thousands)
For purposes of the consolidated financial statements, the Company considers investments purchased with a maturity of three months or less to be temporary cash investments.
(See accompanying Notes to Consolidated Financial Statements.)
The Detroit Edison Company and Subsidiary Companies CONSOLIDATED BALANCE SHEET (Dollars in Thousands)
(See accompanying Notes to Consolidated Financial Statements.)
The Detroit Edison Company and Subsidiary Companies CONSOLIDATED BALANCE SHEET (Dollars in Thousands)
(See accompanying Notes to Consolidated Financial Statements.)
The Detroit Edison Company and Subsidiary Companies CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (Dollars in Thousands)
*At established rate for each series.
(See accompanying Notes to Consolidated Financial Statements.)
THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
INDUSTRY SEGMENT - The Detroit Edison Company ("Company") is a regulated public utility engaged in the generation, purchase, transmission, distribution and sale of electric energy.
REGULATION - The Company is subject to regulation by the Michigan Public Service Commission ("MPSC") and the Federal Energy Regulatory Commission ("FERC") with respect to accounting matters and maintains its accounts in accordance with Uniform Systems of Accounts prescribed by these agencies. As a regulated entity, taking into account the cost recovery restrictions contained in the December 1988 and January 21, 1994 MPSC rate orders and the provisions of the Energy Policy Act of 1992 ("Energy Act"), the Company meets the criteria of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation." This accounting standard recognizes the ratemaking process which results in differences in the application of generally accepted accounting principles between regulated and non-regulated businesses. Such differences concern mainly the time at which various items enter into the determination of net income in order to follow the principle of matching costs and revenues.
PRINCIPLES APPLIED IN CONSOLIDATION - The Consolidated Financial Statements include the accounts of all subsidiary companies, all of which are wholly-owned.
REVENUES - The Company records unbilled revenues for electric and steam heating services provided after cycle billings through month-end.
PROPERTY, RETIREMENT AND MAINTENANCE, DEPRECIATION AND AMORTIZATION - Utility properties are recorded at original cost less regulatory disallowances. In general, the cost of properties retired in the normal course of business is charged to accumulated depreciation. Expenditures for maintenance and repairs are charged to expense, and the cost of new property installed, which replaces property retired, is charged to property accounts. The annual provision for depreciation is calculated on the straight-line remaining life method by applying annual rates approved by the MPSC to the average of year-beginning and year-ending balances of depreciable property by primary plant accounts. Provision for depreciation of Fermi 2, excluding decommissioning expense, was 3.26% of average depreciable property for 1994 and 2.63% for 1993 and 1992, except for $300 million being amortized over 10 years commencing in 1989 and $513 million being amortized over 19 years commencing in 1990. See Note 3 and Deferred Fermi 2 Amortization below. Provision for depreciation of all other utility plant, as a percent of average depreciable property, was 3.2% for 1994, 3.4% for 1993 and 3.3% for 1992.
DEFERRED FERMI 2 DEPRECIATION AND RETURN - An MPSC authorized phase-in plan for Fermi 2, effective in January 1988, provided for gradual rate increases in the early years of plant operation rather than a one-time substantial rate increase which conventional ratemaking would provide. SFAS No. 92, "Regulated Enterprises - Accounting for Phase-in Plans," permits the capitalization of costs deferred for future recovery under a phase-in plan. Accordingly, the Company recorded non-cash income of deferred depreciation and deferred return totaling $506.5 million through 1992. In 1992, deferred depreciation was $4.5 million and deferred return was $13.8 million. Beginning in 1993 and continuing through 1998, these deferred amounts will be amortized to operating expense as the cash recovery is realized through revenues. Amortization of these deferred amounts totaled $84.8 million in 1994 and $30.9 million in 1993.
DEFERRED FERMI 2 AMORTIZATION - The December 1988 MPSC rate order provides for the Company's February 1990 purchase of Wolverine Power Supply Cooperative, Inc.'s ("Cooperative") ownership interest in Fermi 2 for $513 million to be treated as a regulatory asset with a 19-year principal amortization and associated interest of 8%, which is the composite average of the Cooperative debt assumed by the Company at the time of the purchase. Since the straight-line amortization of the regulatory asset exceeds the revenues provided for such amortization during the first 10 years of the recovery period, the Company is recording deferred amortization, a non-cash item of income, totaling $67.2 million through 1999. For 1994, 1993 and 1992, the amounts deferred were $7.5 million, $9 million and $10.5 million, respectively. The deferred amounts will be amortized to operating expense as the cash recovery is realized through revenues during the years 2000 through 2008.
PROPERTY TAXES - The Company accrues property taxes monthly during the fiscal period of the applicable taxing authority.
INCOME TAXES - Deferred income taxes are provided for temporary differences between book and taxable income to the extent authorized by the MPSC. For federal income tax purposes, the Company computes depreciation using accelerated methods and shorter depreciable lives. Investment tax credits utilized which relate to utility property were deferred and are amortized over the estimated composite service life of the related property. See Note 6.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION ("AFUDC") - AFUDC, a non-operating non-cash item, is defined in the FERC Uniform System of Accounts to include "the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used." AFUDC involves an accounting procedure whereby the approximate interest expense and the cost of other (common, preferred and preference shareholders' equity) funds applicable to the cost of construction are transferred from the income statement to construction work in progress in the balance sheet. The cash recovery of AFUDC, as well as other costs of construction, occurs as
completed projects are placed in service and related depreciation is authorized to be recovered through customer rates. The Company capitalized AFUDC at 7.66% in 1994 and 9.65% in 1993 and 1992.
ACCRETION INCOME - In 1988, the Company adopted SFAS No. 90, "Regulated Enterprises - Accounting for Abandonments and Disallowances of Plant Costs," and recorded indirect losses for Greenwood Unit No. 1, for the abandoned Greenwood Unit Nos. 2 and 3 and for a portion of Fermi 2 as a discount (reduction) of the Company's investment in these units. These net after-tax losses, due to discounting, originally totaled $198 million, which amounts are being restored to net income over the period 1988-1998 as the Company records a non-cash return (accretion income) on its investment in these units. The Company recorded $8.9 million, $29.5 million and $30.2 million of net after-tax accretion income in 1994, 1993 and 1992, respectively.
CAPITALIZATION - DISCOUNT, PREMIUM AND EXPENSE - The discount, premium and expense related to the issuance of long-term debt are amortized over the life of each issue. In accordance with MPSC regulations, the discount, premium and expense, when related to debt redeemed without refunding, are written off to other income and deductions, and when related to debt redeemed with refunding, are amortized over the life of the replacement issue. Capital stock premium and expense related to redeemed preferred and preference stock are written off against retained earnings used in the business.
FERMI 2 REFUELING OUTAGES - The Company recognizes the cost of Fermi 2 refueling outages over periods in which related revenues are recognized. Under this procedure, the Company records a provision for incremental costs anticipated to be incurred during the next scheduled Fermi 2 refueling outage. See Note 2.
LEASES - See Note 9.
EMPLOYEES' RETIREMENT PLAN AND OTHER POSTRETIREMENT BENEFITS - See Note 13.
NOTE 2 - FERMI 2
GENERAL - Fermi 2, a nuclear generating unit, began commercial operation in January 1988. Fermi 2 has a design electrical rating (net) of 1,139 megawatts ("MW"). However, due to certain equipment limitations, Fermi 2 is rated at 1,116 MW until modifications can be made to achieve the design rating. This unit represents approximately 28% of total assets, 11% of total operation and maintenance expenses and 11% of summer net rated capability.
MPSC rate orders issued in April 1986, January 1987, December 1988 and January 1994 contain provisions with respect to the recovery of Fermi 2 costs. See Note 3 for a discussion of Fermi 2 rate matters and the MPSC's treatment of Fermi 2 project costs of $4.858 billion.
LICENSING AND OPERATION - The Nuclear Regulatory Commission ("NRC") maintains jurisdiction over the licensing and operation of Fermi 2.
Fermi 2 was out of service in 1994. On December 25, 1993, the reactor automatically shut down following a turbine-generator failure. Safety systems responded within design and regulatory specifications. The turbine suffered mechanical damage, the exciter and generator incurred mechanical and fire damage, and the condenser had some internal damage. The fire was contained in the turbine building, and there was no release of radioactive contaminants during the event. The nuclear part of the plant was not damaged.
Major repairs have been completed and tests are continuing to balance and synchronize the unit. The Company expects that most repair costs related to returning the Fermi 2 turbine-generator to service will be covered by insurance. These costs are estimated to be in the $70 million to $80 million range. The Company has received partial insurance payments of $25 million for property damage. In addition, the Company has received insurance payments of $66 million for replacement power costs. As a result of an investigation as to the cause of the December 1993 mechanical failure, the Company will replace major Fermi 2 turbine components. Installation of new low-pressure turbine sections is expected to add about 20 MW of generating capacity to the plant, which would expand the plant's capability by about 2%.
In the interim period the Company will operate Fermi 2 without the large seventh and eighth stage turbine blades until the next refueling, which will reduce the Fermi 2 power output to a range of about 800 MW to 900 MW. During the lower output period, new turbine shafts and blades will be manufactured for the plant's three low-pressure turbines. These major components will be installed during the next refueling outage in 1996.
Replacing the major turbine components in 1996 is expected to cost between $30 million and $40 million. These costs will not be covered by insurance. These costs will be capitalized and are expected to be recovered in rates because such costs are less than the cumulative amount available under the cap on Fermi 2 capital expenditures, a provision of the MPSC's December 1988 order. See Note 3.
INSURANCE - The Company insures Fermi 2 with property damage insurance provided by Nuclear Mutual Limited ("NML") and Nuclear Electric Insurance Limited ("NEIL"). The NML and NEIL insurance policies provide $500 million of composite primary coverage (with a $1 million deductible) and $2.25 billion of excess coverage, respectively, for stabilization, decontamination and debris removal costs and repair and/or replacement of property. Accordingly, the combined limits provide total property damage insurance of $2.75 billion.
The Company maintains an insurance policy with NEIL providing for extra expenses, including certain replacement power costs necessitated by Fermi 2's unavailability due to an insured event. This policy, which has a 21-week waiting period, provides for three years of coverage.
Under the NML and NEIL policies, the Company could be liable for maximum retrospective assessments of up to approximately $28 million per loss if any one loss should exceed the accumulated funds available to NML or NEIL.
As required by federal law, the Company maintains $200 million of public liability insurance for a nuclear incident. Further, under the Price-Anderson Amendments Act of 1988, deferred premium charges of $75.5 million could be levied against each licensed nuclear facility, but not more than $10 million per year per facility. On December 31, 1994, there were 110 licensed nuclear facilities in the United States. Thus, deferred premium charges in the aggregate amount of approximately $8.3 billion could be levied against all owners of licensed nuclear facilities in the event of a nuclear incident. Accordingly, public liability for a single nuclear incident is currently limited to approximately $8.5 billion.
DECOMMISSIONING - The NRC has jurisdiction over the decommissioning of nuclear power plants. An NRC rule requires decommissioning funding based upon a site-specific estimate or a predetermined NRC formula. Using the NRC's formula, the Company estimates that the cost of decommissioning Fermi 2 when its license expires in the year 2025 is $489 million in current 1994 dollars and $3 billion in future 2025 dollars. The assumed annual inflation rate used to increase the cost to decommission is 6%, compounded annually.
The MPSC and FERC regulate the recovery of costs of decommissioning nuclear power plants. A January 1994 MPSC order authorized a $500 million external trust fund in 1994 dollars to finance the decommissioning of Fermi 2. The MPSC's January 21, 1994 rate order includes an increase in rates for the decommissioning of Fermi 2, which the Company believes will be adequate to fund the estimated cost of decommissioning using the NRC formula. See Note 3. The order approves a decommissioning surcharge on customer bills under which the Company is currently collecting approximately $31.4 million annually, including $3.5 million for the recovery of low-level radioactive waste disposal. The FERC has approved the recovery of decommissioning expense in base rates, most recently in its June 1993 order.
The Company has established external trust funds to hold decommissioning and low-level radioactive waste disposal funds collected from customers. During 1994, 1993 and 1992, the Company collected $26.9 million, $3.7 million and $3.4 million, respectively, from customers for decommissioning Fermi 2. Also, in 1994, the Company collected $3.3 million from customers for low-level radioactive waste disposal. Such amounts were recorded as components of depreciation and amortization expense in the Consolidated Statement of Income and accumulated depreciation and amortization in the Consolidated Balance Sheet. Earnings on the external decommissioning trust fund assets during 1994, 1993 and 1992 were $1.3 million, $1.2 million and $1.0 million, respectively. Earnings on the external low-level radioactive waste disposal trust fund assets were $0.2 million in 1994. Trust fund earnings are recorded as an investment with a corresponding credit to accumulated depreciation and amortization. Trust fund assets are assumed to earn an after-tax rate of return of 7%, compounded annually.
The external trust fund for low-level radioactive waste disposal costs was initially established by charges to other operation expense in the Consolidated Statement of Income of $1.4 million in 1993 and $5.9 million in 1992.
At December 31, 1994, the Company had a reserve of $51.5 million for the future decommissioning of Fermi 2 and $10.8 million for low-level radioactive waste disposal costs. These reserves are included in accumulated depreciation and amortization in the Consolidated Balance Sheet with a like amount deposited in external trust funds.
The Company also had a reserve of $14.2 million at December 31, 1994 for the future decommissioning of Fermi 1, an experimental nuclear unit on the Fermi 2 site that has been shut down since 1972. This reserve is included in other deferred credits in the Consolidated Balance Sheet with a like amount deposited in an external trust fund. The Company estimates that the cost of decommissioning Fermi 1 in the year 2025 is $19 million in current 1994 dollars and $114 million in future 2025 dollars.
The staff of the Securities and Exchange Commission has questioned certain of the current accounting practices of the electric utility industry regarding the recognition, measurement and classification of decommissioning costs for nuclear generating units in the financial statements of electric utilities. In response to these questions, the Financial Accounting Standards Board has agreed to review the accounting for removal costs, including decommissioning. If current electric utility industry accounting practices for such decommissioning are changed: (1) annual provisions for decommissioning could increase, (2) the estimated cost for decommissioning could be recorded as a liability rather than as accumulated depreciation, and (3) trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense.
The Energy Act provided for a fund to be established for the decommissioning and decontamination of existing United States Department of Energy ("DOE") uranium enrichment facilities. Utilities with nuclear units are required to pay for a portion of the cost by making annual payments into the fund over a 15 year period. The law directs state regulators to treat these payments as a necessary and reasonable cost of fuel and, accordingly, the Company has recorded a regulatory asset and liability in the Consolidated Balance Sheet to reflect these costs.
NUCLEAR FUEL DISPOSAL COSTS - The Company has a contract with the DOE for the future storage and disposal of spent nuclear fuel from Fermi 2. Under the terms of the contract, the Company makes quarterly payments to the DOE based upon a fee of 1 mill per kilowatthour applied to the Fermi 2 electricity generated and sold. The spent nuclear fuel disposal cost is included as a component of the Company's nuclear fuel expense. The DOE has stated that it will be unable to store spent nuclear fuel at a permanent repository until after 2010. However, the DOE and utilities with nuclear units are pursuing other interim storage options. The Company estimates that existing temporary storage capacity at Fermi 2 will be sufficient until the year 2000, or until 2015 with the expansion of such storage capacity.
NOTE 3 - RATE MATTERS
The Company is subject to the primary regulatory jurisdiction of the MPSC, which, from time to time, issues its orders pertaining to the Company's conditions of service, rates and recovery of certain costs including the costs of generating facilities. MPSC orders issued in December 1988 and on January 21, 1994 are currently in effect with respect to the Company's rates and certain other revenue and operating-related matters.
On January 21, 1994, the MPSC issued an order reducing the Company's rates in the amount of $78 million annually. The rate reduction was determined by using a 1994 test year and an overall rate of return of 7.66%, incorporating an 11% return on common equity and a capital structure comprised of 40% common equity, 55.01% long-term debt and 4.99% preferred stock. The MPSC order includes the recovery of (1) increased Fermi 2 decommissioning costs of $28.1 million annually, which includes the recovery of low-level radioactive waste disposal costs, (2) full recovery of 1994 other postretirement benefit costs plus recovery and amortization of the 1993 deferred cost (see Note 13), (3) costs associated with the return to rate base of Greenwood Unit No. 1, (4) Fermi 2 phase-in plan revenue requirements of $70.8 million in 1994 and (5) costs associated with a three-year $41.5 million ($7.6 million in 1994, $14.9 million in 1995 and $19 million in 1996) demand-side management program. In keeping with the MPSC's recognition of the need for industrial customers to be competitive, the January 1994 rate reduction was allocated among the various classes of customers approximately as follows: Industrial-$43 million, Commercial-$24 million, Residential-$10 million and Governmental-$1 million. The order was effective for service rendered on and after January 22, 1994 and is the subject of various appeals before the Michigan Court of Appeals.
INDUSTRIAL RATES - In August 1994, the Company entered into 10-year special manufacturing contracts which, if approved by the MPSC, will lower costs for the Company's three largest customers (Chrysler Corporation, Ford Motor Company and General Motors Corporation) without impacting the rates or service of other customers. Annual revenue reductions will range in amounts from about $30 million in 1995 to $50 million for 1999 through 2004. The Company expects to offset these reductions by further reducing operating expenses.
In August 1994, the Company filed an application with the MPSC seeking approval of the special manufacturing contracts. The Commission scheduled expedited hearings in this case, which were completed in December 1994. An order approving these long-term contracts is expected to be issued in March 1995.
FERMI 2 - The December 1988 MPSC order established, for the period January 1989 through December 2003, (1) a cap on Fermi 2 capital additions of $25 million per year, in 1988 dollars adjusted by the Consumers Price Index ("CPI"), cumulative, (2) a cap on Fermi 2 non-fuel operation and maintenance expenses adjusted by the CPI and (3) a capacity factor performance standard based on a three-year rolling average commencing in 1991. For a capital investment of $200 million or more (in 1988 dollars adjusted by the CPI), the Company must obtain prior MPSC approval to be included in rate base. See Note 1 - Regulation.
Under the cap on Fermi 2 capital expenditures, the cumulative amount available totals $50 million (in 1994 dollars) at December 31, 1994. Under the cap on non-fuel operation and maintenance expenses, the cumulative amount available totals $31 million (in 1994 dollars) at December 31, 1994.
Under the capacity factor performance standard, a disallowance of net incremental replacement power cost will be imposed for the amount by which the Fermi 2 three-year rolling average capacity factor is less than the greater of either the average of the top 50% of U.S. boiling water reactors or 50%. For purposes of the capacity factor performance standard, the capacity for Fermi 2 for the period 1989-1993 shall be 1,093 MW, and 1,139 MW for each year thereafter until December 31, 2003.
As discussed in Note 2, Fermi 2 was out of service in 1994 and will operate at a reduced power output until the installation of major turbine components during the next refueling outage in 1996. As a result, the three-year rolling average capacity factor will be unfavorably affected in 1994-1997. The plant's capacity factor was 0%, 86.5% and 76.6% during 1994, 1993 and 1992, respectively, or a three-year rolling average of 54.4% in 1994. The average capacity factor for the top 50% of U.S. boiling water reactors for the 36-month period ending September 1994, was 79.2%. The Company has accrued for the Fermi 2 capacity factor performance standard disallowances that will be imposed during the period 1994-1997.
In accordance with April 1986 and December 1988 MPSC rate orders, ratemaking treatment of the Company's Fermi 2 project costs of $4.858 billion is as follows: (1) $3.018 billion
in rate base with recovery and return, (2) $300 million amortized over 10 years with no return, (3) $513 million amortized over 19 years with associated interest of 8% and (4) $1.027 billion disallowed and written off by the Company in 1988.
At December 31, 1994, the Company's net plant investment in Fermi 2 was $3.1 billion ($3.9 billion less accumulated depreciation and amortization of $0.8 billion).
Under the December 1988 MPSC order, if nuclear operations at Fermi 2 permanently cease, amortization in rates of the $300 million and $513 million investments in Fermi 2 would continue and the remaining net rate base investment amount shall be removed from rate base and amortized in rates, without return, over 10 years with such amortization not to exceed $290 million per year. In this event, unamortized amounts of deferred depreciation and deferred return, recorded in the Consolidated Balance Sheet under the phase-in plan prior to the removal of Fermi 2 from rate base, will continue to be amortized, with a full return on such unamortized balances, so that all amounts deferred are recovered during the period ending no later than December 31, 1998. The December 1988 and January 21, 1994 rate orders do not address the costs of decommissioning if operations at Fermi 2 prematurely cease.
The Company has and believes it will continue to operate under the terms of all applicable MPSC orders with no significant adverse effects as a result of any cost recovery restrictions contained therein.
NOTE 4 - JOINTLY-OWNED UTILITY PLANT
The Company's portion of jointly-owned utility plant is as follows:
* The Company's undivided ownership interest is 62.78% in Unit No. 1, 81.39% of the portion of the facilities applicable to Belle River used jointly by the Belle River and St. Clair Power Plants, 49.59% in certain transmission lines and, at December 31, 1994, 75% in facilities used in common with Unit No. 2.
BELLE RIVER - The Michigan Public Power Agency ("MPPA") has an undivided ownership interest in Belle River Unit No. 1 and certain other related facilities. MPPA is entitled to 18.61% of the capacity and energy of the entire plant and is responsible for the same percentage of the plant's operation and maintenance expenses and capital improvements. The Company is obligated to provide MPPA with backup power when either unit is out of service.
The Company was required to purchase MPPA's capacity and energy entitlement through 1994. Such purchases were 80% for 1992, 20% for 1993 and 10% for 1994. The cost for the buyback of power was based on MPPA's plant-related investment, interest costs incurred by MPPA on their original project financing plus 2.5%, and certain other costs such as depreciation and operation and maintenance expenses. Buyback payments to MPPA were $50.9 million, $12.5 million and $6.0 million for 1992, 1993 and 1994, respectively.
LUDINGTON PUMPED STORAGE - Operation, maintenance and other expenses of the Ludington Pumped Storage Plant ("Ludington") are shared by the Company and Consumers Power Company ("Consumers") in proportion to their respective interests in the plant. See Note 12 for a discussion of litigation related to Ludington.
NOTE 5 - SALE OF ACCOUNTS RECEIVABLE AND UNBILLED REVENUES
The Company has an agreement providing for the sale and assignment, from time to time, of an undivided ownership interest in $200 million of the Company's customer accounts receivable and unbilled revenues.
At December 31, 1994 and 1993, customer accounts receivable and unbilled revenues in the Consolidated Balance Sheet have been reduced by $200 million reflecting the sale. All expenses associated with the program are being charged to other income and deductions in the Consolidated Statement of Income.
NOTE 6 - INCOME TAXES
Total income tax expense as a percent of income before tax varies from the statutory federal income tax rate for the following reasons:
Components of income taxes were applicable to the following:
The Fermi 2 phase-in plan required the Company to record additional deferred income tax expense related to deferred depreciation totaling $33.5 million, with this amount amortized to income over the six-year period ending December 31, 1998.
In January 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach for financial accounting and reporting for income taxes. At January 1, 1993, the Company recorded an increase in accumulated deferred income tax liabilities of $740 million representing (a) the tax effect of temporary differences not previously recognized and (b) the recomputing of its tax liability at the current tax rate. The liability increase was offset by a regulatory asset of equal value, titled "Recoverable Income Taxes" in the Consolidated Balance Sheet. This regulatory asset represents the future revenue recovery from customers for these taxes as they become payable, with no effect on net income. In August 1993, the Omnibus Budget Reconciliation Act of 1993 increased the federal corporate income tax rate from 34% to 35% retroactive to January 1, 1993. As a result, the Company recorded (1) an increase of $88.1 million in accumulated deferred income tax liabilities, offset by a corresponding increase in "Recoverable Income Taxes," and (2) an increase of $10.4 million in income tax expense.
At December 31, 1994, "Recoverable Income Taxes" totaled $663.1 million (deferrals of $828.1 million in 1993 less amortization of $108.2 million in 1994 and $56.8 million in 1993).
Deferred income tax assets (liabilities) are comprised of the following at December 31:
In 1993, the MPSC issued an order, in a generic proceeding, authorizing accounting procedures consistent with SFAS No. 109 and providing assurance that the effects of previously flowed-through tax benefits will continue to be allowed rate recovery.
The federal income tax returns of the Company are settled through the year 1988. The Company believes that adequate provisions for federal income taxes have been made through December 31, 1994.
NOTE 7 - COMMON STOCK AND CUMULATIVE PREFERRED AND PREFERENCE STOCK
At December 31, the outstanding Cumulative Preferred Stock redeemable solely at the option of the Company was:
The Convertible Cumulative Preferred Stock, 5 1/2% Series, is convertible by the holder into Common Stock. The conversion price was $17.79 per share at December 31, 1994. The number of shares converted during 1994, 1993 and 1992 was 3,949, 5,563 and 5,978, respectively. The number of shares of Common Stock reserved for issuance upon conversion and the conversion price are subject to further adjustment in certain events. This Series may be redeemed at any time in whole or in part at the option of the Company at $100 per share, plus accrued dividends.
The Company's 7.68% Series, 7.45% Series and 7.36% Series Cumulative Preferred Stock are redeemable solely at the option of the Company at a per share redemption price of $101, plus accrued dividends.
The Company's 7.75% Series and 7.74% Series Cumulative Preferred Stock are redeemable solely at the option of the Company at a per share redemption price of $100 (equivalent to $25 per Depositary Share), plus accrued dividends, on and after April 15, 1998 and July 15, 1998, respectively.
Apart from MPSC approval and the requirement that common, preferred and preference stock be sold for at least par value, there are no legal restrictions on the issuance of additional authorized shares of such stock.
At December 31, 1994, there was no outstanding Cumulative Preferred Stock subject to mandatory redemption.
At December 31, 1994, the Company had Cumulative Preference Stock of $1 par value, 30,000,000 shares authorized with 30,000,000 shares unissued.
On August 4, 1994, the Company purchased 2,206,635 shares of its $10 par value Common Stock at a price of $27.125 per share, totaling $59.9 million, from the trustee of the Detroit Edison Savings & Investment Plans. These shares were canceled and reverted to the status of authorized but unissued shares.
NOTE 8 - SHORT-TERM CREDIT ARRANGEMENTS AND BORROWINGS
As described below, at December 31, 1994, the Company had total short-term credit arrangements of approximately $405 million. At December 31, 1994 and December 31, 1993, $39.5 million and $138.2 million of short-term borrowings were outstanding with weighted average interest rates of 6.2% and 3.4%, respectively.
The Company had bank lines of credit of $200 million, all of which had commitment fees in lieu of compensating balances. Commitment fees incurred in 1994 for bank lines of credit were approximately $0.3 million. The Company uses bank lines of credit to support the issuance of commercial paper and bank loans. All borrowings are at prevailing money market rates which are below the banks' prime lending rates.
In May 1993, FERC issued its order authorizing the continuation of the Company's $1 billion of short-term borrowing authority. This authority will be in effect through May 31, 1995.
The Company has a nuclear fuel financing arrangement (heat purchase contract) with Renaissance Energy Company ("Renaissance"), an unaffiliated company. Renaissance may issue commercial paper or borrow from participating banks on the basis of promissory notes. To the extent the maximum amount of funds available to Renaissance (currently $400 million) is not needed by Renaissance to purchase nuclear fuel, such funds may be loaned to the Company for general corporate purposes pursuant to a separate Loan Agreement. At December 31, 1994, approximately $205 million was available to the Company under such Loan Agreement. See Note 9 for a discussion of the Company's heat purchase contract with Renaissance.
Renaissance entered into five-year interest rate swap agreements, guaranteed by the Company, in December 1990, with five banks for a nominal amount of $125 million. These agreements are used to reduce the potential impact of increases in interest rates on the variable rate debt by exchanging the receipt of variable rate amounts for fixed interest payments at rates ranging from 8.12% to 8.145% over the life of the agreements. The differential to be paid or received is recognized as an adjustment to the interest component included as part of nuclear fuel expense.
NOTE 9 - LEASES
Future minimum lease payments under long-term noncancellable leases, consisting of nuclear fuel ($221 million computed on a projected units of production basis), lake vessels ($48 million), locomotives and coal cars ($149 million), office space ($28 million) and computers, vehicles and other equipment ($6 million) at December 31, 1994 are as follows:
The Company has a heat purchase contract with Renaissance which provides for the purchase by Renaissance for the Company of up to $400 million of nuclear fuel, subject to the continued availability of funds to Renaissance to purchase such fuel. Title to the nuclear fuel is held by Renaissance. The Company makes quarterly payments under the heat purchase contract based on the consumption of nuclear fuel for the generation of electricity. Renaissance's investment in nuclear fuel was $193 million and $184 million at December 31, 1994 and 1993, respectively. The increase in 1994 from 1993 of $9 million includes purchases of $3 million and capitalized interest of $6 million.
Under SFAS No. 71, amortization of leased assets is modified so that the total of interest on the obligation and amortization of the leased asset is equal to the rental expense allowed for ratemaking purposes. For ratemaking purposes, the MPSC has treated all leases as operating leases. Net income is not affected by capitalization of leases.
Rental expenses for both capital and operating leases were $49 million (including $8 million for nuclear fuel), $126 million (including $89 million for nuclear fuel) and $108 million (including $70 million for nuclear fuel) for 1994, 1993 and 1992, respectively.
NOTE 10 - LONG-TERM DEBT
The Company's 1924 Mortgage and Deed of Trust ("Mortgage"), the lien of which covers substantially all of the Company's properties, provides for the issuance of additional bonds. At December 31, 1994, approximately $3.1 billion principal amount of Mortgage Bonds could have been issued on the basis of property additions, combined with an earnings test provision, assuming an interest rate of 8.9% on any such additional Mortgage Bonds. An additional $1.2 billion principal amount of Mortgage Bonds could have been issued on the basis of bond retirements.
Long-term debt outstanding at December 31 was:
* Weighted average interest rate at December 31, 1994. ** Variable rate at December 31, 1994.
In 1995, 1996, 1997, 1998 and 1999, long-term debt maturities consist of $19 million, $119 million, $144 million, $169 million and $219 million, respectively.
In June 1992, the Company entered into a three-year interest rate swap agreement matched to a $31 million variable rate tax exempt revenue bond. This agreement is used to reduce the potential impact of increases in interest rates on the variable rate debt by exchanging the receipt of variable rate amounts for fixed interest payments at a rate of 4.32% over the life of the agreement. The differential to be paid or received is recognized as an adjustment to interest expense related to the debt.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
CASH AND TEMPORARY CASH INVESTMENTS/SHORT-TERM BORROWINGS The carrying amount approximates fair value because of the short maturity of those instruments.
OTHER INVESTMENTS The fair value of the Company's other investments was not estimated since they are not material and because some are already recorded at fair value.
NUCLEAR DECOMMISSIONING TRUST FUNDS The fair value of the Company's nuclear decommissioning trust funds is estimated based on quoted market prices for securities and carrying amount for the cash equivalents.
SALE OF ACCOUNTS RECEIVABLE AND UNBILLED REVENUES The carrying amount approximates fair value because of the short maturity of accounts receivable and unbilled revenues pledged for sale.
CUMULATIVE PREFERRED STOCK The fair value of the Company's preferred stock outstanding is estimated based on the quoted market prices for the same or similar issues.
LONG-TERM DEBT The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
CUSTOMER SURETY DEPOSITS Surety deposits, including interest as specified by MPSC regulation, are returned to customers. The carrying amount approximates fair value.
The estimated fair values of the Company's financial instruments at December 31, all of which are held or issued for purposes other than trading, are as follows:
NOTE 12 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS - The Company has entered into purchase commitments of approximately $638 million at December 31, 1994, which includes, among other things, the costs of major turbine components to be replaced at Fermi 2 and line construction and clearance costs. The Company also has entered into substantial long-term fuel supply and transportation commitments.
The Company has an Energy Purchase Agreement ("Agreement") for the purchase of steam and electricity from the Detroit Resource Recovery Facility. Under the Agreement, the Company will purchase steam through the year 2008 and electricity through June 30, 2024. Purchases of steam and electricity were $21.3 million, $23.6 million and $24.5 million for 1992, 1993 and 1994, respectively, and annual purchase commitments are approximately $30.0 million, $33.2 million, $35.8 million, $37.0 million and $38.3 million for 1995, 1996, 1997, 1998 and 1999, respectively.
CONTINGENCIES - In 1986, the Michigan Attorney General and the Michigan Natural Resources Commission filed a state lawsuit against the Company and Consumers as co-owners of Ludington for claimed aquatic losses. The Company is a 49% co-owner of Ludington. The suit, which alleges violations of the Michigan Environmental Protection Act and the common law for claimed aquatic losses, seeks past damages (including interest) of approximately $148 million and future damages (from the time of the filing of the lawsuit) in the amount of approximately $89,500 per day (of which 49% would be applicable to the Company).
In 1986, two environmental organizations requested FERC to withdraw the Ludington license or provide some mitigation for fish mortality. In April 1989, Consumers and the Company were ordered by the FERC to install a temporary barrier net around the plant to protect fish on an interim basis until
permanent measures could be developed. A net has been in operation for six seasons and the companies have proposed that it be utilized as part of the permanent solution.
On October 5, 1994, the Company and all other parties to the state action and the FERC proceeding, except certain Indian tribes, reached a tentative settlement. The settlement agreement is subject to FERC and MPSC approval. (The Michigan Supreme Court is holding this matter in abeyance pending approval of a settlement.) The settlement provides for damages and use of the net as a permanent solution. The net present value of the Company's portion of the damages is estimated to be approximately $30 million which will be paid over a 24-year period, including $10 million to enhance recreational opportunities on Company-owned and donated property. At December 31, 1994, the Company has recorded a regulatory asset and liability of $7 million for past damages, pending approval by the FERC and MPSC.
In January 1989, the Environmental Protection Agency ("EPA") issued an administrative order under the Comprehensive Environmental Response, Compensation and Liability Act ordering the Company and 23 other potentially responsible parties ("PRPs") to begin removal activities at the Carter Industrials superfund site. In June 1993, a Consent Decree was entered by the U.S. District Court for the Eastern District of Michigan. It included a provision for the payment of past costs incurred by the EPA of which the Company's share was approximately $1.3 million, paid in June 1993. The Company has recorded a liability of $8.4 million, which amount was charged to other operation expense in the Consolidated Statement of Income in 1989-1992, as its anticipated cost of the clean-up in 1995-1997. On July 7, 1994, the PRPs in this matter petitioned the EPA to consider amending the clean-up plan to permit landfill disposal of certain contaminated soil and on December 12, 1994, the EPA issued a public notice of its intent to amend the Consent Decree to incorporate the proposed change in the clean-up plan. Should the procedure be approved, the Company's portion of the clean-up costs will be reduced by approximately $3 million. There is, however, the possibility that EPA may, through subsequent proceedings, require a clean-up of the sewer and sewer outfall emptying into the Detroit River.
In August 1993, the Company, along with approximately 28 other parties, received a "Notice of Demand" from the Michigan Department of Natural Resources ("MDNR"), acting pursuant to a Michigan statute, for all past ($142,000) and future costs incurred by the state in performing response activities related to the Carter Industrials site. In addition, the notice indicated the need to conduct a PCB-sediment sampling program at the sewer outfall emptying into the Detroit River. In response to the "Notice of Demand," the Carter Industrials Site Group (the group, including the Company, of PRPs formed to jointly remediate the Carter Industrials site) paid $126,600 of past costs incurred by the MDNR, of which approximately 45% ($57,000) was paid by the Company. The group declined to commit to pay future costs which the MDNR may incur and declined to conduct the program of Detroit River sediment sampling and analysis requested by the MDNR. At this time, it is impossible to predict what impact, if any, this matter will have upon the Company.
The Energy Act became effective in October 1992. While the Company is unable to predict the ultimate impact of this legislation on its operations, the Company expects that, over time, non-utility generation resources will be developed which will result in greater competition for power sales.
In addition to the matters reported herein, the Company is involved in litigation and environmental matters dealing with the numerous aspects of its business operations. The Company believes that such litigation and the matters discussed above will not have a material effect on its financial position or results of operations.
See Notes 2 and 3 for a discussion of contingencies related to Fermi 2.
NOTE 13 - EMPLOYEES' RETIREMENT PLAN AND OTHER POSTRETIREMENT BENEFITS
EMPLOYEES' RETIREMENT PLAN - The Company has a trusteed and non-contributory defined benefit retirement plan ("Plan") covering all eligible employees who have completed six months of service. The Plan provides retirement benefits based on the employee's years of benefit service, average final compensation and age at retirement. The Company's policy is to fund pension cost calculated under the projected unit credit actuarial cost method, provided that this amount is at least equal to the minimum funding requirement of the Employee Retirement Income Security Act of 1974, as amended, and is not greater than the maximum amount deductible for federal income tax purposes. Contributions were made to the Plan totaling $23.7 million in 1992, $29.4 million in 1993 and $45.8 million in 1994.
Net pension cost included the following components:
Assumptions used in determining net pension cost are as follows:
The following reconciles the funded status of the Plan to the amount recorded in the Company's Consolidated Balance Sheet:
Assumptions used in determining the projected benefit obligation are as follows:
The unrecognized net asset at date of initial application is being amortized over approximately 15.4 years, which was the average remaining service period of employees at January 1, 1987.
In addition to the Plan, the Company has several supplemental non-qualified, non-contributory, unfunded retirement benefit plans for certain management employees.
OTHER POSTRETIREMENT BENEFITS - The Company provides certain postretirement health care and life insurance benefits for retired employees. Substantially all of the Company's employees will become eligible for such benefits if they reach retirement age while working for the Company. These benefits are provided principally through insurance companies and other organizations.
Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The standard required the Company to change its accounting for postretirement benefits from the pay-as-you-go (cash) basis to the accrual of such benefits during the active service periods of employees to the date they attain full eligibility for benefits. The transition obligation at the time of adoption is being amortized over 20 years. The Company's incremental cost upon adoption of the standard was $49 million for 1993 which is being deferred in accordance with the January 21, 1994 MPSC rate order. See Note 3. This amount is being amortized and recovered in rates over the estimated four-year period 1994-1997.
Net other postretirement benefits cost included the following components:
Assumptions used in determining net other postretirement benefits cost are as follows:
The following reconciles the funded status to the amount recorded in the Company's Consolidated Balance Sheet:
Assumptions used in determining the accumulated benefit obligation are as follows:
Benefit costs were calculated assuming health care cost trend rates beginning at 12.6% for 1994 and decreasing to 6.0% in 2008 and thereafter for persons under age 65 and decreasing from 7.4% to 6.0% for persons age 65 and over. A one-percentage-point increase in health care cost trend rates would increase the aggregate of the service cost and interest cost components of benefit costs by $6 million for 1994 and increase the accumulated benefit obligation by $47 million at December 31, 1994.
NOTE 14 - SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The fourth quarter of 1994 includes a decrease in operating revenues of $59 million, a decrease in operation expense of $65 million and a decrease in maintenance expense of $1 million related to a settlement agreement, with the parties intervening in the 1994 PSCR reconciliation case with the MPSC, for business interruption insurance proceeds associated with the December 25, 1993 outage at Fermi 2. See Note 2.
Earnings per share amounts for each quarter are required to be computed independently and, therefore, may not equal the amount computed for the total year.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company's Board of Directors, upon the recommendation of the Board's Audit Committee, has appointed Deloitte & Touche LLP as independent accountants of the Company for the year 1995. The appointment is subject to ratification by the Company's Common Stock Shareholders at the Annual Meeting of Common Stock Shareholders to be held on April 24, 1995 ("Annual Meeting"). (The Company's Board of Directors has also approved the formation of a holding company; and ratification of the appointment of Deloitte & Touche LLP as independent accountants of the Company will be considered ratification of the firm's appointment as independent accountants for the holding company if the holding company is approved at the Annual Meeting.)
In prior years, Price Waterhouse LLP served as independent accountants of the Company. During the Company's two fiscal years ending December 31, 1994 and the subsequent interim period from January 1, 1995 through the date hereof, there have been no disagreements with Price Waterhouse LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to its satisfaction, would have caused Price Waterhouse LLP to make reference thereto in their report on the financial statements for such years. None of Price Waterhouse LLP's reports on the financial statements for the past two years contained an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the Company's executive officers is incorporated herein by reference to Items 1 and 2 - Business and Properties, "Employes and Executive Officers" on pages 20-21 hereof; information regarding compliance with section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the data under the heading "Compliance with Section 16(a) of the Securities Exchange Act of 1934" on page 35 of the Company's definitive proxy statement dated March 9, 1995, in connection with its Annual Meeting of Shareholders to be held on April 24, 1995; and information regarding directors is incorporated herein by reference to the data under the heading "The Election of Directors" on pages 5-9 of the Company's definitive proxy statement dated March 9, 1995, in connection with its Annual Meeting of Shareholders to be held on April 24, 1995.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION.
Information regarding "Executive Compensation" is incorporated herein by reference to the data under the heading "Board Compensation Committee Report on Executive Compensation" on pages 10-15 of the Company's definitive proxy statement dated March 9, 1995, in connection with its Annual Meeting of Shareholders to be held on April 24, 1995.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding ownership of equity securities is incorporated herein by reference to the heading "Security Ownership of Management" on page 9 of the Company's definitive proxy statement dated March 9, 1995, in connection with its Annual Meeting of Shareholders to be held on April 24, 1995.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is incorporated herein by reference to the heading "Compensation Committee Interlocks and Insider Participation" on page 15 of the Company's definitive proxy statement dated March 9, 1995, in connection with its Annual Meeting of Shareholders to be held on April 24, 1995.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report on Form 10-K.
(1) Consolidated financial statements. See "Item 8 - Financial Statements and Supplementary Data" on page 30.
(2) Financial statement schedules. See "Item 8 - Financial Statements and Supplementary Data" on page 30.
(3) Exhibits (* Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14 (c) of this report).
(i) Exhibits filed herewith.
Exhibit Number ------- 4-169 - Supplemental Indenture, dated as of December 1, 1994, establishing the Series KKP No. 15 and 1994 Series DP Mortgage Bonds.
4-170 - Supplemental Indenture, dated as of October 15, 1985, establishing the Series KKP No. 9 Mortgage Bonds.
4-171 - Supplemental Indenture, dated as of July 15, 1989, establishing the Series KKP No. 10 Mortgage Bonds.
4-172 - Supplemental Indenture, dated as of December 1, 1989, establishing the Series KKP No. 11 and 1989 Series BP Mortgage Bonds.
4-173 - Supplemental Indenture, dated as of February 15, 1990, establishing the 1990 Series A, 1990 Series B, 1990 Series C, 1990 Series D, 1990 Series E and 1990 Series F Mortgage Bonds.
*10-56 - Amended and Restated 1994 Officers' Shareholder Value Improvement Plan (1994 and subsequent years, January 23, 1995).
*10-57 - 1995 Officers' Shareholder Value Improvement Plan (January 23, 1995).
*10-58 - Plan for Deferring the Payment of Directors' Fees (January 23, 1995).
*10-59 - Retirement Plan for Non-Employe Directors (February 27, 1995).
Exhibit Number -------
11-21 - Primary and Fully Diluted Earnings Per Share of Common Stock.
12-26 - Computation of Ratio of Earnings to Fixed Charges.
12-27 - Computation of Ratio of Earnings to Fixed Charges and Preferred and Preference Stock Dividend Requirements.
23-7 - Consent of Independent Accountants.
(ii) Exhibits incorporated herein by reference.
4(a) - Restated Articles of Incorporation of the Company, as filed December 10, 1991 with the State of Michigan, Department of Commerce - Corporation and Securities Bureau (Exhibit 4-117 to Form 10-Q for quarter ended March 31, 1993).
4(b) - Certificate containing resolution of the Board of Directors establishing the Cumulative Preferred Stock, 7.75% Series as filed February 22, 1993 with the State of Michigan, Department of Commerce - Corporation and Securities Bureau (Exhibit 4-134 to Form 10-Q for quarter ended March 31, 1993).
4(c) - Certificate containing resolution of the Board of Directors establishing the Cumulative Preferred Stock, 7.74% Series, as filed April 21, 1993 with the State of Michigan, Department of Commerce - Corporation and Securities Bureau (Exhibit 4-140 to Form 10-Q for quarter ended March 31, 1993).
4(d) - By-Laws of the Company as amended November 25, 1991 (Exhibit 4-118 to Form 10-K for year ended December 31, 1991).
4(e) - Mortgage and Deed of Trust, dated as of October 1, 1924, between the Company (File No. 1-2198) and Bankers Trust Company as Trustee (Exhibit B-1 to Registration No. 2-1630) and indentures supplemental thereto, dated as of dates indicated below, and filed as exhibits to the filings as set forth below:
September 1, 1947 Exhibit B-20 to Registration No. 2-7136 October 1, 1968 Exhibit 2-B-33 to Registration No. 2-30096
Exhibit Number ------- November 15, 1971 Exhibit 2-B-38 to Registration No. 2-42160 January 15, 1973 Exhibit 2-B-39 to Registration No. 2-46595 June 1, 1978 Exhibit 2-B-51 to Registration No. 2-61643 June 30, 1982 Exhibit 4-30 to Registration No. 2-78941 August 15, 1982 Exhibit 4-32 to Registration No. 2-79674 November 30, 1987 Exhibit 4-139 to Form 10-K for year ended December 31, 1992 November 1, 1990 Exhibit 4-110 to Form 10-K for year ended December 31, 1990 April 1, 1991 Exhibit 4-111 to Form 10-Q for quarter ended March 31, 1991 May 1, 1991 Exhibit 4-112 to Form 10-Q for quarter ended June 30, 1991 May 15, 1991 Exhibit 4-113 to Form 10-Q for quarter ended June 30, September 1, 1991 Exhibit 4-116 to Form 10-Q for quarter ended September 30, 1991 November 1, 1991 Exhibit 4-119 to Form 10-K for year ended December 31, January 15, 1992 Exhibit 4-120 to Form 10-K for year ended December 31, February 29, 1992 Exhibit 4-121 to Form 10-Q for quarter ended March 31, April 15, 1992 Exhibit 4-122 to Form 10-Q for quarter ended June 30, July 15, 1992 Exhibit 4-123 to Form 10-Q for quarter ended September 30, 1992 July 31, 1992 Exhibit 4-124 to Form 10-Q for quarter ended September 30, 1992 November 30, 1992 Exhibit 4-130 to Registration No. 33-56496 January 1, 1993 Exhibit 4-131 to Registration No. 33-56496 March 1, 1993 Exhibit 4-141 to Form 10-Q for quarter ended March 31, March 15, 1993 Exhibit 4-142 to Form 10-Q for quarter ended March 31, April 1, 1993 Exhibit 4-143 to Form 10-Q for quarter ended March 31, April 26, 1993 Exhibit 4-144 to Form 10-Q for quarter ended March 31, May 31, 1993 Exhibit 4-148 to Registration No. 33-64296 June 30, 1993 Exhibit 4-149 to Form 10-Q for quarter ended June 30, 1993 (1993 Series AP)
Exhibit Number ------- June 30, 1993 Exhibit 4-150 to Form 10-Q for quarter ended June 30, 1993 (1993 Series H) September 15, 1993 Exhibit 4-158 to Form 10-Q for quarter ended September 30, 1993 March 1, 1994 Exhibit 4-163 to Registration No. 33-53207. June 15, 1994 Exhibit 4-166 to Form 10-Q for quarter ended June 30, 1994. August 15, 1994 Exhibit 4-168 to Form 10-Q for quarter ended September 30, 1994.
4(f) - Collateral Trust Indenture (notes), dated as of June 30, 1993 (Exhibit 4-152 to Registration No. 33-50325).
4(g) - First Supplemental Note Indenture, dated as of June 30, 1993 (Exhibit 4-153 to Registration No. 33-50325).
4(h) - Second Supplemental Note Indenture, dated as of September 15, 1993 (Exhibit 4-159 to Form 10-Q for quarter ended September 30, 1993).
4(i) - Third Supplemental Note Indenture, dated as of August 15, 1994 (Exhibit 4-169 to Form 10-Q for quarter ended September 30, 1994).
4(j) - Amended and Restated Standby Note Purchase Credit Facility, dated as of April 26, 1994, among The Detroit Edison Company, The Bank of New York, The Toronto-Dominion Bank, acting through its Houston Agency, Toronto-Dominion (Texas), Inc., as Administrative Agent and Citicorp Securities, Inc., as Remarketing Agent (Exhibit 99-5 to Registration No. 33-50325).
4(k) - Standby Note Purchase Credit Facility, dated as of August 17, 1994, among The Detroit Edison Company, Barclays Bank PLC, as Bank and Administrative Agent, Bank of America, The Bank of New York, The Fuji Bank Limited, The Long-Term Credit Bank of Japan, LTD, Union Bank and Citicorp Securities, Inc. and First Chicago Capital Markets, Inc. as Remarketing Agents (Exhibit 99-18 to Form 10-Q for quarter ended September 30, 1994).
Exhibit Number ------- *10(a)- Form of Indemnification Agreement between the Company and (1) Frank E. Agosti, (2) Gerard M. Anderson, (3) Robert J. Buckler, (4) Malcolm G. Dade, Jr., (5) Ronald W. Gresens, (6) Leslie L. Loomans, (7) S. Martin Taylor, (8) Saul J. Waldman, (9) Susan M. Beale, (10) Frederick S. Karwacki, (11) Douglas R. Gipson, (12) Robert J. Horn, (13) Thomas A. Hughes, (14) Christopher C. Nern, (15) Ronald J. Gdowski, (16) Elaine M. Godfrey, (17) Allen W. Anning, (18) Christopher C. Arvani, (19) James R. McGillivary, (20) Thomas J. Howlin, (21) Donald J. Brett, (22) Michael E. Champley, (23) T. Michael Holton, and (24) Haven E. Cockerham (Exhibit 10-41 to Form 10-Q for quarter ended June 30, 1993).
*10(b)- 1991 Shareholder Value Improvement Plan - A, as amended effective January 25, 1993 (Exhibit 10-43 to Form 10-Q for quarter ended June 30, 1993).
*10(c)- 1990 Shareholder Value Improvement Plan - A, as amended January 25, 1993 (Exhibit 10-44 to Form 10-Q for quarter ended June 30, 1993).
*10(d)- 1994 Officers' Shareholder Value Improvement Plan, January, 1994 (Exhibit 10-50 to Form 10-K for year ended December 31, 1993).
*10(e)- Certain Arrangements Pertaining to the Employment of S. Martin Taylor (Exhibit 10-38 to Form 10-K for year ended December 31, 1992).
*10(f)- Certain arrangements pertaining to the employment of Anthony F. Earley, Jr. (Exhibit 10-53 to Form 10-Q for quarter ended March 31, 1994).
*10(g)- Amended and Restated Savings Separation Plan, June 1994 (Exhibit 10-54 to Form 10-Q for quarter ended June 30, 1994.)
*10(h)- Certain arrangements pertaining to the employment of Haven E. Cockerham (Exhibit 10-55 to Form 10-Q for quarter ended September 30, 1994).
*10(i)- Key Employe Deferred Compensation Plan (January 1990). (Exhibit 10-21 to Form 10-K for year ended December 31, 1989).
Exhibit Number
*10(j)- Retirement Reparation Plan for Certain Employes of The Detroit Edison Company (as amended through May 22, 1989). (Exhibit 10-25 to Form 10-K for year ended December 31, 1989).
*10(k)- Benefit Equalization Plan for Certain Employes of The Detroit Edison Company (as amended through May 22, 1989). (Exhibit 10-26 to Form 10-K for year ended December 31, 1989).
*10(l)- Certain Arrangements Pertaining to the Employment of Larry G. Garberding (Exhibit 28-52 to Form 10-Q for quarter ended June 30, 1990).
*10(m)- Form of Indemnification Agreement, between the Company and (1) John E. Lobbia, (2) Larry G. Garberding and (3) Anthony F. Earley, Jr. (Exhibit 19-7 to Form 10-Q for quarter ended March 31, 1992).
*10(n)- Form of Indemnification Agreement, dated March 17, 1992, between the Company and (1) Terence E. Adderley, (2) Wendell W. Anderson, Jr., (3) Walter J. McCarthy, Jr., (4) Lillian Bauder, (5) David Bing, (6) Alan E. Schwartz, (7) William Wegner, (8) Theodore S. Leipprandt, (9) Patricia S. Longe, (10) Eugene A. Miller, (11) Dean E. Richardson, (12) David M. Gates, and (13) Otis M. Smith (Exhibit 19-8 to Form 10-Q for quarter ended March 31, 1992).
*10(o)- Supplemental Long Term Disability Plan, dated November 5, 1991 (Exhibit 10-32 to Form 10-K for year ended December 31, 1991).
*10(p)- Executive Vehicle Program, dated October 1, 1993 (Exhibit 10-47 to Form 10-Q for quarter ended September 30, 1993).
*10(q)- Amendment No. 1 to Executive Vehicle Plan, November 1993 (Exhibit 10-58 to Form 10-K for year ended December 31, 1993).
*10(r)- Certain arrangements pertaining to the employment of Gerard M. Anderson (Exhibit 10-40 to Form 10-K for year ended December 31, 1993).
*10(s)- Restated Management Supplemental Benefit Plan, January 1994 (Exhibit 10-57 to Form 10-K for year ended December 31, 1993).
99(a)- Belle River Participation Agreement between the Company and Michigan Public Power Agency, dated as of December 1, 1982 (Exhibit 28-5 to Registration No. 2-81501).
Exhibit Number ------- 99(b)- Belle River Transmission Ownership and Operating Agreement between the Company and Michigan Public Power Agency, dated as of December 1, 1982 (Exhibit 28-6 to Registration No. 2-81501.)
99(c)- 1988 Amended and Restated Loan Agreement, dated as of October 4, 1988, between Renaissance Energy Company (an unaffiliated company) ("Renaissance") and the Company (Exhibit 99-6 to Registration No. 33-50325).
99(d)- First Amendment to 1988 Amended and Restated Loan Agreement, dated as of February 1, 1990, between the Company and Renaissance (Exhibit 99-7 to Registration No. 33-50325).
99(e)- Second Amendment to 1988 Amended and Restated Loan Agreement, dated as of September 1, 1993, between the Company and Renaissance (Exhibit 99-8 to Registration No. 33-50325).
99(f)- Third Amendment, dated as of August 31, 1994, to 1988 Amended and Restated Nuclear Fuel Heat Purchase Contract, dated October 4, 1988, between The Detroit Edison Company and Renaissance Energy Company (Exhibit 99-21 to Form 10-Q for quarter ended September 30, 1994).
99(g)- $200,000,000 364-Day Credit Agreement, dated as of September 1, 1993, among the Company, Renaissance and Barclays Bank PLC, New York Branch, as Agent (Exhibit 99-12 to Registration No. 33-50325).
99(h)- First Amendment, dated as of August 31, 1994, to $200,000,000 364-Day Credit Agreement, dated September 1, 1993, among The Detroit Edison Company, Renaissance Energy Company, the Banks party thereto and Barclays Bank, PLC, New York Branch, as Agent (Exhibit 99-19 to Form 10-Q for quarter ended September 30, 1994).
99(i)- $200,000,000 Three-Year Credit Agreement, dated September 1, 1993, among the Company, Renaissance and Barclays Bank PLC, New York Branch, as Agent (Exhibit 99-13 to Registration No. 33-50325).
99(j)- 1988 Amended and Restated Nuclear Fuel Heat Purchase Contract, dated October 4, 1988, between the Company and Renaissance (Exhibit 99-9 to Registration No. 33-50325).
99(k)- First Amendment to 1988 Amended and Restated Nuclear Fuel Heat Purchase Contract, dated as of February 1, 1990, between the Company and Renaissance (Exhibit 99-10 to Registration No. 33-50325).
Exhibit Number ------- 99(l)- Second Amendment, dated as of September 1, 1993, to 1988 Amended and Restated Nuclear Fuel Heat Purchase Contract between the Company and Renaissance (Exhibit 99-11 to Registration No. 33-50325).
99(m)- First Amendment, dated as of September 1, 1994, to $200,000,000 Three-Year Credit Agreement, dated as of September 1, 1993, among The Detroit Edison Company, Renaissance Energy Company, the Banks party thereto and Barclays Bank, PLC, New York Branch, as Agent (Exhibit 99-20 to Form 10-Q for quarter ended September 30, 1994).
99(n)- Master Trust Agreement, dated as of June 30, 1994, between the Company and Fidelity Management Trust Company relating to the Employes Savings Plans (Exhibit 4-167 to Form 10-Q for quarter ended June 30, 1994).
(b) Registrant did not file any reports on Form 8-K during the fourth quarter of 1994.
(c) * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit to this report.
THE DETROIT EDISON COMPANY AND SUBSIDIARY COMPANIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
-----------------------
(a) Collection of accounts previously written off.
(b) Uncollectible accounts written off.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE DETROIT EDISON COMPANY ---------------------------------- (Registrant)
By /s/ JOHN E. LOBBIA By /s/ LARRY G. GARBERDING ---------------------------------- ---------------------------------- John E. Lobbia Larry G. Garberding Chairman of the Board, Executive Vice President, Chief Executive Chief Financial Officer and Director Officer and Director
By /s/ ANTHONY F. EARLEY, JR. By /s/ RONALD W. GRESENS --------------------------------- ---------------------------------- Anthony F. Earley, Jr. Ronald W. Gresens President and Chief Operating Vice President and Controller Officer and Director
By /s/ TERENCE E. ADDERLEY By /s/ WALTER J. McCARTHY, JR. --------------------------------- ---------------------------------- Terence E. Adderley, Director Walter J. McCarthy, Jr., Director
By /s/ WENDELL W. ANDERSON, JR. By /s/ EUGENE A. MILLER --------------------------------- ---------------------------------- Wendell W. Anderson, Jr., Director Eugene A. Miller, Director
By /s/ LILLIAN BAUDER By --------------------------------- ---------------------------------- Lillian Bauder, Director Dean E. Richardson, Director
By /s/ DAVID BING By /s/ ALAN E. SCHWARTZ --------------------------------- ---------------------------------- David Bing, Director Alan E. Schwartz, Director
By /s/ THEODORE S. LEIPPRANDT By /s/ WILLIAM WEGNER ---------------------------------- --------------------------------- Theodore S. Leipprandt, Director William Wegner, Director
By /s/ PATRICIA S. LONGE ---------------------------------- Patricia S. Longe, Director
Date: March 27, 1995
THE DETROIT EDISON COMPANY
ANNUAL REPORT ON FORM 10-K FOR
YEAR ENDED DECEMBER 31, 1994
File No. 1-2198
EXHIBIT INDEX
Exhibit Page Number Number ------- ------
Exhibits Filed Herewith
4-169 - Supplemental Indenture, dated as of December 1, 1994, establishing the Series KKP No. 15 and 1994 Series DP Mortgage Bonds.
4-170 - Supplemental Indenture, dated as of October 15, 1985, establishing the Series KKP No. 9 Mortgage Bonds.
4-171 - Supplemental Indenture, dated as of July 15, 1989, establishing the Series KKP No. 10 Mortgage Bonds.
4-172 - Supplemental Indenture, dated as of December 1, 1989, establishing the Series KKP No. 11 and 1989 Series BP Mortgage Bonds.
4-173 - Supplemental Indenture, dated as of February 15, 1990, establishing the 1990 Series A, 1990 Series B, 1990 Series C, 1990 Series D, 1990 Series E and 1990 Series F Mortgage Bonds.
*10-56 - Amended and Restated 1994 Officers' Shareholder Value Improvement Plan (1994 and subsequent years, January 23, 1995).
*10-57 - 1995 Officers' Shareholder Value Improvement Plan (January 23, 1995).
*10-58 - Plan for Deferring the Payment of Directors Fees (January 23, 1995).
*10-59 - Retirement Plan for Non-Employe Directors (February 27, 1995).
11-21 - Primary and Fully Diluted Earnings Per Share of Common Stock.
12-26 - Computation of Ratio of Earnings to Fixed Charges.
12-27 - Computation of Ratio of Earnings to Fixed Charges and Preferred and Preference Stock Dividend Requirements.
23-7 - Consent of Independent Accountants.
Exhibit Page Number Number ------- ------
Exhibits incorporated herein by reference.
See Page Numbers ______ for location of Exhibits Incorporated By Reference
4(a) - Restated Articles of Incorporation of the Company, as filed December 10, 1991 with the State of Michigan, Department of Commerce - Corporation and Securities Bureau.
4(b) - Certificate containing Resolution of the Board of Directors establishing the Cumulative Preferred Stock, 7.75% Series, as filed February 22, 1993 with the State of Michigan, Department of Commerce - Corporation and Securities Bureau.
4(c) - Certificate containing resolution of the Board of Directors establishing the Cumulative Preferred Stock, 7.74% Series, as filed April 21, 1993 with the State of Michigan, Department of Commerce - Corporation and Securities Bureau.
4(d) - By-Laws of the Company as amended November 25, 1991.
4(e) - Mortgage and Deed of Trust, dated as of October 1, 1924, between the Company and Bankers Trust Company as Trustee and indentures supplemental thereto, dated as of the dates indicated below:
September 1, 1947
October 1, 1968
Exhibit Number ------- November 15, 1971
January 15, 1973
June 1, 1978
June 30, 1982
August 15, 1982
November 30, 1987
November 1, 1990
April 1, 1991
May 1, 1991
May 15, 1991
September 1, 1991
November 1, 1991
January 15, 1992
February 29, 1992
April 15, 1992
July 15, 1992
July 31, 1992
November 30, 1992
January 1, 1993
March 1, 1993
March 15, 1993
April 1, 1993
April 26, 1993
May 31, 1993
June 30, 1993 (1993 Series AP)
Exhibit Number ------- June 30, 1993 (1993 Series H)
September 15, 1993
March 1, 1994
June 15, 1994
August 15, 1994
4(f) Collateral Trust Indenture (notes), dated as of June 30, 1993.
4(g) First Supplemental Note Indenture, dated as of June 30, 1993.
4(h) Second Supplemental Note Indenture, dated as of September 15, 1993.
4(i) Third Supplemental Note Indenture, dated as of August 15, 1994.
4(j) Amended and Restated Standby Note Purchase Credit Facility, dated as of April 26, 1994, among The Detroit Edison Company, The Bank of New York, The Toronto-Dominion Bank, acting through its Houston Agency, Toronto-Dominion (Texas), Inc., as Administrative Agent and Citicorp Securities, Inc., as Remarketing Agent.
4(k) Standby Note Purchase Credit Facility, dated as of August 17, 1994, among The Detroit Edison Company, Barclays Bank PLC, as Bank and Administrative Agent, Bank of America, The Bank of New York, The Fuji Bank Limited, The Long-Term Credit Bank of Japan, LTD, Union Bank and Citicorp Securities, Inc. and First Chicago Capital Markets, Inc. as Remarketing Agents.
Exhibit Number ------- *10(a)- Form of Indemnification Agreement between the Company and (1) Frank E. Agosti, (2) Gerard M. Anderson, (3) Robert J. Buckler, (4) Malcolm G. Dade, Jr., (5) Ronald W. Gresens, (6) Leslie L. Loomans, (7) S. Martin Taylor, (8) Saul J. Waldman, (9) Susan M. Beale, (10) Frederick S. Karwacki, (11) Douglas R. Gipson, (12) Robert J. Horn, (13) Thomas A. Hughes, (14) Christopher C. Nern, (15) Ronald J. Gdowski, (16) Elaine M. Godfrey, (17) Allen W. Anning, (18) Christopher C. Arvani, (19) James R. McGillivary, (20) Thomas J. Howlin, (21) Donald J. Brett, (22) Michael E. Champley, (23) T. Michael Holton, and (24) Haven E. Cockerham.
*10(b)- 1991 Shareholder Value Improvement Plan - A, as amended effective January 25, 1993.
*10(c)- 1990 Shareholder Value Improvement Plan - A, as amended January 25, 1993.
*10(d)- 1994 Officers' Shareholder Value Improvement Plan, January, 1994.
*10(e)- Certain Arrangements Pertaining to the Employment of S. Martin Taylor.
*10(f)- Certain arrangements pertaining to the employment of Anthony F. Earley, Jr.
*10(g)- Amended and Restated Savings Separation Plan, June 1994.
*10(h)- Certain arrangements pertaining to the employment of Haven E. Cockerham.
*10(i)- Key Employe Deferred Compensation Plan (January 1990).
Exhibit Number ------- *10(j)- Retirement Reparation Plan for Certain Employes of The Detroit Edison Company (as amended through May 22, 1989).
*10(k)- Benefit Equalization Plan for Certain Employes of The Detroit Edison Company (as amended through May 22, 1989).
*10(l)- Certain Arrangements Pertaining to the Employment of Larry G. Garberding.
*10(m)- Form of Indemnification Agreement, between the Company and (1) John E. Lobbia, (2) Larry G. Garberding and (3) Anthony F. Earley, Jr.
*10(n)- Form of Indemnification Agreement, dated March 17, 1992, between the Company and (1) Terence E. Adderley, (2) Wendell W. Anderson, Jr., (3) Walter J. McCarthy, Jr., (4) Lillian Bauder, (5) David Bing, (6) Alan E. Schwartz, (7) William Wegner, (8) Theodore S. Leipprandt, (9) Patricia S. Longe, (10) Eugene A. Miller, (11) Dean E. Richardson, (12) David M. Gates, and (13) Otis M. Smith.
*10(o)- Supplemental Long Term Disability Plan, dated November 5, 1991.
*10(p)- Executive Vehicle Program, dated October 1, 1993.
*10(q)- Amendment No. 1 to Executive Vehicle Plan, November 1993.
*10(r)- Certain arrangements pertaining to the employment of Gerard M. Anderson.
*10(s)- Restated Management Supplemental Benefit Plan, January 1994.
99(a)- Belle River Participation Agreement between the Company and Michigan Public Power Agency, dated as of December 1, 1982.
Exhibit Number ------- 99(b)- Belle River Transmission Ownership and Operating Agreement between the Company and Michigan Public Power Agency, dated as of December 1, 1982.
99(c)- 1988 Amended and Restated Loan Agreement, dated as of October 4, 1988, between Renaissance Energy Company (an unaffiliated company) ("Renaissance") and the Company.
99(d)- First Amendment to 1988 Amended and Restated Loan Agreement, dated as of February 1, 1990, between the Company and Renaissance.
99(e)- Second Amendment to 1988 Amended and Restated Loan Agreement, dated as of September 1, 1993, between the Company and Renaissance.
99(f)- Third Amendment, dated as of August 31, 1994, to 1988 Amended and Restated Nuclear Fuel Heat Purchase Contract, dated October 4, 1988, between The Detroit Edison Company.
99(g)- $200,000,000 364-Day Credit Agreement, dated as of September 1, 1993, among the Company, Renaissance and Barclays Bank PLC, New York Branch, as Agent.
99(h)- First Amendment, dated as of August 31, 1994, to $200,000,000 364-Day Credit Agreement, dated September 1, 1993, among The Detroit Edison Company, Renaissance Energy Company, the Banks party thereto and Barclays Bank, PLC, New York Branch, as Agent.
99(i)- $200,000,000 Three-Year Credit Agreement, dated September 1, 1993, among the Company, Renaissance and Barclays Bank PLC, New York Branch, as Agent.
99(j)- 1988 Amended and Restated Nuclear Fuel Heat Purchase Contract, dated October 4, 1988, between the Company and Renaissance.
99(k)- First Amendment to 1988 Amended and Restated Nuclear Fuel Heat Purchase Contract, dated as of February 1, 1990, between the Company and Renaissance.
Exhibit Number ------- 99(l)- Second Amendment, dated as of September 1, 1993, to 1988 Amended and Restated Nuclear Fuel Heat Purchase Contract between the Company and Renaissance.
99(m)- First Amendment, dated as of September 1, 1994, to $200,000,000 Three-Year Credit Agreement, dated as of September 1, 1993, among The Detroit Edison Company, Renaissance Energy Company, the Banks party thereto and Barclays Bank, PLC, New York Branch, as agent.
99(n)- Master Trust Agreement, dated as of June 30, 1994, between the Company and Fidelity Management Trust Company relating to the Employes Savings Plans.
* Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit to this report.