ML20198S298

Toledo Edison Co 1985 Annual Rept

ML20198S298
Person / Time
Site:	Beaver Valley, Davis Besse, Perry, 05000000
Issue date:	12/31/1985
From:	Smart P, Williamson J TOLEDO EDISON CO.
To:
Shared Package
ML20198S250	List: ML20198S247 ML20198S284 ML20198S298 ML20198S319 ML20198S348
References
NUDOCS 8606100387
Download: ML20198S298 (32)

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1985 was one of the most momentous years in the long history of The Toledo Edison Company. Our intention to af filiate with The Cleveland Electnc lituminating Company under a newly formed hold ng company that will prov.de the overall management. planning and pohcy making for the two electnc utihties was announced on June 25 Tha year also saw a restructunng of our senior management, the closing down of our steam heating service, the sale of our natural gas distnbution system, and the finahzation of a coal-supply related contract that will save about $18 million for our customers in the future.

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l The new holding company Centenor Energy Cor-j poration, will be among the nation's 20 largest electric j

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i utihties in terms on the market value of its common

j stock. Centenor Energy is scheduled to become the j

ho! ding company of Toledo Edrson and Cleveland j

1 Electr c, following approval by the Securities and Exchange Commission. The common shareowners of l

Toledo Edison and Cleveland Electnc overwhelmingly approved the atfiliation in November.1985 Based on Decerrber 31,1985 market value and assets. the two compames wou!d have had a common stock market value of about $2.9 bilhon and total assets of about

$9 0 bilhon.

John P Wilhamson Paul M. Smart Cha r~an & Chief Execu ve of t ;_er P*eset & Chef opeeg o" cer We believe that our affiliation, under Centerior Energy, signifies an inevitable trend toward fewer, butlarger-sized, electric systems in the United States. The decision to affiliate was part o' our companies' long-term strategic planning, to estabbsh ourselves as more viable competitors in the increasingly competitive environment of the e!ectnc utihty industry While the investment communit y will know us as Centenor Energy to our customers and employees we'll still be the same rehable Ed: son Company The af fikatton with Cleveland Electnc gives us the strength that larger size can i

bring, but a!!ows us to continue to operate with considerab!e autonomy and to maintain our unique local identity i

Toledo Edison will continue to operate with essentia!!y the same Board of Directors We will continue to provide electncity to the same service area The most obvious change to the common shareowners of Toledo Edison and Cleveland Electr'c is that they will be the joint shareowners of Centenor Ener0y which in turn will own three subsidianes - Toledo Edison, Cleveland Electnc and a service company The latter. Centenor Service Company will perform on a combined basis cer,ain similar functions now performed separately by Toledo Edison and Cleveland Electnc.

We are confident that we willrealize numerous benefits from the affiliation. For exampic. as we combine the operating expenence of Toledo Edison's nuclear peop!e with the expertrse of Cleve!and E!ectric's nuclear man-agement team, we will achieve the best poss:bie quahty in nuclear operations And from a f:nancial viewpoint, the affihation will help both e!ectnc utihties complete their large nuclear construction programs. Centenor Energy should have better and less expensive access to the cap:tal markets This would reduce future financing costs and help hold down efectnc rates 1

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The Northern Ohio economy will also benefit in add:tton to electnc rates that will be lower ti.an would otherwise be the case, customers are assured of an adequate and rehable supply of electncity This will help retain existing industry in Northern Ohio. And it wdl help attract new industry In short. the af fikation shou!d resu!t in a more streamlined. etf,cient, financia'ly strong organizat:on You wdl find additional details about the af fikat;on on pages 4 and 5 Our senior management restructuring was inggered by the m:d-1985 retirement of Wendell Johnson who had served as President and Chief Operating Of ficer of To!edo Edison s:nce 1979. Th s and other changes in our planned management succession are discussed on page 6 Steam heating service in downtown Toledo ended on June 1 when our Water Street Stat:on was shut down af ter 90 years of service. The stat,on's inrtial efectric generation assignment he' ped power early industnal growth in the Toledo area However, the stat:on's use for e!ectnc generation decreased and ended as new more ef ficient units came on hne at other plants. By the 1950s. steam heat had become the station's major service In recent years, the number of steam heat customers dMndled and the system began incurnng annual operat;ng losses.

Our Water Street Station employees were assrgned to other duties in our serv;ce area Future use of the station budding located on Toledo's redeveloped downtown nverfront is being stud!ed We sold our smallnatural gas distribution system to :hc Chio Gas Company in September We nad operated the system since 1925 It served only about 5.350 customers in Defiance and Detta. Ohio. Sa'e of this small gas distnbution business enables us to concentrate solely on our electnc system operations We finalized a money-saving coal transportation contractin late 1985. Atter five years o' negottations in the af termath of government deregulation of the radroads. We completed a freight contract with the ra l carner that dehvers our Bay Shore coal which will save To!edo Edison customers about $2 5 milhon a year through 1992.

For the Toledo area economy 1985 was a stabte year. Toledo Ed: son s industnal sales tota'ed 3 429 megawatt-hours, atmost the same as in 1984 Our commercial sales, however. rose 3 percent whde our residential sa!es dropped 3 percent. The pnmary f actor for lower resident:al sales was a cooler than normal summer and a warmer autumn that resu!!ed in less use of electncity for air cond.t;oning and e!ectnc heating Our 1985 notincome of S173 million was up 13 percent over the $154 mdhon of 1984 Atter the accrual for preferred stock dividends. earnings on common stock were $132 mdhon. an 11 percent increase over the $119 mdhon of 1984 Included in earnings were non-cash accounting cred ts for "a90wance for funds used dunng construction" aggregating $138 mdhon for the year These cred:ts on the income Sta'ement offset interest and dividend payments on montes ra+ sed to finance construction of new generat,ng units until the recovery of those capital costs are included in the Company s rates to its customers Our camings per common share were 53.54, down only 4 percent from $3 70 in 1984 desp te a 16 percent increase in the number of common shares outstand ng Account;ng cred:ts apphcabie to Un.t 2 of the Perry Nuclear Power Plant east of Cleveland were deferred start:ng in m:d-1985. due to the uncerta:n future construc-tron status of that unit This had the effect of lowenng the Company s 1985 earnings by 33 cents per share.

However. this deferral wou!d reduce the future adverse impact on earn;ngs should that unit be canceHed We continued to make progress in our nuclear construction program dunng 1985. Perry Un:t t. wh;ch Cleveland Electnc is budd ng. was essent;aly comp!eted by year-end. We o.vn 19 91 percent of this unit it shou'd be producing power by early to nod-1986 2

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Beautiful Lake Erie provides the backdrop for the Perry Nuclear Power Plant at North Perry, Ohio. Toledo Edison is a part-owner of Unit 1, which is scheduled to start operating in 1986.

Beaver Va!!ey Unit 2 was about 91 percent physically comp!ete at the end of 1985 We also own 19 91 percent of this nuclear unit, which is being built in Western Pennsylvania by The Duquesne Light Company The estimated completion date is about the end of 1987.

Our Davis-Besse Nuclear Power Station was forced offline by equipment failures in June. Srnce then we have continued to take major actions to demonstrate our commitment to the safe and elficient operation of Davis-Besse Further information about the plant appears on pages 8 and 9 Our Bay Shore Station in nearby Oregon, Ohio, was once again cited as one of the most etficient generating facilities in the nation. In an annual study conducted by Electnc Light & Power, an industry trade jout nal, three of the four Bay Shore un:ts ranked in the top twenty for heat rate et ficiency in 1984 In add. tion, our entire fossil-fueled

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l system ranked fif th in the nation for heat rate ef ficiency This is the industry's standaro for ind:cating a generating unit's ability to produce electncity from a given amount of fuel The survey included hundreds of coa!-f, red and nuclear units as well as gas-fired turbines and diesel engines.

We expect that this is the last Annual Report for Toledo Edison as an independent company After the affiliation is consummated, common shareowners and otherinvestors willreceive the Centenor Energy Annud Report which will. of course, provide information about Toledo Edison's operations.

Although Toledo Edison was incorporatedin 1901, our roots go even further back. to the 19th century days of horse-drawn street cars and gas lights. Over it,e years, Toledo Edison developed a well-deserved reputation for reliability andinnovation, and for dedicated employees andloyalshareowners. We have every confidence that this tradition will be camed on by Centenor Energy into the 21st century Cordia!Iy.

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,v John P Wilhamson Pau! M Smart cn.m, s om c m # onm nes a,m a cm er w, ove 3

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.i Centenor's temporary headquarters are at oght, next to CEI ottice build:ng in Cleveland suburb of Independence.

The affiliation between Toledo paramount in the mutual decision of need every competitive edge J can get Edison and Cleveland Electric is a log-Toledo Edison and Cleveland Electnc to A reliable source of econom cally t

icaloutgrowth of evolving trends in the affMate competitive electnc power, such at the electnc utihty industry and of federal in May of 1905. To!edo Edison for_ proposed new company would ofit -

govemment pohcies maily proposed the af fMation to Cleve-provides one of those edges "

An influential 1964 study by the Fed. land Electnc Because the manage-The affiliation was also viewed eral Power Commission stated "The ment ph!!osoph es of the two compan-favorably by Thomas Chema. Chair.

?conomies of sca!e in large generating

'es are close!y in tune, rap:d progress man of The Public Utilities Commis-units coupled with low-cost energy was made in negotiations. and the sion of Ohio. In September. he told the intention to affliate was announced on transportat:On suggests that indtvidual New York Society of Secunty Ana!ysts.

i power systems shou!d join together in June 25 A key pnnciple of the affikatron "We prehm; nan!y view the ho!d,ng com was that each company wou!d reta:n its pany as an appropnate vehicle fo constructing new capacity either f'

through joint projects or by staggenng cunent serne am local ident:ty and these two compantes to meet the com-their construction programs "

considerab e autonomy pet, tion and to market their product in in 1967. To'edo Ed; son and Cleve-One of our major objectives in affil-the future "

land E!ectnc were among five electnc i ting was to keep ounates as low as On August 8. To'edo Edison and utihties who formed the Central Area possible. Competitive electnc rates Cleve!and Electnc fJed documents with Power Coordination Group CAPCO can help retain existing industry in the Secunt.es and Exchange Commis-was estabhshed to ach. eve the econo-Northern Ohio and he!p attract new s1on request;ng its approva! under the i

mies of sca'e ad/ocated by the federat industry This was recognized by the PubFc UtAty Ho!d.ng Company Act of Cleveland Pla!n Dealer in an eddona!

government Another purpose was to 1935 Economic stud:es submitted in atta n greater service rehabMty through

-As the twentieth century and the support of the request concluded that strong interconnect:ons and operating age of Amencan smokestack ndustry the af f,hation could resu!t in levehzed economtes These reasons were also draw to a close. Northern Ch a /,m annua: sa :ngs of about $90 mmhon a 4

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year over the next 15 years The largest in buy:ng and se!hng activit:es in buik anticipated payment dates of common savings, about $53 milhon a year, would power markets Thus, we will be better stock dividends will be about the mid-result from the utihties being able to able to compete for power sa!es to die of February. May, August and defer the need for add,tional generat-other utthties. especially in long-range.

November rather than the 28th day of ing capacity large-sca!e comm.tments By spread-the pnor month it is important to understand these ing our fixed costs over a larger cus-Preferred stock, bonds and other savings were projected in terms of con _

tomer base and by making profits from financia! obhgations of To!edo Edison stant 1985 dollars We based these pro.

buik power sa!cs. we may be ab!e to and Cleveland Electric will rmt oc jections for the penod 1986-2000 on

[ educe the size of future rate increases af fected by the af f thation. They w?l con-stated assumptions about inflation and in our service temtones tinue to carry the same dividend and the cost of capital In actuahty. the sav-

• Our combined purchasing strength interest rates and be individual obhga-ings will vary from year to year The $90 will permit savings when we buy fuel tions of Toledo Edison and Cleveland milbon of annual savings is the ma'he-and various supphes. Additional sav-Electnc.

matical equwalent of those irregular ings wi!! be reahzed through our joint Centerior Energy will have its home annual savings over the next 15 years.

control of inventory base in the Cleveland area, but will be The procedure of discounting future e We should expenence greater stabil-separate from Cleveland Electric's savings and then levehzing them to pro-ity in industnal sa!es. Toledo Edisons headquarters. A Centenor Energy vide the level annual savings is com' major industrial customers include headquarters was established initially mon in financial circles.

refineries and glass makers, while in Independence,11 miles south of Cleveland Electnc serves many chem-Cleveland.

Toledo Edison and Cleveland Elec-ical companies Both utthfies serve the Toledo Edison and Cleveland Elec-tric anticipato numerous benefits from steel and automobile industnes The tric will be operating subsidianes of the affiliation:

diversification resulting from the af fik - Centerior Energy. A third subsidiary tion could help cushion problems Centerior Service Company. will per-o The U!!: mate poohng of nuclear teams caused by economic downturns-form on a combined basis and in a is expected to effect the best possible e The af fihatron wi!! result in more effi-cost-effective way certain functions quality in nuclear construction and cient administration. a!though it is antic-now performed separately by To!edo operation. Nuclear units require adher-ipated that any staff reductions will be Edison and Cleveland Electric. The ence to exacting construction, oper-achieved through attntion. not layof fs.

pace of the consolidation of activ: ties ating and maintenance standards Developments in nuclear power over We selected "Centerior Energy into the service company will be dictat-the past two decades - including orporabon" as the name of our new ed pnmanly by cost-benefit analyses increased regulation and high com. holding company Centerior is a combi-To help devise a structure that best nation of " center" and " interior". terms fits Toledo Ed: son and Cleveland Elec-phance costs - warranted the creation of an electnc utihty system larger than that descobe the geographic location tric, representatives of both companies either Toledo Edison or Cleveland of our two utihtres These terms a'so sig-studied ten existing electric utihty hold-Electric.

nif y the central importance and value of ing companies in the United States electncity in the U S economy "Cen-The growth of the service company o We are devising a program of joint terior" a!so includes the initials of Cleve-will depend on future developments economic dispatch of electncity This land Electnc and Toledo Edison.

t means that the lowest-cost generating and needs. Since we expect most of capacity of the combined systems will Although the Centerior Energy l

be used at all times for customers of Bocrd o/ Directors will establish a divi-companies, most employees will con-tinue to work at Toledo Edison and both JIlhtieS dend policy, it is expected that the Cleveland Electnc.

annual dividend will be S2.56 a com-o The problem of " minimum loads" for mon share. In December. Toledo Edi-Any two organizations have differ-our systems should be substantially reduced through coordinated deci_

son paid a special dividend of 12 cents ences in style and va!ues that must be sions relative to which unds to operate per common share. This compensated harmonized Our del. berate upproach l

and how to utikze them.

shareowners for a delay in the payment will help forge a common culture as dates for regular quarterly dividends we move ahead. Toledo Edison and o Our larger size will make it easier t af ter 1985 in order to bnng To!edo Edi-Cleveland Electric have positioned integrate new generahng technologies son's dividend payment schedule in themselves not only to move with the Also, the economies of scale should hne with that of Cleveland Elecinc's - changing times. but to take advantage make any capacity additions less nsky the anticipated dividend payment of the opportunities changing times o The attmation will permlt coordination schedule of Centenor Energy The present 5

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During 1985,important changes in Mr Crouse is now responsible for l

Toledo Edison's senior management our energy supply and customer serv-were made. These changes were the ices operations, and for our three serv-culmination of many months of careful ice d:stricts in Northwestern Ohio He planning and exemphfied the Com-joined Toledo Edison as a student pany's long tradition of promot:ng from engineer in 1957 and most recently within, yet also being willing to go out-served as Vice President in charge of side Toledo Edison to obta:n extraordi-our nuc! ear operations.

nary expertise-Mr Phillips was elected a Vice Pres-The changes were triggered by the ident in 1976 and, since 1984, had been retirement of Wendell A Johnson, who responsible for corporate planning and had served as President and Chief administration His new position added Operating Of ficer since 1979. Mr.

marketing, strategic planning and rates Johnson, who spent 36 years with functions to his duties. Since joining the Toledo Edison, gave notice in Decem-Company in 1962, he has been involv-ber.1984, that he wished to take early ed in many aspects of electric utihty retirement. He subsequently under-management.

went open-heart surgery early Named Vice President, Public in 1985 Af fairs, was Leon H. Shaf fer, whose Mr. Johnson was succeeded as position includes our public relations, President ano Chief Operating Officer business analysis and governmental by Paul M. Smart, who had been liaison activities. He had been Assistant j

Senior Vice President and General to the Chairman Before joining Toledo Counsel He began his legal career Edisen in 1972, he was executive with the Toledo law firm of Fuller & secretary to the Ohio House of Henry in 1953 ano specialized in the Representatives.

l Company's electric utinty activities. He An additionalimportant change d" '

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is a past President of the Toledo Bar occurred on February 1,1986 when for Toledo Edison, so was it a year of Association and several other legal John P Williamson announced that he positive developments in our service area. Businesses invested about $288 organizations. Active in community was stepping down as Chief Executive af f airs as well, Mr. Smart currently Officer, effective upon consummation miWon to expand or modernize their serves on the boards of Toledo Hos-of Toledo Edison's af filiation with Cleve_

tacihties in Northwest Ohio dunng 1985.

pital, WGTE-Pubhc Broadcasting TV-land Electric. Mr Williamson will be Sun Ref;ning is spend:ng s70 million the Greater Toledo United Way, the named Chairman Ementus of both to modernize its refinery in nearby Ore-American Red Cross, First Ohio Toledo Edison and Centerior Energy gon. As a result of this modernization, Bancshares, Inc. and the First Natronal Corporation and will consult with both we expect to pick up an additiona! elec-Bank of Toledo organizations.

tnc ioad of about 20 megawatis. A key Named Senior Mce President and factor in Sun's investment decision was Mr. Williamson had served as placed in charge of our Nuclear Mis-Toledo Edison's CEO since 1972. He our wilhngness to make special provi-sion was retired AdmiralJoe Williams joined the Company in 1951 following a sions as to the pnce of electacity for this Jr., a nationally known nuclear expert. career in pubhc accounting He has addition.

He began his U S Navy career as an held numerous industry and commu-Libbey-Owens-Ford is investing $17 enlisted seaman recruit and rose nity leadership positions. He currently mdhon to modernize its rass-making through the ranks to Vice Admiral-is Chairman of the North American plant in Rossford, thus r.gaahng a Since retinng in 1977, he has held h:gh-Electric Reliability Council, which strong commitment to continJe lts glass level consulting posts with electric represents all the e!ectnc systems in production in Northwest Ohio. A new utikties and f;nancial institutions in con-the United States and Canada, and luxury hotel. the Sofitel, cpened on the nection with nuclear power plants President of the Toledo Symphony rejuvenated Toledo riverfrt nt. Work is Also elected Senior Vice Presi-Orchestra.

currontly progressing on another first dents were Richard P Crouse and class hotel and on a large convent:on Lyman C. Phillips.

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a One al Toledo's major attnbutes. lor both tounsm and commerce. Ls the Maumee R:ver At aght is a new luxury hotel on the nver/ront, the Hotel Sof.?tel As we noted in our 1984 Annual Overall, 7985 was a yearo/consoli-workers in thts area are d,rectly emp oy-Report there is a strong enterdepen-dation and stabihty for the Toledo area ed by the auto industry and the metal dence between an e!ectnc utihty and economy. Like the rest of the U S econ-working. machinery and other auto-the economy of the area it serses A omy - a:though at a s!ower pace - the related industries employ another strong economy means more custom-Northwest Oh:o economy is becom:ng 16 000 people in recent years. General ers and bnsk business for the utihty and more or:ented toward services From Motors has spent hundreds of mdhons a strong ut.hty wd; be abfe to meet the 1975-84 manufactunng emp!oyment in of do!!ars on new p! ants and equ:pment increased demand f or electricity the five-county Totedo Standard Met-in our service area requtred by a grow.ng economy To:edo repohtan Statist: cal Area dropped 6 Fat Toledo Edison, a positive Edison is a v:tal force in keep ng eust-percent. while non-manuf actunng development was the continued ing businesses in the area and m emp!oyment rose 15 percent movement by our industria/ customers attract:ng new ones to the Toledo area Chase Econometrics prea! cts that toward more electric energy intensive For examp'e. we heiped Pre Fin:sh manufactur;ng employment :n To'edo production. In 1979. efectr c;ty use per Metals to locate here Th:s f:rm's e!ec-rema:n staW os W,e ned Ws manhour woM m manufactunng m trogalvanizing process. new to the years. as aW the area's popu'at on And our serv;ce area was 17 ki owatt-hours Un ted States w4 protect automobHe in the sportant factor of rea; personat in 1985 it was above 19 knowatt-hours.

bod es f rom rust and corros on Pre Ftn-income Dncome adjusted for inf:at.on) nearly a 12 percent increase ish Meta's is spend ng over $50 meon Chase pro;ects that the Toteco area s 1st as large compan es have been to expand :ts To'edo hant The expan-growth wm average 2 5 percent a year reaf f:rm:nq' the;r fa th in the future of s:an involves the Conversion from a through 1989 and 21 percent from To!eco so too hase :ocat res: dents In U39 gas-f, red process to an e: ectr:c treat-a 1985 survey a substa' t'a! majonty of ment process One important factor ;n Desp te the 'ncreas og tr portance peop'e exprmsed sat stact on w.th the this company s expans on decis.on of serv 4ce bus:nesses. the automob 'e area s cualty of Lfe Such sat sfact on was our abity to assure an ample sup-industry rema ns the ma nstay of the bodes wel for tre future of tne To'edo p;y of e' ectr c ty at a compet tTe cr ce Ncrthzest Oho eccocmv About '6 000 a ea 7

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l The Davis-Besse Nuclear Power Sen:or Vice Pres dent. Nuclear. ef fec-Early on the morning of June 9. a Stat.on was the focal po:nt of numerous tive July 1. vth responstbrhty for the senes of equipment f adures forced events dunng 1985 Toledo Edison Company's nuclear power program Davis-Besse of f line There was no operates the 866-megawatt plant.

Accora ng to James G Kepp!er. reg on-escape of radiation. no :njur;es. and no which is located near Oak Harbor. 21 a! adm:n;strator of Reg on ill of the U S s.gn.ficant damage to the equ pment in mies east of Totedo We own about 49 Nuclear Regu!atory Comm.ss:on. "The the plant percent of the plant. with The C!eseland NPC has a h.gh degree of conf 1dence E'ectnc IHum.nat ng Company own:ng in Mr WHhams ' The reorgancat1cn The NRC investigated the incident the rest

/,hich became effect.ve on Ju!y 1. a'so and. on December 16 levied a A realignment of our Nuclear Mis-invol' ed the h r.ng of a new p! ant mana-

$900 000 fine for ten opn : Sng ana sion management began in May.

ger. a new supenntendent of ma nie-ma ntenance ru!e v,o:ations dm : overed That's when re!. red Adm.ral Joe Wd-nance. and a superintendent of during the Corrm.sston s :nvewgation hams Jr accepted the position of p! ann:ng a newly created post Esen so the NRC acknowedged that 4

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On September 12, we submitted to the NRCaplannedcourse of action for l

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improving operations at Davis-Besse.

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already in progress before the June 9 incident. For example, in November,

/j 1984 we decided to replace a steam-f

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1985, wdl improve the reliability of plant J

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safety systems

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Our 2,200-page course of action

,r report listed many rther important im-

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provements. All Nuclear Mission employees were moved to Davis-3 J _,,

Besse. The total staf f is being

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employees. Salaries are being

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'4 were redef ned.

i Improvements were also evident in the rearm of t-ning We spent about

$650.000 on nuclear tra:ning in 1978 In

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73'M 1985. we spent a'most $4 mdhon, plus 4

another $2 million to improve class-room and laboratory training facihties.

The 1985 figures do not include a three-year, $10 million project to build a Toledo Ed: son "has taken signif; cant ini-ratio. In September we broke ground control room simulator, a computer-tratives to correct the problems on a $15 million. five-story support f acil-directed operating mockup of the identified "

ity at Davis-Besse. This will provide Davis-Besse control room. This employees with state-of-the-art shop simulator wdl be used to train operators We were a! ready aware of vanous f acihties for maintenance activities The to respond to various situations that can maintenance and other problems at new budding wdl also enab!e us to bring anse in the control room. (For the past j

Davis-Besse. and were working to together employees who have previ-seven years Davis-Besse operators 1

solve them prior to June 9 and the ously been working at temporary have tra:ned on Babcock and Wdcox's NRC's invest 1gatton Dunng the second facihtiec The consol<dation of employ-simulator ir Lynchburg. Virginia ) The half of 1985. We reakgned our ma;nte-ces by work function should improve imp!ementation of such improvements nance organization, with more profes-communication within the Nuclear Mis-is expected to he'p bring Davis-Besse 5

sionals hired in key posit'ons and with sion The budding is scheduled for back into operation in the secend quar-y an improved supervisor-to-emp!oyee complebon in late 1986 ter of 1986 9

=

1

RESULTS OF OPERATIONS Our eamings on common stock rose 11 percent over Allowance for debt and equity funds used during 1984, but earnings per common share dropped 4 percent.

construction (AFUDC) rose substantially in 1985 due to This reflected a 33 cent reduction in ea nings per common greater investment in nuclear generating units under con-share due to the creation of a reserve for Perry Unit 2 AFUDC struction. Total AFUDC in 1985 was also impacted by the accruals discussed on page 12 and a 16 percent increase in reserves discussed in Notes 3 and 6. AFUDC is a non-cash the average number of common shares outstanding.

accounting credit intended to compensate us for the cost Our 1985 electricity retail sales revenues increased by of money we invest in facilities that are not yet included

$45 million (9 percent) over 1984 as a result of higher base in our rate base. Through this allowance, we capitalized rates and fuel recovery factors. The increased base rates a large amount of the financing costs associated with reflected the full-year of fact of the September.1984 perma.

our construction program. including a return on equity nent rate increase and the partial-year effect of the Febru.

funds used.

ary,1985 interim rate increase. (See Note 6 for a discussion The funding of our 1985 construction program was of rate matters, including revenues subject to refund )

accomplished through debt, preferred and common stock Although we are taking actions to maintain and financings These external financir gs increased intercst increase industrial safes, we face - as do a number of other expense and dividend payments. Moreover, the issuance of electric utilities - the prospect of plants closing in our serv.

additional shares of common stock had a dilutive etfect on ice area. This is especialiy true in industries confronted with earnings per common share.

strong foreign competition.

We filed an $82 million retail rate increase request Our revenues from electricity sales to wholesale cus-(above current rate levels) with The Public Utilities Commis-tomers reboended in 1985. These customers increased sion of Ohio (PUCO)in June 1985. In addition. we have their electricity consumption, reversing the decline experi.

requested the PUCO to make permanent the 523 million enced in this customer classification in recent years.

February.1985 interim rate increase. About 60 percent of the total requested is related to the inclusion of construction Our gas and stcam heating sales declined. We sold w rk in progress at Perry Unit 1 and the recovery of certain our sma!I natural gas distnbution system and closed our steam heating operation. These changes will enable us to annplized operating expenses for that unit. The Commis-Sion s decision on the request is expected in March,1986.

concentrate solely on our electnc system operations.

Some utility regulators have responded unfavorably to Our /uel and net purchased power expense rose as requests for large rate increases associated with plac:ng a result of ct;anges in our /uelmix. The ongoing outage at new g n raung unhs in service. In addition, some state util-the Davis-Besse Nuclear Power Station caused us to rely ity commissions have initiated proceedings to determine more t'eavily on our fossil-fired units and on buying power whether to disallow or defer rate inc< eases for completed frora other utilities. (See Note 4 regarding the pending units. Such a disallowance or deferral is generaily based investigation concerning recovery of the costs of the upon finding of imprudent management of the construc-replacement power) tion project, excess generating capacity. or simply upon a Operating and ada.inistrative expenso increased as a political desire to hold down energy costs. (See Note 3 result of several factors. These included: higher operating regarding possible changes in related accounting stand-costs associated with increased generation at our Acme ards and a discussion of investigations into the costs of and Bay Shore Stations; modifications to facilities at Davis-nuclear units co-owned by Toled, Edison )

Besse; and personnel increases in the nuclear and Thus, it is possible there may be a deferral or disallow-administrative areas.

ance of recovery in rates of a portion of our investment in Outages at Davis-Besse increased expense for mainte-nuclear units under construction. There may also be a lag nance of equipment and facilities in 1985. See Note 4 for a between the time expenses associated with the commer-discussion of the continuing June 9 outage.

cial operation of a unit begin and the time such expensas Depreciation and amortization expense decreased due are recovered in rates. Moreover, net income may decline to lower production from Davis-Besse and the resultant unless AFUDC associated with that unit is of fset by similar decl nc in the unit-of-production depreciation provision credits or cash revenues Our federal income taxes dropped in 1985. As shown Note 15 explains the effect of inflation on our operations.

in Note 7, ihis was caused primarily by a lower net income subject to federal income tax 10

For the years ended December 31, 1985 1984 1983 (milhons of dollars)

Eiectnc;ty sales to retail customers 573 528 478 Electncity sales to wholesale customers.

16 14 17 Gas and steam heating sales.

6 9

9 l

595 551 504 Fuel.

131 131 112 2

Net purchased power 32 15 14 Operating and administ ative.

95 81 78 Maintenance of equipment and facilities.

43 38 33 Depreciation and anortization.

44 50 51 State and itcal taxes.

49 47 45 Federalir come taxes 61 66 56 455 428 389 140 123 115 Allowance for equity funds used during construction.

97 83 65 Other income and deductions - net 11 8

2 Income tax credits-nonoperating.

38 34 24 146 125 91 286 248 206 Debt interest.

154 129 104 Allowance for borrowed funds used during construction.

(41)

(35)

(26) 113 94 78 173 154 128 Preferred stock dividends accrued 41 35 30 132 119 98 37 32 28 53.54

$3.70

$3.50 14.7%

15.3%

14.5 %

The acccanpanying notes are an inte,yal part of this statement 11

L I

L

=

LlOUIDITY AND CAPITAL RESOURCES The June 25,1985 agreement to affiliate with CEI dis-cussed in Note 11:mits the amount of additional capital stock the Company can issue prior to March 16,1986 f

Toledo Edison is engaged in a nuclear construction Under the agreement. Toledo Edison may not issue more program as part of a power-pooling arrangement, known than $30 milhon in additional preferred and preference t

E as CAPCO, with four other utilities. (See Notes 2 and 3.)

stock, af ter giving ef fect to the $30 million preferred stock During 1985, the Company invested $335 m@on in tnese issued in October,1985. The Company also may not have y

units. Other 1985 investments in plant and equipment.

outstanding more than 41.8 million shares of common stock.

L 1

inc!uding nuclear fuel, totaled $79 million.

Once the af fdiation is completed, it is expected that com-Dunng the five-year period 1986-1990. we expect our rnon equity funds for Toledo Edison will be raised through 2

construction program (including AFUDC) to cost $746 mil-the sale of common stock to our parent company, Centerior lion, which excludes any direct costs or AFUDC for Perry Energy Corporation.

[

Unit 2. These construction costs also do not include any Under its mortgage indenture and articles of incorpora-F post in-service AFUDC on deferred rate base for generat-tion Toledo Edison cannot issue add.tional non-refund;ng ing units under construction. The current construction pro-first mortgage bonds or preferred stock unless certain gram does not take into account any changes which might interest and dividend coverage requirements are met. Af ter k

be decided af ter the proposed affiliation with The Cleve-taking into account planned issues of preferred stock and E

land Electric liluminating Company (CEI) descnbed in Note first mortgage bonds in March,1986, the Company will h

I becomes etfective. Should construction delays or cost exhaust such coverages. The length of time during which escalations occur, or more stringent environmental regula-such lack of coverage will continue depends upon the cut-I tions be adopted, construction program expenditures for come of pending and subsequent rate cases and future r:

this live-year period could increase substantially (See earnings. The issuance of unsecured debt and preference Notes 3 and 11.) In addition, nuclear fuel acquisition and stock is not subject to any coverage requirements

{

related costs over this five-year period will require about To meet short-term cash needs and contingencies, the

$59 million, excluding financing costs. See Note 12 for dis-Company had about $119 million of cash and ten.porary f

cussion of nuclear fuel financing arrangements.

cash investments and $69 million of unused short-term bor-5 As discussed in Note 3, Perry Unit 2 construction activ-

- rowing arrangements at December 31,1985. Details of ity was reduced to such a level that, as of July 1,1985. the these arrangements are discussed in Note 13.

E L

Company ceased to include AFUDC on that unit in not The Company's ability to finance depends upon ade-income. Instead, the Company began crediting the Perry quate and timely rate increases and ready access to Unit 2 capitalized AFUDC to a balance sheet reserve capitalmarkets. Permanent rate increases granted by the account established for that purpose. Creation of the PUCO during recent years have been significantly lower reserve account did not affect cash flow, but did reduce than the amounts requested. These decisions have limited eamings by 33 cents per common share in 1985.

the amount of funds the Company can generate internally The Company may be required under certain circum-See Note 6. As a resu!t, earnings on common stock in 1986 l

stances to wri;e off its investment in Perry Unit 2 (see Note are expected to be corr. posed entirely of non-cash AFUDC 3). lne Company beneves its ability to maintain its current (see " Summary of Significant Accounting Policies"). This M

common stock dividend would not be impaired solely allowance was 93,99, and 105% of earnings on common 3

because of a wnte-of f of the Company's investment in Perry stock in 1983,1984 and 1985. respectively Unit 2. However, any reduction in Earnings Reinvested The Company's ability to obtain external financing and resulting from such a write-ofI may require modifications to the cost of such funds also depend upon financial market r

3 future financing programs. This could include a greater s, and changes in its construction pro-conditions, earning'atings, among other factors. In 1985 reliance on sa!es of common stock in order to maintain a grams and credit r E

more balanced capital structure.

ing agencies lowered our secunties ratings, making the 5

To finance construction, the Cornpany relied almost cost of raising new capital more expensive. The Company's entirely on extemal financings in the public and private preferred stock is now rated below investment grade qual-E securities markets. Over the 1981-1985 penod, the Com-ity by these agencies and the Company's first mortgage pany raised about 95 percent of its cash construction bonds are rated below investment grade quality by two expenditures through bank borrowings and secunties agencies if sufficient rate rehef is not granted in future rate

=

r sales. The Company currently expects that about 85 per-orders. it could be extremely difficult for the Company to g

cent of its estimated 1986-1990 construction program cash reoain interest and dividend coverage ratios necessary to

~

E requirements, approximately $536 million, wdl require exter-issue first mortgage bonds and preferred stock. If the Com-E nal financing, with larger percentages in eart er years.

pany were unable to obtain suf ficient external financing, it Additionally the Company must refinance $261 mdlion would have to consider postpon:ng construction expends of ma*uring debt and preferred stock over the 1986-1990 tures and conserving internally generated cash by reduc-E period, which may result in either increased or decreased ing other cash outlays. See Note 3 regarding the pet, tion to interest and dividend charges. See Note 8 for further infor-proh:b:t the use of proceeds from secunty issues to finance g

mation regard:ng 1;rst mcitgage bonds and preferred stock Perry Unit 2 Q

12 7

1

For the years ended December 31, 1985 1984 1983 (millions of dollars) 222 188 161 Add - Not income.

173 154 128 Deduct Dividends Declared -

Preferred Stock.

42 37 31 Common Stock.

76 83 70 55 34 27 277 222 188 For the years ended December 31, 1985 1984 1983 (millionsof dollars)

Net income,

173 154 128 Principa! non-cash items:

Depreciation and amortization.

44 50 51 Deferred federa! income taxes.

13 19 19 investment tax creoits - net.

6 9

9 Allowance for funds used dunng construction (debt and equity).

(138)

(118)

(91)

Other - net.

9 12 2

Funds provided from operations.

107 126 118 Dividends.

(118)

(120)

(101)

Net change in current assets and liabilities and other accounts.

,5) 13 26 Allowance for funds used during construction (debt and equity) 138 118 91 Provided from intemal sources.

122 137 134 Sale of Securities:

Common stock.

81 64 71 Preferred stock.

30 65 30 First mortgage bonds.

96 107 130 Unsecured notes.

100 29 Pollution control notes - proceeds at issuance.

54 45

- net change in escrow account.

(11)

(21)

Net increase (decrease) in short-term notes payable.

1 28 (43)

Net increase in temporary cash investments.

(31)

(69)

(14)

Redemption of long-term debt and preferred stock (59)

(21)

(8)

Net increase in nuclear fuel obligations.

31 32 56 Provided from external sources.

292 259 222 414 396 356 Construction Expenditures.

378 356 294 Increase in Nuclear Fuel Inventery.

36 40 62 414 396 356 The accompanying notes are an integraf part of these sta'ements 13

December 31 1985 1984 (milhons of do!!ars)

Plant in service.

1418 1 391 Less accumulated provision for depreciation.

391 365 1 027 1 026 Construction work in progress.

1 731 1 395 Nuclear fuel in process.

193 156 Nuclear fuel in service, at amortized cost 34 40 2 985 2 617 Cash and temporary cash investments.

119 88 Accounts receivable - net 65 54 inventories, at average cost.

31 34 Prepaid taxes.

19 18 Special deposits and other.

15 13 249 207 Property taxes - subsequent years 22 21 Deferred charge - cancelled generating projects.

28 33 Construction funds neld in escrow 32 21 Deferred fuel.

10 7

Miscellaneous.

39 30 131 112

_ : v:_ = = _

3 365 2 936 Common shareowners' equity.

950 814 Cumulative preferred stock.

230 200 Cumulative preferred stock with mandatory redemption provisions.

154 158 Long-term debt 1 339 1 110 2 673 2 282 208 182 Short-term notes payable.

29 28 Long-term obligations due within one year.

42 72 Accounts payable.

58 50 Accrued taxes.

52 50 Accrued interest.

40 30 Dividends declared.

11 32 Accrued expenses and other.

10 7

242 269 Deferred federalincome taxes.

149 135 Investment tax credits.

55 49 Reserve for nuclear fuel disposal costs and other.

38 19 242 203 3 365 2 936 The accompanying notes are an integral part of this statement 14

~.,. -.

December 31, 1985 1984 (millions of dollars)

Common stock. $5 par value, 60 million shares authorized, 194~

171 39 and 34 million shares outstanding.

Premium on capital stock.

479-421 Earnings reinvested in the business.

277 222 950 814

)

Annual.

Shares Outstanding.

Current Par Dividend December 31,1985 Redemption Value Rate (millions)

Price.

i Not

$100

$ 4.25 - $ 4.56

.3

$101 - $105.

31 31 Subject to 7.76.-

10.00

.6 103-105.

59

- 59 i~

Mandatory 25 4.28

.8 32-20 20

. Redernption

~

1.0 27 25 25' 2.21 Provisions 2.37 1.4 29 35 35 3.47 1.2 31 30 30 4

30 Adjustable "A" 1.2 230 200 Subject to 100 11.00

.1

.106 6-6-

Mandatory 9.38

.2 106 22 24 12 13

'Rodemption 13.25

.1 109 Provisions '

12.65-

.2 109 19 20 14.80

.3 115 30 30 25 3.75 1.2 29 30 30 3.72 1.4 29 35 35 7

154 158 l

~ First Mortgage Bonds, excluding current maturities Maturities Interest Rates 1986 3%%.

15

-1988 4%.

15 15 j

1990 14%.

65 65 1991 -1995 10% - 16%%.

405 308 1996-2000 6% - 10%.

66 66 2002-2006 7% - 9.65%..

112 112

(

2008 - 2013 9% - 15%.

247 247 Discount in process of amortization.

(1)

(1) 909-827 Other Long Term Debt, excluding current maturities 83 90 Notes,8.75%, due 1987 - 1989.

[

Notes.15%, due 1990 - 1993 100

- Term bank loans,9.25% average interest rate, due 1987 - 1989.

50 50 Term bank loans, 13.53 - 14.49%, due 1989 - 1990.

29 29 Pollution control notes, 5.15 - 7%%, due 1987 - 2009 37 37 t

Pollution centrol notes,10%%. due 1995 - 2015.

24 l

Pollution control notes, 12% - 13.25%, due 2014 - 2015.

75 45 Pollution control loan agreements. 9.93 - 10%, due 2000 - 2010.

32 32 1 339 1 110 l

2 673 2 282 The accompanying notes are an integral part of this statement.

15 1

--~

~ _ _ _,

additions since December 31,1973, as well as the tax i

The Company's accounting records are maintained in offects of certain other timing dif forences. Tne remaining accordance with the Uniform System of Accounts as pre-timing dif ferences are considered in rates in the year in scribed by the Federal Energy Regulatory Commission and which they affect taxes payable. The estimated cumulative adopted by the PUCO.

effect on earnings of the flow-through treatment of timing dif ferences at December 31,1985 is $77 million. Based on i

PUCO and Ohio Supreme Court decisions, the Company Customers are billed on a monthly cycle basis for their believes such taxes can be recovered in future revenues.

electricity consumption, based on rates authorized by the For federal income tax purposes, all interest costs are PUCO. These revenues are recorded in the accounting deducted as they occur, except for amounts required to be period ouring which meters are read. A fuel factor is added capitalized for real property to the Company's base rates for electric service. This factor For certain property, the Company receives investment is designed to recover fuel costs from the Company's cus-tax credits which are accounted for as deferred credits.

tomers. The rate is based on actual and projected costs These tax credits are reflected as reductions to tax and generation. It is changed every six months af ter a expense over the life of the related property Investment tax hearing before the PUCO.

credits generated from 1981 to 1985, amounting to $23 mil-lion, are available under current tax laws to ofIset future taxes payable and will be recorded when utilized. The The dif ferences between actual fuel costs and amounts availab!e expire in varying amounts from 1996 estimated fuel costs recovered through the Company's fuel through 2000. See Note 7 for further information regarding factor are deferred until they can be applied to customers' 9Jeral income taxes.

bills. This allows a better matching of fuel expenses with fuel adjusted revenues. At December 31,1985. the Com-pany had aa unrecovered fuel cost balance of $10 million.

Debt interest is reported net of interest capitalized on The cost of nuclear fuel is charged to fuel expensn nuclear fuel obligations Interest capitalized on nuclear fuel based on consumption. In addition, estimated future obligations amounted to $16 million in 1985, $17 million in nuclear fuel disposal costs are included in fuel expense 1984 and $12 million in 1983.

and are being recovered through the Company's rates.

Property, plant and equipment are stated at original The original cost of the properties, except for the cost. Included in the cost of construction are items such as Davis-Besse Nuclear Power Station, is depreciated over related payroll taxes, pensions, fringe benefits, manage-their estimated useful lives on a straight-line basis. Depreci, ment and general overheads, and AFUDC. AFUDC repre-ation expense on Davis-Besse is based on the unit-of-pro-sents the estimated composite debt and equity cost of duction method. This inclu1es a provision for the estimated capital on funds used to finance construction. This non-decommitsioning costs. The equivalent straight-line provi_

cash allowance is concurrently credited to income on the sions for depreciation excluding Davis-Besse, overall Results of Operations statement, except for AFUDC cred-averaged 3.5 percent in 1985 and 1984 ana 3 6 percent ited to reserve accounts in 1985. (See Notes 3 and 6.) The in 1983 Company's AFUDC rates, net-of-income tax effect, were 10% percent in 1985, and ranged from 10 percent to 10%

Costs associated with four CAPCO nuclear generating percent in 1984 and 1983.

units cancelled in 1980 are being amortized and recovered through the Company's rates over a ten-year period ending Maintenance and repairs are charged to expense as in 1991. Amortization of these costs amounted to $5 million incurred. The cost of replacing plant and equipment is annually from 1983 through 1985. At December 31,1985, charged to the utility plant accounts The cost of property the unamortized balance of the costs associated with the retired plus removal costs, net of salvage, is charged to the cancelled generating units, $28 million, is not included in accumulated provision for depreciation.

the Company's rate base for rate determination purposes (8 "

Certain reclassifications have been made to prior years' financial statements to make them comparable with 1985 classifications. The Company's 1983 and 1984 finan-Consistent with the methods used for rate-making pur-cial statements were restated to reflect capitalization of poses, the Company provides deferred federal income nuclear fuel lease commitments entered into prior to taxes as required on the dif ferences between straight-line December 31 1982 in accordance with the Statement of depreciation and tax depreciation amounts for property Financial Accounting Standards (SFAS) No 71.

16

December 31,1985 Toledo Edison and CEI entered into a definitive agree.

receive one share of Centerior's common stock in ment on June 25,1985 to af filiate the companies under a exchange for each share of the Company's common stock newly formed holding company, Centerior Energy Corpora-held Holders of CEI common stock will receive 1.11 shares tion, which will provide overall management, planning and of Centerior common stock in exchange for each share of policy making for the two electnc utilities. Under the af filia.

CEI common stock held. Other than common stock, no tion, each utility will retain its local identity and con.

Other securities or financial obligations of the Comoany will siderable autonomy The agreement calls for the be affected. Action on the af filiation by the SEC is pending.

development and implementation for the mutual benefit of The following tables present selected historical and pro

the customers of both companies of an equitable program forma combined financial information for Toledo Edison and

' of capacity rationalization and joint economic dispatch CEl. The Toledo Edison and CEl historical data are taken or designed to achieve substantial balance of the relative derived from audited financial statements of Toledo Edison capacit/ responsiblities of the companies, financial parity and CEl. The pro forma data are unaudited and have been as to capacity costs per sales unit and availability to all based on accounting for the affiliation as a pooling-of-inter-customers of both companies of the lowest cost available ests. The selected pro forma data are not necessarily indi-energy on their combined systems.

cative of the results of operations or the financial condition which would have been reported had the affiliation been in The affiliation agreement was approved by the share-etfect during those periods or which may be reported in owners of both companies on November 26,1985 Under the future. This data should be read in conjunction with the terms of the agreement, Toledo Edison shareowners will audited financial statements of both Toledo Edisun and CEl.

PRO FORMA

SUMMARY

FINANCIAL INFORMATION (unaudited) 1985 1984 1983 (milhons of dollars, except per share amounts)

TOLEDO EDISON - HISTORICAL Resuits of Operations Data for the Years Ended December 31:

Operating revenues.

595 551 504 Total AFUDC,

138 118 91 Net income 173 154 128 Earnings per common share 3.54 3.70 3.50 Dividends declared per common share 2.01*

2.52 2.46 Balance Sheet Data as of December 31:

1 1

Total assets.

3 365 2 936 2 501 Long-term debt 1 339 1 110 985 Preferred and preference stock:

I With mandatory redemption provisions.

154 158 94 Without mandatory redemphon provisions 230 200 200 Common shareowners' equity.

950 814 716 Book valua per common share 24.44 23.76 24.12 CEI-HISTORICAL Results of Operations Data for the Years Ended December 31:

Operating revenues.

1254

'215 1 210 Total AFUDC.

220 171 115 Net income.

311 291 246 Earnings per common share 3.53 3 64 3 28 Dividends declared per common share 2.55 2.43 2.31 Balance Sheet Data as of December 31.

Total assets.

5 651 5 120 4 425 Long-term debt 2 100 1 884 1 519 Preferred and preference stock:

'With mandatory redemption provisions.

314 293 318 Without mandatory redemption provisions 144 144 144 Common shareowners' equitv.

1764 1 593 1 355 Book value per common share 22.46 21.51 20.79

• A $ 63 fourth quarter db;idend was declared on January 7.1986. A $ 12 special dividend was declared in November 1985 to make up fo' the delay resulting trom the synchronization of dmdend payment dates to the da'es scheduled for Centenor r arqy Corporation.

l 17 l

1

PRO FORMA

SUMMARY

FINANCIAL INFORMATION (unaudited) 1985 1984 1983 (millions of dollars. except per share amounts)

PRO FORMA - TOLEDO EDISON AND CEI COMBINED Results of Operations Data for the Years Ended December 31' Operating revenues.

1847 1 764 1 712 Total AFUDC.

358 289 206 Net income 484 445 374 Earnings per common share

• 3.29 3.41 3.11 Dividends declared per common share

• 2.20 2.29 2.19 Balance Sheet Data as of December 31:

Total assets.

9 004 8 050 6 922 Long-term debt 3 439 2 994 2 504 Preferred and preference stock:

With mandatory redemption provisions.

468 451 412 Without mandatory redemption provisions 374 344 344 Common shareowners' equity.

2 714 2 407 2 071 Book value per common share

• 21.53 20 67 20.30

• After multtplying CEI shares by 1.11 4

related nuclear fuel inventory The Company's portion of The five member utilities of the Central Area Power Coor-operating expenses associated with these facilities is d4 nation Group (CAPCO) own, as tenants in common, various included in the Results of Operations statement. The amounts power genvating facilities. Toledo Edison is obligated to pay reflected on the Balance Sheet under property plant and its share of each of the units under construction and its equipment at December 31,1985, include the following:

Actual or Scheduled in-Ownership Ownership Plant Accumulated Construction Generating Unit Service Date Share Megawatts Fuel in-Service Depreciation Work in Progress (milhons of dollars)

Mansf.cid 2 1977 17.30%

135 Coal 68 17 Davis-Besse 1977 48.62 %

421 Nuclear 451 68"*

25 Mansfield 3 1980 19 91%

159 Coal 133 24 Under Construction (see Note 3):

Petry 1 1986 19 91 %

240 Nuclear 837' Beaver Valley 2 1987 19 91 %

166 Nuclear 25" 623 Perty 2 Uncertain 19.91 %

240 Nuclear 246

• Includes common facihties for Perry 1 and Perry 2

" Common racilities with Beaver Valley 1

'" Includes decommissioning costs of $4.2 million h

18

f d

CEI believes that the seismic design of Perry complies with The Company is engaged in a nuclear construction NRC requirements and. although CEI cannot give assur-procyam as a part of the CAPCO power poobng arrange-ances, it believes that an operating license should be issued.

ment. In the interest of rehabic power generation and econ-omy, the Company joined with CEl. Duquesne Light Company. Ohio Edison Company and Pennsylvania Power

b. Beaver Valley Unit 2 Company to form CAPCO in 1967. CEI is constructing Perry Beaver Valley Unit 2 is about 91 percent complete.

Units 1 and 2 and Duquesne is constructing Beaver Val!ey Duquusne is currently performing a detailed study on the i

Unit 2 for the CAPCO companies. Note 2 discusses the estimated cost and completion schedule for this unit. The Company's ownership share of the three units and the study is expected to be completed during the first half of amounts invested in them 1986. However, in October,1985 Duquesne informed the ther CAPCO companies that its continuing review indi-

a. Perry Unit 1-cated that the previous estimated cost for the Company's i

Perry Unit 1 and the facihties to be used in common share of $890 mdlion announced in January,1985 to com-with Perry Unit 2 are essentially completed. The equipment plete Beaver Valley Unit 2 will increase. As a result, the testing and Nuclear Regulatory Commission (NRC) staf f Company now estimates its share of the total cost of the review necessary before fuel can be loaded are nearing unit to be $926 million or $5.578 per KW of capacity l

completion and CEI is awaiting permission to load fuel.

Duquesne expects its study to provide a more definitive

- Addhnal time (a minimum of six months af ter commence-revised estimate. No change is expected in the scheduled ment of fuelload) will be required before the unit achieves completion date, which remains around the end of 1987.

commercial operation. The experience of the e!ectric utility industry has shown that events can occur which could sig.

c. Perry Unit 2 nificantly delay achievement of any of the steps in the start-The estimated cost and completion timetable for Perry up process.

Unit 2, which is about 44 percent comp!cte, remains under in September,1984, it was announced that the Com.

review and the CAPCO companies continue to consider all pany's share of the estimated cost to complete Perry Unit 1 options with respect to that unit, including cancellation The and common facihties would be $800 million, or $3,333 per future of the unit is undecided.

- KW of capacity This was revised upward in June,1985 The During the first half of 1985, the only work performed increase was due to two interruptions ir' the testing pro-on Perry Unit 2 was that necessary to enable Perry Unit 1 gram and the need for more time to co uplete certain tests to be placed in service. Moreover, construction activity has before loading fuel. The Company now estimates that its been reduced to such a level that, as of July 1.1985, the

~

Company ceased to include AFUDC on Perry Unit 2 in net total investment in Perry Unit I and commen facilities at December 31.1985 of $837 milhon will increase by about income. Instedd, the Company began crediting the Perry

$385.000 to $460.000, for each day in 1986 until the unit Unit 2 capitakzed AFUDC to a balance sheet reserve

[

achieves full commercial operation, depending on the account established for that purpose. Prior to July the PUCO's ultimate treatment of the AFUDC reserve ordered in Company had been including the AFUDC related to Perry the Company's February 1985 rate order. See Note 6 for Unit 2 in net income at a rate of about $2 million per month.

information on rate matters.

Creation of such a reserve did not aflect cash flow, but net On January 31,1986 an earthquake occurred which income was reduced by about $12.5 million during 1985, measured approximately 5.0 on the Richter scate and or about 33 cents per common share.

which was centered about 10 miles south of the Perry if construction were terminated on Perry Unit 2 and the Nuclear Power Plant. Inspections of Perry 1 have found no Company were not provided a means to recover its invest-damage to any safety systems, structures or components.

ment in that unit through customer rates, and no other Based on preliminary investigations, the earthquake did not basis for recovery were anticipated, the Company would be exceed the piant's seismic design capabihty CEI filed a required to wnte of f its investment against that year's earn-report with the NRC detailing an analysis of the earth-ings. At December 31,1985, this write-off would have been quake's impact on the plant.

approximately $178 million, net-of-federal income tax ef fect.

Af ter the earthquake, several groups separately peti-based on the Cr,mpany's investment in the unit of about tioned the NRC to investigate the adequacy of the seismic

$246 millior This amount does not reflect cancellation i

design of Perry 1. One of the groups also requested the charges and other costs payable if Perry Unit 2 were to be NRC to review the proposed af filiation with To!cdo Edason cancelled. Such costs are presently undeterminab!e, but

-and CEI relative to the two companies' financial qua!ihca-the Company believes that they could be somewhat of fset tions under the NRC's regulations. The Company cannot by possible cost reallocations and sales of machinery and I

predict what actions. if any, the NRC might take. However.

equipment.

19

In September,1983, the Ohio Office of the Consumers' enced substantial cost increases, construction delays and.

Counsel, the City of Cleveland, the Commissioners of in the case of some non-CAPCO utilities, licensing dif ficul-Geauga County Ohio, and certain community groups peti-ties. These have been caused by various factors, including tioned the PUCO and the Ohio Power Siting Board to inves-inflation, required design changes and rework, allegedly tigate the need for Perry Unit 2. The petition requests an faulty construction, govemmental regulations, intervention order to cease construction of Perry Unit 2, to cease accru-by consumer and environmental groups, limits on the abil-ing AFUDC on that unit and to prohibit the use of proceeds ity to finance, difficulty in obtaining needed rate increases, of secunties issues to finance Perry Unit 2. The Company reduced forecasts of energy requirements and economic believes the petition is without merit and opposes it vigor-conditions. This experience indicates that the risk of signifi-ously Under some circumstances, the request of the peti-cant cost increases, delays and licensing dif ficulties tioners, were it to be granted, could require cancellation of remains preseut through to commercial operation of any the unit.

oroject, including Perry Units 1 and 2 and Beaver Valley Unit 2.

d. Industry Matters On April 30,1985, the PUCO ordered an investigation to The Financial Accounting Standards Board (FASB) has determine whether any Perry Unit 1 costs are excessive proposed changes to SFAS No 71 which will, if adopted, due to imprudent management. The PUCO staff engaged require changes in current accounting practices. The pro-an outside consultant to assist in the investigation. The posed changes would result in a wnte-down with respect to PUCO is also investigating the existence of possible abandoned plant costs currently being amortized by the excess generating capacity The possibihty of excessive Corapany, unless there is a change in the current PUCO costs at Beaver Valley Unit 2 is being investigated by a rate teatment of such costs (see " Summary of Significant consultant at the direction of the Pennsylvania Public Utikty Accounfng Policies"). The proposed changes would also Commission (PaPUC).

require recognition of losses relating to the Company's units As a result of the pending investigations and uncer-currently under construction in the event of future abandon.

tasties with other aspects of the nuclear program dis-monts, cost disallowances or the adoption of phase-in cussed above, there can be no assurance that the full plans by regulatory bodies that do not meet specific cost costs of all the CAPCO units under construction will uite recovery criteria.

mately be recovered in rates charged to customers or to Nuclear generating projects in the electric utikty indus-what extent the Company will be permitted to earn a return try. includ.ng those of the CAPCO companies, have experi-on its investments.

ture for its nuclear mission, which emphasized training, The Davis-Besse Nuclear Power Station, which Toledo maintenance and planning activities. The number of Edison operates and co-owns with CEl, was shut down nuclear mission employees is expected to increase by June 9,1985 due to the failure of the unit's main and auxil-approximately 240 by the end of 1986; salaries are being iary feedwater supply There were no injuries or radiation increased as necess try to become more competitive with leaks and the shutdown resulted in negligible camage.

the industry On July 24,1985, a Nuclear Regulatory Commission An official of the NRC indicated on February 6,1986 fact finding team concluded the major underlying cause of that the Davis-Besse Nuclear Power Station is not likely to the June 9 event was the Company's inattention to detail in be approved for restart before late April 1986 at the earliest.

the maintenance of plant equipment. The team also con-A final NRC staf f safety evaluation is not expected to be cluded that the key safety significance of the event was ready for the NRC until mid-April. The NRC staf f must still that multiple equipment failures involving back-up safety evaluate the etlectiveness of modifications to plant mainte-equipment occurred.

nance programs before the plant will be allowed to restart.

On September 10,1985, the Company submitted to the That evaluation is currently scheduled for mid-March. The NRC an extensive report about its own investigation of the NRC staff, however, indicated that the plant's backup feed-causes of the June 9 event, including a description of steps water system is sufficiently reliable to permit a restart. The that have been or will be taken to correct the problems Company estimates that about 3.300 maintenance and identified by the NRC. The report stated that an additional modification work orders remain to be accomphshed. The attematively powered, larger feedwater pump was being Company believes it will continue to have suf facient replace-insta!!ed to improve the rehabihty of plant safety systems.

ment power from its own more costly non-nuclear generat-The Company also described the new organizational struc-ing units, supplemented by wholesale power purchases as 20

4 1

necessary to meet its service area needs during the out-fuel aud:t hearing of the Company to be held in November, age. Whether the Company and CEI will be able to recover 1986. The findings would not be binding on the PUCO or on all additional replacement power costs, which are expected any of the parties.

i to be substantial, will be determined by the PUCO.

Should the PUCO find that these costs should not be On November 12,1985, the Company CEl, OCC and recovered the stipulation provides such previously col-I ' the PUCO staff entered into a stipulation agreement with lected costs with interest would be returned to the custom-respect to the June 9 event. The PUCO approved the stipu-ers of the Company and CEl. The final resolution of this lation in January.1986. The stipulation calls for the engage-matter is not expected to have a material adverse effect men' of an independent management auditor to evaluate on the financial position of the Company whether the June 9 event was caused in whole or in part by in late 1985, the NRC levied a $900,000 fine agaast the imprudent management. The auditor would also determine Company for the June 9 equipment malfunctions. In the any extra cost of fuel and purchased power associated interest of moving ahead with its current improvement pro-with the Davis-Besse outage and the extent to which these gram at Davis-Besse, the Company announced it does not costs have been recovered from customers of the Com-intend to contest the NRC's findings. However, the Com-pany and CEI through their electric fuel factors. The auaitor pany will request mitigation of the fine in light of the efforts would report his findings to the PUCO during the annual expended since June 9.

The Atomic Energy Act of 1954, as amended by the licensed nuclear units. Thus, about $650 million of liability Price-Anderson Act, limits the amount of public liability for a coverage is currently in effect per nuclear incident. Also.

nuclear accident from a reactor to $560 million, or the max-through private insurance and an industry-cooperative imum amount of insurance or other coverage available. Util-arrangement, property damage insurance covering nuclear ity companies provide $160 million of coverage through plants has been increased to over $1.1 billion for each private insurance companies. Additional private coverage nuclear site. Notwithstanding such insurance, a nuclear of $5 million for each nuclear reactor licensed for operation incident at a unit in which the Company has an interest would be provided by retroactive assessments against could still have a material adverse impact on the Company each reactor operator. Currently, there are about 100 The current Price-Anderson Act expires in 1987.

subject to refund amounted to $19.5 million. The PUCO ordered that during the period when the interim rates were j

in September,1984. the PUCO granted the Company a being collected, the Company must reduce AFUDC by

$17 million (or 3 percent) increase in annual retail electric creating a reserve equal to the net-of-tax amount of the rates. This was only 28 percent of the Company's Decem-nterim revenues collected. The purpose of the reserve is to ber,1983 request. In particular, the PUCO allowed just $7 ensure that revenues collected durino the surcharge period million of construction work in progress in the rate base out will ultimately result in future rates txino Icwer than they of the Companyh $186 million request. The PUCO elimi-otherwise would have been. The amou'n of the reserve bal-nated the Perry Unit 1 construction work in progress allow-ance would either be excluded from rate base or else l

ance altogether, even though the allowance had been included in rate base with carrying charges. If the latter l

granted in the Company's prior rate order-option were chosen, future revenues would be reduced by In February,1985, the PUCO approved an interim retail the amount of interim revenues collected, including carry-rate increase for the Company The order allowed, among ing charges, over a period equal to that of the surcharge.

other things, $22.7 million in additional gross annuai At December 31,1985, the balance of this reserve was operating revenues by means of an emergency temporary

$10.5 million.

uniform surcharge. These additional revenues are subject in June,1985, the Company requested an $82 2 million to refund if the revenues established in the Company's (15 percent) permanent increase in its retail electric rates in pending rate case discussed below are less than the level addition to making permanent the $22.7 million interim rate of temporary revenues allowed in the interim proceeding.

increase discussed above. The application requested the At December 31,1985, the Company's revenues collected maximum construction work in progress (CWIP) allowable, 21 l

1

$906 million, be permitted in rate base. Nearly all of the The Company expects to request permission from the CWIP component is relateo to Perry Unit 1 and would gen.

PUCO in 1986 to allow the accrual of the equivalent of erate $19 8 million in annualized revenues. The application AFUDC on its Perry Un.t 1 investment from the time the unit also included recovery of cortain annualized operating commences commercial operation until it is fully included in expenses for Perry Unit 1 The Company believes that even rate base as plant in service. If the PUCO denies recovery if the PUCO did not allow Perry Unit 1 CWIP in rate base of Perry Unit 1 operating expenses, the Company would and recovery of its expenses, an increase above the level request permission to defer such expenses. Denial by granted under the February,1985, order could still be Justi-the PUCO to accrue the equivaient of AFUDC or defer fied. The PUCO staf f recommended that the Company be operating expenses on Perry Unit 1 would have a signifi-granted an increase in the range of $20 million to $27 mil-cant adverse impact on the Company's future Results of lion. The PUCO's dedion on the application is expected in Operations.

March,1986.

The Percentage of income Plan (PIP) mandated by the in October,1985, in a rate increase order to Ohio Edi-PUCO requires the Company to continue electric service if son, the PUCO stated that when Perry Unit 1 produces sig-eligible customers pay 15 percent of their income, regard-nificant positive not generation of at least 20 percent of less of the size of the bill. The PUCO currently permits capacity Ohio Edison can file new rate tariffs to reflect utihties to recover PIP receivables delinquent more than inclusion of its share of Perry Ur.t 1 CWIP in rate base to twelve months through their fuel factors. However, this the maximum includable un' Ohio law. If Perry Unit 1 method of recovery is current;y being challenged by an CWIP were denied in the C

,;any's pending rate case, appeal to the Supreme Court of Ohio. At December 31 the Company would expect treatment similar to that 1985, the Company did not have a significant amount of PIP accorded Ohio Edison.

receivables delinquent in excess of twelve months. To the extent that such amounts increase in the future, the Com-pany intends to recover such amounts through its fuel fac-tors or otherwise.

Supplementary information regarding federal income taxes is set forth in the following tables:

For the years ended Decemt,er 31 1985 1984 1983 _

For the years ended December 31.

1985 1984 1983 (mdlions of dollars)

(millions of dollars)

FEDERAL INCOME TAX EXPENSE FEDERAL INCOME TAX EXPENSE WAS COMPUTED AS FOLLOWS:

DETAILS ARE AS FOLLOWS-Tax at statutory rate on Currently payable.

1 4

2 pre-ta x income 90 85 74 Investment tax credits:

Increases (decreases)in tax due to:

Deterred.

9 15 10 Allowance for funds used Amortized (2)

(2)

(1) dunng construction (64) (54) (43)

Deferred taxes:

Ac e depfec tion Accelerated depreciation (net) 10 12 11 P

an ditferences.

2 3

Cancelled generating projects.

(2)

(2) (2)

Other items (3)

(1)

(2)

Deferred fuel costs.

(1)

(2) 3 Total federalincome tax expense 23 32 32 Nuclear fuel interest charges.

7 8

5 Tax included as credit in Other income 38 34 24 Other provisions 1

(1) 4 Federal Income Taxes included in Operating Expenses 61 66 56 Tota! Federal income Tax Expense 23 32 32 22

Shares of these series are redeemable at the sinking

a. Capital Stock Transactions fund redemption price of par value per share p!us accrued and unpaid dividends. Future sinking fund redemption For the years ended requirements are: $3.8 million in 1986; $50 million annually December 31 1985 1984 1983 in 1987 through 1989, and $8.3 million in 1990.

NUMBER OF SHARES (thousands of shares)

SOLD (RETIRED):

Common stock Public sales 3 000 3 000 2 500

c. Cumulative Preference Stock Dividend Reinvestment and The Company is authorized to issue 5 rpillion shares of Stock Purchase Plan.

1 613 1 589 945

$25 par cumulative preference stock under its amended Total common stock.

4 613 4 589 3 445 atticles of incorporation. The preference stock's dividend nd liquidation rights are junior in priority to the Company's Cumulative preferred stock cumulative preferred stock, but senior in prionty to the Public sales. $25 par

$3 47 series 1 200 Company's common stock. There were no shares of Adjustable series "A" 1 200 cumulative preference stock issued and outstanding at Cumulative preferred stock December 31,1985.

with mandatory redemption Public sales, $25 par

$3.75 senes 1 200

d. Long-Term Debt

$3.72 series 1 400 Retirements, $100 par The annual interest requirement on long-term debt

$11.00 senes (5)

(5)

(5) outstanding at December 31,1985, excluding current

$ 9 38 senes (17) maturities, is $160 million, or 11.9 percent. This includes PREMlUM ON CAPITAL STOCK (millions of dollars) amortization of debt discount and expense.

Balance, beginning of year 421 380 326 Sinking fund redemption requirements and scheduled Premium, net of expense-maturities for long-term debt, excluding nuclear fuel leases, Common stocl'.

59 44 52 tt. cough 1990 are as follows:

Preferred stock.

(1)

(3) 2 Balance cod of year.

479 421 380 First Mortgage Sinking Fund Redemption Scheduled Year Requimments Matunties

b. Cumulative Preferred Stock The Company is authorized to issue 3 million shares of 1986 3

22

$100 par and 12 million shares of $25 par cumulative pre-1987 3

23 ferred stock under its amended articles of incorporation.

1988 3

38 The annualized dividend requirement on cumulative pre-1989 3

33 1990 3

117 ferred stock outstanding at December 31,1985 was $44 million, or 11.4 percent.

The dividend rate on the Company's adjustable rate preferred stock, $25 par value, fluctuates based on In addition, the Company's first mortgage bond inden-changes in yields on certain government securities. This ture provides for a required annual minimum payment (af ter rate will not be more than 14 percent or less than 7 percent.

certain credits, as defined) to the trustee as a maintenance The average rate on this series was 109' percent in 1985.

and replacement fund. The Company has been satisfying The Company held as treasury stock 12.585 shares at its sinking fund and maintenance and replacement require-December 31,1985, and 5,335 shares at December 31, ments by pledging property additions that otherwise might 1984. The sinking fund requirements for the various series have been used as the basis for the issuance of additional of cumulative perferred stock through 1990 are:

bonds.

The first mortgage bond indenture constitutes a direct Dmdend Minimum Effective first mortgage lien on substantially all property and fran-Rate Yearly Shares Date chises owned. This does not include expressly exempted (in thousands) property, such as cash and securities, accounts receivable,

$1 79 fuel, supplies and automotive equipment.

13.25 9

1986 12 65 8

1986 14 80 12 1987 3.75 60 1990 3.72 70 1990 23

The coal supply contract with Quarto expires Decem-ber 31,1999. Total purchases by the Company under these The Company's retirement income plan is non-contnbu.

Contracts amounted to $19 mdhon in 1985, $16 million in tory and covers all employee groups. The Company funds 1984 and $15 million in 1983. The contractual pricing provi-each year's cost currently and amortizes unfunded past sions reflect Quarto's production costs, deferred mine service costs over a 30-year penod. Pension costs are based development charges and fixed charges on debt and lease on estimated satary levels and service years of employees at commitments, among other charges.

their retirement. Total pension costs were $4 million annually In 1984, the CAPCO companies suspended operation in 1983 through 1985. Experience gains and losses on invest-of one Quarto mine. The Company expects its share of the ments are amortized over 15 years.

mine's deferred development and equipment costs will A comparison of the actuarial value of accumulated continue to be recovered in the delivered coal price unless plan benefits with not assets available for benefits, as such price exceeds a presenbed market price At Decem-shown below, may not present an accurate picture.

ber 31,1985, the Company's share of the mine's deferred Assumptions as to plan 'erminations, future service and development and equipment charges was $31 million. The wages, as well as actual investment performance, may OCC has appealed a PUCO decision allowing Ohio Edison affect the long-term funding process.

recovery through its fuel factor of deferred mine develop-ment costs related to that one mine. A decision overtuming At January 1 1985 1984 the PUCO's action could adversely af fect the Company's (nlilli ns f dollars) prior and future recovery of costs related to that Actuarial present value of accumulated Quarto mine.

plan benefits:

Vested 53 46 Non vested 7

6 Total 60 52 The Company may eventually be required to install flue Market value of net assets gas desulfurization equipment or to use even lower sulfur available for beaefits 95 89 coal at its Bay Shore Station depending upon: the passage of " acid rain' legislation by the United States Congress; the The above calculation of actuarial present value of outcome of certain pending environmental litigation; or the accumulated plan benefits assumed a weighted average application of " tall stack" regulations adopted in 1985 by annual rate of return of approximately 8 percent.

the United States Environmental Protection Agency The During 1985, the FASB issued new standards on pen-installation o'such equipment would involve substantial sion accounting The Company will be required to adopt capital expenditures and increased operating costs. The new pension expense and disclosure standards no later attemate use of even bwer sulfur coal would Skely result in than 1987. Based on a preliminary review, the Company higher fuel and operating costs.

expects that the adoption of the new standards will not have a material of fect on its financial position or results of operations.

Certain health care and life insurance benefits are The Company has lease and trust arrangements to provided for substantially all employees when they retire finance up to $298 milhon of nuclear fuel. The Company with pension benefits. The cost of these benefits, which believes that these commitments will provide adequate amounted to about $720,000 in 1985, is charged to nuclear fuel financing through 1988. Substantial additional expense when paid, nuclear material will have to be obtained in the future to supply fuel over the remaining useful life of the Company's nuclear units discussed in Notes 3 and 4.

Obligations under the long-term leasing arrangements The CAPCO companies have long-term agreements amounted to $168 milkon at December 31,1985, including with Quarto Mining Company to supply coal to the Mans-

$11 million of capitalized interest during 1985 The 1985 field units. Each company guarantees its share of Quarto's interest rate on the leases was calculated at an average debt and lease commitments incurred to develop and rate of 8.7 percent. Lease payments are made to coincide equip the mines. As of December 31,1985, the Company's with the usage of nuclear fuel in the reactor. Estimated

- share of the guarantees was $28 milkon, or 7.6 percent. The lease payments, including interest, are: $18 mdhon in 1986, Company's share of commitments incurred af ter December

$50 million in 1987, $66 million iri 1988, $73 milhon in 1989 31,1985 will increase to 12.4 percent.

and $96 million in 1990.

Under these arrangements, the Company's share of the At December 31,1985, the trust had invested $59 mil-minimum yearly payments for fixed charges on debt and lion in nuclear material, which included $5 milhon of lease commitments is expected to decline from $6 mdlion capitalized interest in 1985. The 1985 interest was cal-in 1986 to $5 million in 1990.

culated at an average rate of 9 5 percent.

24

At December 31,1985 the Company had line of credit rowed. The deposits provide operating balances for the arrangements with various banks for $73 million. Of this Company and are not legally restricted.

amount, $54 mill on was unused. The Company pays com-The Company has also entered into a five-year revolv-mitment fees ranging from % percent to % percent on ing underwriting facility which enables it to sell up to $25 a!most all of those lines. The rest are based on informal million in short-term notes if certain conditions are met. The compensating balance arrangements. Banks expect the Company pays fees of % percent per annum for this Company to maintain average deposits equal to 5-20 per-arrangement. At December 31,1985, $10 million in borrow-cent of the line of credit, depending on the amounts bor-ings were outstanding under this agreement.

The following quarterly results reflect all adjustments (that are of a normal recurring nature) to insure a fair statement of j

results for such periods:

(miirions of dottars)

(dollars per common share)

Earnings on Operating Operating Net Common Dividends Market Pnce*

Quarter ended Revenues income income Stock Eamings Paid High Low March 31 152 37 48 37 1.08

.63 18 %

16 %

June 30 139 34 45 35

.92

.63 21 %

17 %

September 30 155 41 45 35

.92

.63 21 %

19 %

December 31 149 28 35 25

.62

. 75" 22 %

19 %

March 31 140 34 39 31 1.03

.63 18 %

16 June 30 130 30 35 26

.87

.63 1/%

13 %

September 30 142 30 40 31

.92

.63 17%

13 %

December 31 139 29 40 31

.89

.63 18 %

1G%

' Common stock is listed on the New York, Midwest and Pacific Stock Exchanges. The price quotations are from The Wall Street Joumal. There were 86.528 common stock sharchciders as of December 31,1985, as compared to 86.209 in 1984.

" Includes special dividend of $012.

income statement, except depreciation, represent the amounts recorded in the historical cost income statement.

This section shows the of fccts on the Company of changes in prices of specific assets, namely property, plant income taxes are not adjusted because current tax laws do and equipment, using Current Cost Accounting.

not allow for the inflationary impact on capital investment.

Current costs reflect changes in specific prices of plant The Company has calculated depreciation provisions for from the date the plant was acquired to the present. The 1985 on the Current Cost amounts of property, plant and

. current cost of plant estimates the probable con of replac-equipment. The calculation was made by applying the ratio ing existing plant assets. It was determined by indexing the of the provision for depreciatien over the average property, surviving plant by the Handy-Whitman Index af Public Util.

plant and equipment on the historical cost basis, to the

. dexed plant values.

in ity Construction Costs.

- The table below shows the net elfect of inflation on Under current law, the Company cannot recover through revenues more than the original cost of plant common stock equity in 1985 from Current Cost assets, even though the cost to replace such assets would Accounting:

mostantially exceed the original cost. In 1985, the added h"j(' n of fect during 1985 on capital investment (milhons of cost, due to inflation, of replacing the plant assets is shown

~

increase in specific prices to current costs 59 under " Inflation eflect during 1985 on capital investment."

Ef fect of change in general price level (168)

During a period of inflation, issuers of debt experience Impact of discontinued operations.

41 an economic gain. This is especially important for the Com-Reduction to net recoverable cost (2) pany due to the substantial amount of debt issued to Additional provision for depreciation.

(35) finance its construction program. This gain is shown under (105)

" Gain from decline in purchasing power of net amounts Gain from decline in purchasing 4.,

c of net owed mounts owed (pnmarily debt).

72 Net eHect oMadon on common stod evty (33)

The comparative Current Cost values of all items on the 25

The table below presents selected operating and finan-additional provision for depreciation were deducted from cial data for the past five years adjusted for inflation as the reported amount of such income. Data from 1984 were measured by the Consumer Price Index for All Urban Con-revised to reflect actual indices. Certain reclassifications sumers. Earnings on common stock and earnings per have been made to prior year figures to make them compa-share are shown as if only the amount reportable as an rable with 1985 classifications.

(mdhons of dollars exc# oer share amounts) 1985 1984 1983 1982 1981 Operating Revenuu..

595 571 545 537 523 Earnings on Common Stock.

97 69 72 55 33 Gain from Decline in Purchasing Power of Net Amounts Owed 72 65 56 50 110 Increase in General Pnce Level Over (Under)

Increase in Specific Pnces (109) 39 46 (23) 14 Net Property. Plant and Equipment 4 644 4 403 4 076 3 834 3 663 Net Assets at Net Recoverable Cost 900 805 760 680 629 Per Common Share Amounts:

Earnings.

2.60 2.16 2.57 2.18 1.54 Annual Dividends 2.52*

2.61 2.66 2.65 2.72 Market Pnce,

22.00 19.55 19.44 23.40 19 52 Consumer Pnce Index:

Annual Average.

322.2 311.1 298.4 289.1 272.4 Year End.

327.7 315.5 303.5 292.4 281.5

• Current annual common stock dividend rate.

We have examined the balance sheets and statements ings. As a result of investigations regarding the alleged of capitahzation of The Toledo Edison Company (an Ohio excess cost of these units and uncertainties associated corporation) as of December 31.1985 and 1984, and the with other aspects of the nuclear program, management related statements of results of operations, earnings rein-can give no assurance that the Company's full investment vested and source of funds invested in plant and facilities in these units will ultimately be recovered in rates charged for each of the three years in the penod ended December to customers.

31,1985. Our examinations were made in accordance with In our opinion. subject to the of fects on the financial generally accepted auditing standards and, accordingly, statements of such adjustments, if any, as might have been included such tests of the accounting records and such required had the outcome of the uncertainty discussed in other auditing procedures as we considered necessary in the second paragraph been known, and subject to the the circumstances.

ef fects on the 1985 financial statements of such adjust-As discussed further in Note 3, the future of Perry Unit ments. if any, as might have been required had the out-No. 2 is undecided. Al! options are being considered come of the uncertainty discussed in the third paragraph including cancellation As such. management can give no been known, the financial statements referred to above pro-assurance when, if ever, Perry Unit No. 2 will go in service sent fairly the financial position of The Toledo Edison Com-or whether its full investment will be recovered in rates pany as of December 31,1985 and 1984, and the results of charged to customers.

its operations and the source of funds invested in plant and As discussed further in Note 3. the Company has facihties for each of the three years in the period ended incurred construction costs relating to two additional December 31,1985, all in conformity with generally accepted nuclear generating units: Perry Unit No.1 and Beaver Val _

accounting pnnciples apphed on a consistent basis.

ley Unit No. 2. These units are currently scheduled to go in service in 1986 and 1987, respectively However. recovery of the Company's full investment in these units will be deter-mined by rate regulatory agencies in future rate proceed-26

Gas &

Totai Total Tota!

Steam Operatuig War Residential Comrrercia!

Industr.ai Other Retad Wholesa'e E!ectnc Heating Revenues 1985 185 129 214 45 573 16 589 6

595 1984 173 115 195 45 528 14 542 9

551 1983 161 105 170 42 478 17 495 9

504 1982 154 102 159 38 453 21 474 8

482 1981 139 91 151 32 413 22 435 7

442 1975 61 39 65 14 179 18 187 4

191 income fuel & Ne4 Depreciahon Federal income Other Before Purchased State &

Income Operabng AF UDC-Tax Income -

Interest War Power.

Ope *ahon Vaintenance Amortizatm Local Tanes Taxes Income Equdy Credds Net Charges 1985 103 95 43 44 49 61 140 97 38 11 286 1984 146 81 38 50 47 66 123 83 34 8

248 1983 126 78 33 51 45 56 115 65 24 2

206 1982 128 76 39 44 41 45 109 49 19 1

178 1981 122 64 32 43 37 41 103 32 10 9

154 1975 84 25 8

14 14 13 33 14 6

59 e

Return Amrage on Preferred Earrungs Shares Average Debt AFUDC -

Not Stock on Outstanding Eowty Dmdends Market Pm Book War interest Debt income Omdends Common (mmons)

Earnerys Dectared Mgh Low earEnd Value 1985 154 (41) 173 41 132 37 3.54 14.7 2.01 " 22.13 16.50 22.00 24.44 1984 129 (35) 154 35 119 32 3.70 15 3 2.52 18.88 13.38 18.88 23.76 l

1983 104 (26) 128 30 98 28 3 50 14.5 2.46 22.50 17.50 18.00 24.12 1982 94 (22) 106 27 79 25 3.18 13.3 2.38 21.13 15.75 21.00 23.53 i

1981 86 (15) 83 23 60*

22 2.77*

11 6*

2.30 18.38 15 00 16.50 23.46 i

( 1975 24

( 6) 35

,7 28 9

3 29 14.5 2.06 24.38 16 38 24.38 22.39 l

l l

• In 1981, excludes extraordinary gain from exchange of common stock for bonds (af ter gmng ef fect to the extraordinary gain, earnings on common were equal to $70 milhon; eamings per share to $3 27. and return on average common equity to 13.5 percent).

"A 63c tourth quarter dmdend was declared on January 7.1986. A 12e special dividend was declared in November 1985 to make up for the delay I

resu!!ing from the synchrontzation of dividend payment dates to the dates scheduled for Centenor Energy Corporation.

$I

Annual Annual Pnce Revenue KWH Per Per Industnai Per KWH Customer War Resdenbal Commercial industra Whvesae Other To'a!

Resdents Commerca

& Other Tua.

Customer (Cents)

(Do6ars) 1985 1901 1 436 3 429 330 451 7 547 245 485 24 261 3 942 273 688 7 770 9.72 755 1984 1 958 1 398 3 444 305 440 7 545 243 912 23 891 3 920 271 723 8 045 8 81 709 1983 1915 1 341 3 127 320 428 7 131 242 959 23 694 3 864 270 517 7 900 8.44 665 1982 1 911 1 325 2 873 395 414 6 918 241 492 23 495 3 815 268 802 7 906 8 04 636 1981 1 919 1 294 3 080 449 409 7 151 241 663 23 573 3 844 269 080 7 966 7.23 576 1975 1 722 1 156 3 011 438 331 6 658 223 807 22 495 3 340 249 642 7 732 3.56 275 Net Capatyr4 y load Capac4y Company Net Fuei Cost Eftcency at f ame Peak Factor Magin Gerera'ed Purchased Per KWH BTU Per War ofPeak lead

(%)

(%)

Fossa Pacear totar Power Toti (Cents) kWH 1985 1 754 1 374 67 22 5 743 952 6 695 1 402 8 097 1.90 10 124 1984 1 726 1 327 68 23 5 182 2 091 7 273 719 7 992 1.73 10 193 1983 1 777 1 325 66 25 4 683 2 383 7 066 593 7 659 1.67 10 337 1982 1 790 1 355 62 24 5 306 1 569 6 875 510 7 385 1.80 10 221 1981 1 773 1 315 66 26 5 349 2 142 7 491 157 7 648 1.68 10 274 1975 1 39/

1 256 b4 11 4 ol/

4 877 2 227 7 104 1.04 9 982 Accumulated Construction Annual Pant in Provisions For Nd Work in Nuclear Fues Nuc+ ear Fuel Tota!

Constructon Total Ye3f SE*r vCO Deprecraftsn Pant Progress in Process in Servce Plant Expenditures Assets 1985 1 418 391 1 027 1 731 193 34 2 985 378 3 365 1984 1 391 365 1 026 1 395 156 40 2 617 356 2 936 1983 1 358 325 1 033 1 078 140 23 2 274 294 2 501 1982 1 307 286 1 021 844 92 18 1 975 249 2 181 1981 1 261 252 1 009 647 18 11 1 685 201 1 878 1975 480 126 354 342 696 112 759 comueve Preferre<1 Common Cumulative with Lonry Shareowners' Preferred M.wiatury Term Wrar Eqwty Stock Redemptrn Debt Tofat 1985 950 36 230 9

154 5

1 339 50 2 673 1984 814 36 200 9

158 7

1 110 48 2 282 1983 716 36 200 10 94 5

985 49 1995

(

1982 617 35 170 10 95 5

876 50 1 758 1981 550 35 150 10 96 6

762 49 1558 1975 216 33 90 14 10 1

349 52 665 28 L

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