EX-99.2 3 k97140exv99w2.htm MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS UNDER ITEM 2 exv99w2
 

Exhibit 99.2
The Detroit Edison Company
Management’s Narrative Analysis of Results of Operations
Factors impacting income: Earnings of $55 million for the 2005 first quarter increased by $11 million as compared to the $44 million earned in the 2004 first quarter. As subsequently discussed, these results primarily reflect higher rates due to the November 2004 MPSC final rate order and lower operations and maintenance expenses, partially offset by increased depreciation and amortization expenses.
 
                 
    Three Months Ended
    March 31
    2005   2004
(in Millions)                
Operating Revenues
   $ 990     $ 886  
Fuel and Purchased Power
     301       216  
 
                
Gross Margin
     689       670  
Operation and Maintenance
     321       343  
Depreciation and Amortization
     150       114  
Taxes Other Than Income
     69       68  
 
                
Operating Income
     149       145  
Other (Income) and Deductions
     69       79  
Income Tax Provision
     25       22  
 
                
Net Income
   $ 55     $ 44  
 
                
 
                
Operating Income as a Percent of Operating Revenues
     15 %     16 %
 
Gross margins increased $19 million in the 2005 first quarter. Operating revenues increased primarily due to rate increases as a result of the MPSC final rate order issued in November 2004 and the return of customers who in the comparable 2004 period participated in the Customer Choice program. Detroit Edison lost 13% of retail sales in the 2005 first quarter and 15% of such sales in the 2004 first quarter as a result of Customer Choice penetration. Operating revenues and fuel and purchased power costs increased in the 2005 first quarter compared to the 2004 first quarter reflecting a $3.46 per megawatt hour (MWh) (23%) increase in power cost which is a pass-through with the reinstatement of the PSCR. The increase in power supply cost is driven by higher purchase power rates, higher coal prices and increased power purchases due to an outage at our nuclear facility, Fermi 2, which was offline for 14 days during the 2005 first quarter. Pursuant to the MPSC final rate order, transmission expenses previously recorded in operation and maintenance expenses are now reflected in purchased power expenses. The PSCR mechanism provides related revenues for transmission expenses.

1

 

 
                 
    Three Months Ended
    March 31
    2005   2004
Electric Sales                
(in Thousands of MWh)                
Retail
     10,415       10,423  
Wholesale and other
     2,282       2,186  
 
                
 
     12,697       12,609  
Internal use and line loss
     596       781  
 
                
 
     13,293       13,390  
 
                
 
                 
Power Generated and Purchased                
(in Thousands of MWh)                
Power plant generation
               
Fossil
     9,763       9,784  
Nuclear
     2,053       2,408  
 
                
 
     11,816       12,192  
Purchased power
     1,477       1,198  
 
                
System output
     13,293       13,390  
 
                
 
                
Average Unit Cost ($/MWh)
                
Generation (1)
   $ 14.40     $ 12.88  
 
                
Purchased power (2)
   $ 49.30     $ 34.54  
 
                
Overall average unit cost
   $ 18.28     $ 14.82  
 
                
 
 
(1)   Represents fuel costs associated with power plants.
 
(2)   Includes amounts associated with hedging activities.
 
                 
Electric Deliveries                
(in Thousands of MWh)                
Residential
     4,051       4,069  
Commercial
     3,364       3,491  
Industrial
     2,897       2,754  
Wholesale
     563       556  
Other
     104       109  
 
                
 
     10,979       10,979  
Electric Choice
     1,722       1,975  
Electric Choice — Self Generations*
     192       167  
 
                
Total Electric Deliveries
     12,893       13,121  
 
                
 
 
*   Represents deliveries for self generators who have purchased power from alternative energy suppliers to supplement their power requirements
Operation and maintenance expense decreased $22 million in the first quarter of 2005. Pursuant to the MPSC final rate order, merger interest is no longer allocated to Detroit Edison. The 2005 period also experienced lower benefit costs and lower uncollectible accounts receivable expense, partially offset by increased power plant outage expense, higher costs for the funding of low-income customer assistance fund and system reliability expenses.
Depreciation and amortization expense increased $36 million in the first quarter of 2005. The increase reflects the income effect of recording regulatory assets, which lowers depreciation and amortization expenses. The interim and final electric rate orders in 2004 recover PA 141 costs previously deferred as regulatory assets. As a result, the regulatory asset deferrals totaled $13 million in the first quarter of 2005 compared to $42 million in the first quarter of 2004.

2

 

Other income and deductions decreased $10 million primarily due to lower interest expense as a result of adjustments due to settlements related to tax audits.
Outlook – Future operating results are expected to vary as a result of external factors such as regulatory proceedings, new legislation, changes in market prices of power, coal and natural gas, plant performance, changes in economic conditions, weather, the levels of customer participation in the electric Customer Choice program and the severity and frequency of storms
We expect cash flows and operating performance will continue to be at risk due to the electric Customer Choice program until the issues associated with this program are resolved. We have addressed certain issues of the electric Customer Choice program in our revenue neutral February 2005 rate restructuring proposal. We cannot predict the outcome of these matters.
In conjunction with DTE Energy’s sale of the transmission assets of International Transmission Company (ITC) in February 2003, the Federal Energy Regulatory Commission (FERC) froze ITC’s transmission rates through December 2004. Annual rate adjustments pursuant to a formulistic pricing mechanism will result in an estimated increase in Detroit Edison’s transmission expense of $50 million annually, beginning in January 2005. Additionally, in a proceeding before the FERC, several Midwest utilities seek to recover transmission revenues lost as a result of a FERC order modifying the pricing of transmission service in the Midwest. During the first quarter of 2005 Detroit Edison recorded an estimated $9 million of additional expense. Detroit Edison anticipates additional expenses of approximately $1 million per month from April 2005 through March 2006. Detroit Edison is expected to incur an additional $15 million in 2005 for charges related to the implementation of Midwest Independent Transmission System Operator’s open market. Detroit Edison received rate orders in 2004 that allow for the recovery of increased transmission expenses through the PSCR mechanism.
See Note 3 – Regulatory Matters.

3