ML20214V323

Ohio Edison Annual Rept 1986

ML20214V323
Person / Time
Site:	Beaver Valley, Perry, 05000000
Issue date:	12/31/1986
From:	Rogers J OHIO EDISON CO.
To:
Shared Package
ML20214V285	List: ML20214V283 ML20214V323 ML20214V371 ML20214V405 ML20214V438
References
NUDOCS 8706120053
Download: ML20214V323 (44)

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Fin:nci:I HighNghts For the Years Ended December 31 1986 1985 Change (in mnons except per share amounts)

Kilowatt Hour Sales 28,165.6 28,885.7

-2.5%

Operating Revenues

$1,741.9

$1,754.7

- 0.7%

Fuel Expense 422.8 499.2

- 15.3%

Operating income 392.4 380.4

+3.2%

Allowance for Funds Used During Construction, Net 320.8 287.7

+ 11.5%

Interest and Other Charges 410.4 410.2 Net income 410.8 370.7

+ 10.8%

l Earnings on Common Stock 359.8 318.1

+ 13.1 %

Earnings per Caminon Share

$2.47

$2.45

+0.8%

Dividends per Common Share *

$1.92

$1.88

+2.1%

Dividends on Capital Stock

$330.8

$297.1

+ 11.4%

Capital Expenditures:

Construction of Facilities

$717.8

$765.6 Nuclear Fuel 52.0 52.8 Other Capital Leases 6.4 8.6

$776.2

$827.0

-6.1%

Internally Generated Cash 232.7 275.3

- 15.5%

Net Financing Activities 370.5 443.8

- 16.5%

Return on Average Common Equity 14.9 %

15.2 %

'The quarterly dividend was increased to 49 cents per share ($1.96 on an annual basis) beginning with the dividend payable on March 31,1987.

l Operating Revenues Earnings per Share Annual Dividend Return on Average stusma per Share Common Equity t%)

l

$2.0

$2.50

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Our improved operating performance and suc-lower than the previous year. This was largely cess in holding down costs helped us achieve the result of utilities in the mid-Atlantic region a 1986 carnings per share on common stock

-our primary market-switching back to their of $2.47, up from $2.45 in 1985. We accom-ow n oil-fired generating units when oil prices plished this despite our having 12 percent fell in 1986. Also, three large generating units more common shares outstanding.

were placed in service, providing additional Total kilowatt-hour sales to customers in our p wer in that region.

service area were up nearly 2 percent. Com-These changing market conditions made a mercial sales increased 5.6 percent, reflecting major off-system sales agreement with Potomac continued growth of retail and service-related Electric Power Company (PEPCO) all the more businesses. Residential sales were up 3.7 gratifying. The agreement, which is subject percent, for the most part due to increases in to approval by the Federal Energy Regulatory new home construction and demand for heat-Commission, takes effect June 1,1987, and ing and air-conditioning. Industrial sales were should bring in an average of $150 million in off 2.5 percent, mainly because of lengthy annual revenue through the year 2005.

strikes that halted operations at the plants of Financial position improves two of our largest mdustrial customers.

Our ongoing efforts to improve operating effi-Although off-system kilowatt-hour sales to ciency have been rewarding, especially in power other utilities produced $138 million in reve-plant operations. Average generating unit avail-nues in 1986, those sales were 15.8 percent ability increased from 60 percent in 1979 to nearly 80 percent in 1986. This performance re-duced annual operating costs about $50 million.

k hh)

We also took advantage of lower interest rates and refinanced more than $210 million of debt l

during the year. This will save $14 million in annual interest expense.

These and other successful efforts to improve our financial position have enabled us to increase the annual common stc4 dividend from $1.76 in 1982 to $1.92 in 1986. In February, the Board of Directors again raised the quarterly

^

dividend to 49 cents per share, or $1.96 on an annual basis.

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Perry Plant progress p.

On November 13,1986, the Nuclear Regula-MIRG1J.

tory Commission (NRC) issued a full-power operating license for Perry Unit 1. The unit moved closer to full commercial operation when, in mid-December, it supplied power to the system for the first time.

As construction at Perry was nearing comple-tion, the Public Utilities Commission of Ohio ordered an independent audit to identify the 2

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t causes 'of construction delays and cost increases.

~erating the bulk of electric power this country In releasing its findings last August, the auditors needs to maintain living standards and support x said the Perry project was well managed. They

' future economic growth.

attributed most of the construction delays and But no new nuclear generating units and only a cost increases to factors outade the control of few coal-fired units have been ordered since utihty company management.

1978. Our nation needs to develop an energy Othe r concerns about nuclear power plants are policy that encourages construction of plants

-often brought up-and must be addressed-as to meet future demand and that provides for pl:w, approach full operation. The Perry Plant a reasonable return on investment in those

= is no exception.

plants. Without it, our industry's continued Following an earthquake in northeastern Ohio ability to deliver reliable and economical elec-in J:nuary 1986, questions were raised about tne power will be seriously jeopardized, the possibility of damage to the plant. The

. U *P** **

NRC conducted a thorough investigation and a congressional subcommittee held a public Last year I met with many executives who run industrial and commercial businesses in our

' hearing. Both concluded that the plant did indeed safely withstand the earthquake.

area. While sharing their concerns for Solding down operating costs, improving sales and pro-Despite these findings, nearly seven months moting growth, I assured them that we will after the earthquake, Ohio's governor withdrew never take their business for granted; that we his support for the Ihrry emergency evacuation will do everything possible to keep our prices

~ plan. This plan had been developed, tested and competitive.

approved by the state and had the approval of The increasing intensity of competition from federal agencies.

other energy suppliers is not the only thing In withdrawing his support, the governor cited that can affect our financial performance. New the accident at the Soviet Union's Chernobyl environmental laws, deregulation, restructuring plant. Even some of the severest critics of and diversification could also significantly nuclear power have conceded that Chernobyl change our industry over the next few years.

was not built with the margin of safety basic to all U.S. nuclear plants. We believe the exten-We are prepared to meet these and other chal-sive safeguards and backup systems built into lenges without being distracted from our pri-U.S. plants clearly demonstrate our concern mary bj,ectives: quality service and improved for public safety far beyond what was evident profitability.

at Chernobyl.

Given the considerable achievements of our We also believe nuclear power represents a employees in recent years, I am confident about the future. With c ur resources, our dedi-source of energy that must play a growing role in meeting our future energy needs. Oil and.

cated people and the continued support of you, natural gas eventually will be in much shorter wr <t ekholders, we will get the job done.

. supply. At some point, nuclear and coal are likely to be the only practical choices for gen-

' (.

v Justin T. Roger >, Jr.

President March 1,1987 3

Review cf Cperations Area sales increase Use of electricity in our service area grew 1.7 percent in 1986, despite lower sales to industrial customers.

Sales to commercial customers showed the largest gain, up 5.6 percent, as retailers and generation because of depressed oil prices.

service businesses enjoyed steady growth.

Residential sales also grew, by 3.7 percent, Also, thee generating units placed in seMee by other utilities supplied additional power mainly from new home construction and higher heating and air-conditioning use.

to the region. Howem, long-temnonnacts secured in 1983 helped us realize $138 million On July 18, our customers set a new system in revenues from off-system sales last year.

record for peak energy demand of 4,243 A major new contract, effectiveJune 1,1987, megawatts. The heat and humidity also will ssure revenues from off-system sales strained regional supplies of electricity, which through the year 2005. The agreement was reflected in our sale of 826 megawatts should produce an average of $150 million to other utih.. ties.

annually from sales of electricity to the A 2.5 percent downturn in sales to industrial Allegheny Power System for resale to customers was primarily due to prolonged Potomac Electric Power Company, which strikes at facilities of two of our largest steel serves the Washington, D.C., area.

manufacturing customers. Off-system sales to other utilities fell 15.8 percent as eastern Special programs attract utilities used more of their own oil-fired and keep customers To help steel manufacturers keep prices competitive with foreign suppliers, we offer two special rate options to customers operat-l ing electric melting furnaces. In return, these options allow us to interrupt this heavy power demand during the Company's peak

>New technologies have con-l tributed to our improved effi-l ciency and enabled us to generate sources of revenue g

g from nonutility businesses, including microfilm records g

and fiber optics.

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demand period if needed for capacity short-falls, system emergencies or other purposes.

This program also helps preserve jobs and the economy in communities where steel plants are located. Thirteen companies signed up for these options in 1986.

Our most successful program is a special share of this market, which represents about five-year price-incentive plan that offers 5.5 percent of our annual revenues, we have growing businesses significant savings in been establishing prices competitive with electricity costs. It has helped persuade 50 natural gas and selling the many benefits companies to build new facilities or expand of electric heating.

their operations in our service area. They A study conducted in May 1986 showed that created more than 2,000 jobs and added annual operating costs of homes with electric

$11.4 million to our annual sales revenue.

baseboard heating and load control were equal Another 20 companies that qualified to to or lower than operating costs of homes participate in the plan should add 2,000 heated by gas. A 1985 study showed cost morejobs and more than $9 million in an-savings for homes with heat pumps and load nual revenue when their facilities are operating.

control over those with gas furnaces and air-conditioning. These studies are helping to Expanding home heating sales convince homeowners that our pricing options in 1986, electric heating was the choice of make electric heat cost competitive as well builders and buyers in 35 percent of new as more efficient and comfortable than gas homes in our service area. To gain a larger or oil heat.

Customers can also reduce their energy costs with our Power Commander program.

In exchange for controllable service, resi-dential and commercial customers receive a reduced electric rate for space and water heating. Interest-free loans are available

> Facilities to develop robotics i

and train technicians are among the resources avall-1

'd able to industrial clients at the Advanced Technologies

/

Center of Lorain County Q

Community College.

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4 Kent State University's Liquid g

gg gas CrystalInstitute, a leader in

_i" the research and application im H

of electronics displays, con-tributes to our area's high-tech development.

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for load-control systems and electric water heaters that replace gas or oil water heaters.

Trouble-free equipment performance is the goal of our Alternative Plus program, which assures that heat pumps are installed accord-ing to the Company's recommended stan-dards. To retain electric heating customers, generating level, Ohio Edison has been our Performance Plus program gives cus-authorized by the Public Utilities Commis-tomers up to $250 for qualifying repairs and sion of Ohio to begin recovering a portion of impro.ements to electric heating systems.

the Company's financing costs. Customer Our newest plan, the Ileat Pump Perform.

bills would increase by about 2 percent, and the new rates would add an estimated ance Check, helps pay for annual service

$42 million in annual revenue.

inspections.

In October 1986, the Company withdrew Perry Unit I licensed a request for a rate increase that would have Unit I at the Perry Nuclear Power Plant re-primarily covered operating and maintenance ceived a full-power license on November 13, expenses, depreciation and taxes for Perry 1986, from the Nuclear Regulatory Commis-Unit 1. Because of legal and other delays in sion (NRC). With tests continuing at various receiving a full-power operating license, the levels of operation, the unit is expected to unit was not expected to be operating at full reach commercial operation in mid-1987, capacity within the test year approved for according to the plant's operator, the Cleveland the rate case. A new request will be filed in Electric illuminating Company.

1987 to recover our investment and operat-ing c sts for Perry Unit 1.

When Perry Unit I reaches the 20 percent Because of different state regulations, Penn Power has not withdrawn a rate request it filed in June 1986 with the Pennsyhnnia Public Utility Commission (PPUC). The request h

> Perry Unit 1 received its full-power operating license in

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November 1986 and is undergoing tests that should 1

lead to commercial operation i

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in mid-1987.

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would increase retail electric rates gradually over the next four years. The four equal an-nual installments would total $70.9 million in annual revenue, reflecting investment and operating costs for Perry Unit 1. Ilowever, on February 2,1987, an administrative law judge recommended a one-time increase of systems and licensing activities. Ohio Edison

$23.1 million. Penn Power has taken excep-owns about 42 percent of this 833 megawatt tion with the recommendation and filed a unit, which is being built by Duquesne brief with the PPUC.

Light Company.

I Ohio Edison and Penn Power own about l

35 percent of the 1,205 megawatt Perry Financing costs reduced l

Unit 1. Construction of Perry Unit 2 has As a result of good earnings performance in l

stopped and all options are being evaluated.

recent years, internal financing of construc-l tion and system improvements has helped Ileaver Wiley Unit 2 reduce our interest costs. Of the $718 million fuelloading scheduled the Companies raised in 1986 for construc-l Nuclear fuel was delivered to Unit 2 of the tion,33 percent was generated internally.

l lleaver Valley Power Station in September.

This compares with only 12 percent in 1980.

With major construction and most regulatory In 1987, we expect internal financing of reviews completed, fuel is scheduled to be 32 percent of our $626 million construction loaded into the reactor in the spring of 1987.

budget.

In the latest NRC inspection, lleaver Valley During 1986, we further reduced annual Unit 2 received high ratings for safety-related interest costs more than $14 million by re-l placing some $210 million in high-interest debt with issues at lower rates. We secured l

our lowest interest rate in nine years by work-ing with a group of Swies banking institu-tions. That arrangement, one of the first in N

> Centralizing water and coat analyses at a single labora-tory has reduced costs for expensive equipment and outside testing, and resulted in greater accuracy.

<!n a recent survey, nine out of ten customers who experi enced a service interruption said that our employees re-y

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the country by an electric utility, was com-pleted in May and raised $44 million at an effective rate of 8.6 percent.

Efficiency improves Aggressive productivity and cost-containment l

goals continued paying off in 1986. Through We now lease the use of fiber-optic cable improved maintenance programs, redesigned along some of our existing transmission and and computer-supported controls and better-distribution routes to telecommunications trained employees, the generating units we companies. Our high-speed computerizeJ operate achieved nearly 80 percent avail-bill processing services attracted a major ability. Improvements made since 1979's Akron-area company that wanted to improve availability of just over 60 percent are saving its cash management. And we've sold serv-us about $50 million in annual operating costs.

ices in advanced microfilm processing, en-Computers and other advanced technology vironmental consulting, and chemical and have contributed to more efficient performance metallurgical laboratory analysis.

in a wide range of other activities as well.

Consolidating some of our operations will Improved efficiency has also enabled us to help control future costs as well. To reduce use some available resources to earn addi-the costs of coordinating the local distribu-tional revenue from nonutility business ven-tion of electricity and repair work, we are tures. In just two years, Ohio Edison has se-combining nine area dispatching offices into cured contracts that have exceeded $573,000 one location. This streamlining should lower in annual revenue.

annual operating costs by about $2 million.

Finding low-cost environmental solutions We are working on two fronts to achieve cost-effective solutions to environmental l

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national attention as a test for more economical means of reducing plant sulfur emissions.

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problems. The fir st involves research on new technologies to reduce power-plant emissions. One project, Limestone Injection N1ultistage i Burners (LINIB), reduces sulfur dioxide and nitrogen oxides from power-plant emissions by injecting time into the boiler and using special burners. The U.S. Department of and is based on the success of similar work Energy, U.S. Environmental Protection in other countries. The program's goal is to Agency, state of Ohio, Babcock & Wilcox treat about 100 lakes and streams. Company and others have recently expanded LIN1B funding from $18 million to $47 million. Recognizing our commitment Success with this and other projects at to the community several of our plants could result in more During the year, we continued developing economical environmental controls and programs that reflect our responsibility to greater use of high-sulfur midwestern coal. customers, which goes beyond providing Another environmental project is aimed at reliable service and keeping our product reducing the acidity of lakes and streams by c mpetitively priced. treating them with lime. Last year,15 lakes One example is our Project Reach program, in the Northeast with high acidic levels re-now in its third year. Through 1986, cus-ceived treatments through Living Lakes, Inc. tomers and employees made donations, This $20 million program is cosponsored by matched by the Companies, raising more Ohio Edison, Penn Power and other compa-than $228,000 to help nearly 4,000 needy nies to reduce acidity regardless of the cause families pay a part of their energy bills dur-ing the winter months. To assist the elderly, we introduced our Gatekeeper Program in early 1987. Cus-tomer service representatives, meter readers and other employees who have daily contact > One of the many local vol-unteer projects created by 4 employees, Adopt-A-Family 3 in our Marion Division pro-ks 3-vides clothes and toys for k the needy at Christmas time. Wf 4 4In service to communities, i + employees are proud to sup- %M port volunteer programs like e blood drives, donating more than 1,100 pints of blood In 1986. 14

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with customers are trained to recognize the special needs of the elderly. An employee who notices that someone may need help con-tacts the appropriate Area Agency on Aging. Our CrimeWatch program was expanded in 1986 to give special attention to child safety. CrimeWatch, along with Utility Watch in area - we are leading an effort to enlist local Pennsyhunia, prepares employees to ob. c mpanies in cosponsoring Writing to Read. serve and report suspicious activities and This program utilizes computers and other emergencies to local police or fire depart-educational materials to improve the reading ments. Working with schools, we're letting and writing skills of children in kindergarten children know that if they need help, they and elementary school. Children learn how to form words and sentences based on the can get it from our employees. sounds of individual letters. Ohio Edison is To help support higher education and the contributing $15,000 to kick off the program, arts, our Matching Gifts Program is matching Beginning in 1986, area educators who de-employee contributions, dollar for dollar, up vel p energy education projects dealing with l to $3,000 annually for qualifying educational electricity are eligible for grants of up to and cultural institutions. Nearly 75 institu. $300 fmm Ohio Edison. The program is l tions shared the $14,760 raised in the pro _ designed to support educators who develop gram's first year. innovative energy projects that can be shared To help reduce illiteracy and the number of by other schools. Thirteen grants were school dropouts - and in the long run im-awarded for the 1986-87 school year. Grant prove economic development in our service winners are selected with help from our Educational Advisory Council, a panel of educators who assist in reviewing and evalu-ating the nearly 150 free films, booklets and special programs we provide to area schools. 4 Child safety activities range from classroom demonstra-3 [ y #, tions to CrimeWatch, which lets children know they can k ,a 'f depend on employeesif they 4 need to report emergencies. n w y. .; pO a w

MW W The consolidated financial statements were prepared by the management of Ohio Edison Company, who take responsibility for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles and are consistent with other financial hformation appearing else-where in this report. Arthur Andersen & Co., independent public accountants, have expressed an opinion on the Company's finan-cial statements, as shown on page 37. The Company's internal auditors, who are responsible to the Audit Committee of the Board of Directors, review the results and performance of operating units within the Company for ade-quacy, effectiveness and reliability of accounting and reporting systems, as well as managerial and operating controls. The Audit Committee consists of four nonemployee directors whose duties include: consideration of the adequacy of the in-ternal controls of the Company and the objectivity of financial reporting; inquiry into the number, extent, adequacy and validity of regular and special audits conducted by independent public accountants and the internal auditors; the recommendation of independent accountants to conduct the normal annual audit and special purpose audits as may be required; and reporting to the Board of Directors the Committee's findings and any recommen-dation for changes in scope, methods, or procedures of the auditing functions. The Audit Committee held three meetings during 1986. M Y V. A. Owoc W. A. Daniels Executive Vice President Comptroller Chief Financial Officer i7

htanagement's DiszuTsion cnd Analysl3 of Results Cf Operation 3 cnd Fin:ncialGondition Results of operations On September 25,1986, a settlement agreement was adopted Operating results for 1986 continued the upward trend of past by the Pennsylvania Public Utility Commission (PPUC) years. Earnings available for common stock increased by whereby Penn Power is currently making refunds to its cus-13.1% over 1985, although a 12.0% increase in the average tomers in connection with certain income taxes normalized number of shares of common stock outstanding in 1986 in prior years. The effect of this settlement decreased operat-limited the increase in earnings per share to 0.8% and resulted ing revenues and income taxes by $6,547,000 and $7,232,000, in a slight decline in return on common equity. This increase respectively, and increased other interest expense by $659,000 in earnings occurred, even though the Companies stopped resulting in no material effect to net income. including allowance for funds used during construction The change in fuel costs during the last two years was attrib-(AFUDC) relating to Perry Umt 2 in net income as of July 1, utable to the following factors: 1985 (see Notes 1 and 7); inclusion of this AFUDC in 1985 and 1984 provided earnings of S.17 and $.26 per share, respec-1986 1985 tively. In addition, results for 1984 also included a $6,800,000 nsu plon 5 gn,na,on3;$ noncash adjustment to Penn Power's depreciation reserve, (hange nj,uel Oj es which increased earnings per share by $.06. Ddference in net deferred fuel costs (37.9) 37.0 bannm se(de rease) $(76.3) $ 76 4 Operating revenues declined slightly in 1986 due in part to a reduction in the Company's fuel recovery rate. This reduction A refueling outage at Beaver Valley Unit I during 1986 was reflects the Company's continued success in procuring fuel at primarily responsible for the increase in maintenance expenses competitive prices. The following summarizes the sources of and contributed to the increase in purchased and interchanged the changes in operating revenues during 1986 and 1985: power. This contrasts with a decrease in purchased and inter-changed power in 1985 when compared to 1984 resulting 1986 1985 from an increase in kilowatt-hour generation from the Sales to Residential Commercial ompanies' pm&ction fachies in M. A reduedon d and industrial custorners: $14,400,000 in pension costs is reflected in other operation fnc else Nt expenses for 1986. The reduced pension costs resulted from Change in fuel recovery rates (59.1) 42.4 the Companies' adoption in 1986 of a new pension account-Total 10 5 68 9 ing standard issued by the Financial Accounting Standards N"utIY"" 45 9 a s uction was b aMon m a %,M,M ( 3 sales to an other customers (0.3) 68 reduction in pension costs for 1985 resulting from a change Other revenues 48 in actuarial assumptions (see Note 1). Totalincrease (decrease) $(12 8) $ 117.6 _ The Companies' ongoing construction programs, requiring ,Etal kilowatt-hour sales for 1986 were 2.5% lower than 1983. the continuation of debt financing, resulted in an increase in An increase of 1.7% in kilowatt-hour sales to system customers interest on long-term debt during 1986. Offsetting this increase was offset by a 15.8% decreas: m, sales to other unhues. was a decline in interest on long-term obligations resulting rhe increase in kilowatt-hour sales to customers resulted I i i 198 W in ibutable from increases in sales to residential and commercial cus-to long-term debt reflects the refinancing of $213,000,000 tomers of 3.7% and 5.6%, respectively, offsetting a 2.5% of long-term debt with an effective annual interest rate of decrease m sales to industnal customers. 17.1% and additional borrowings resulting in the issuance of $315,000,000 of new long-term debt with an effective annual interest rate of 10.1%. As the Companies' construction proj-ects proceed and until the projects are placed in service and/ or included in rate base, total AFUDC ill continue to increase in order to capitalize those fina ing costs not being recovered through rates. 18

The electrie utility industry is subject to inflationary pressures in - Jdition to cash generated internally and available cash similar to those experienced by all other industries. To the resources described above, the Company presently expects extent that the Companies incur additional costs or receive to finance its capital needs during 1987 by issuing up to benefits resulting from the effects of inflation, it is antici-3,400,000 shares of common stock through the Dividend pated that those effects will ultimately be reflected in the Reinvestment and Stock Purchase Plan; 5,t00,000 addi-Companies' rates. tional shares of common vock through public sales: $60,000,000 of preferred stock; and $245,000,000 of long-CapitalResources and Uquidity term debt. The Company is presently explon.ng the possi-C,ap. l requirements in 1986 for the C,ompam.es construction ita bility of entering into a sale / leaseback arrangement for a por-programs, capital leases and nuclear fuel were approximately tion of its ownership interest in Perry Unit 1. If the Company $776,000,000, of which approximately $422,000,000 was proceeds with this arrangement, some or all of thi, financing financed externally. Over the !ast five years these requirements may not be needed. Additionally, investments in nuclear fuel were approximately $4,000,000,000, of which approximately of,pproximately $41,000,000 will be made in 1987 through $2,700,000,000 was provided from external sources.,l'he the incurrence of additional long-term obligations. 1987-1991 coreuction program and capital lease requirements are currently estimated to be $1,700,000,000 (excluding Based upon earnings for 1986 and after giving effect to the costs of nuclear fuel); additional financing including the issu-redemption of $88,300,000 of first mortgage bonds in ance of additional common stock and other securities will be February 1987, the Company would be permitted, under the necessary to fund a portion of this new construction. The Companies have additional cash requirements of approximately $890,000,000 for the 1987-1991 ocriod to meet maturities of, and sinking fund requirements for, long-term debt, long-term obligations (excluding nuclear fuel), and preferred and N ase,*et Prfce to Book Walue preference stock. N 100 125 Investments for additional nuclear fuel during the five years 1987-1991 are estimated to be approximately $204,000,000. During that same period, long-term obligations related to nuclear fuel are expected to be reduced by approximately $345,000,000 as the Companies recover such costs through their electric rates. 60 75 At December 31,1986, the Companies had approximately $148,000,000 of cash and temporary cash investments, and approximately $30,000,000 of funds held in escrow from 5" previous pollution control financings. The Companies also have $50,000,000 of short-term bank lines of credit, in addi-tion to a $500,000,000 revolving credit agreement available to the Company, which could be used for interim financing 20 25 purposes. i 0 0 MM N N2 H3 M4 MS M6 82 N3 M4 US 86 Preknred j 101 Deta l M cannwn Spay 19

carnings coverage test contained in its first mortgage inden-second quarter of 1987, providing for new rates to become ture, to issue at least $1,071,000,000 principal amount of effective upon the commercial operation date of Ibrry Unit 1, first mortgage bonds at an assumed interest rare of 10.5%, or as long as that date is not later than July 17, 1987. If the date 4 under the earnings coverage test contained in its Charter to is later, Penn Power will either seek an extension for imple-issue at least $1,308,000,000 of preferred stock at an menting the new rates to coincide with the commercial oper-assumed dividend rate of 10.5%. If it were to issue both first ation date or file a new rate case. The Company expects to mortgage bonds and preferred stock, some lesser combina-file a rate increase request with the Public Utilities Commis-tion of the two would be permitted. The Company is cur-sion of Ohio to recover its costs for Perry Unit I after the unit rently able to issue $735,000,000 principal amount of first is in operation. mortgage bonds against previously retired bonds without th The Tax Reform Act of 1986 reduced the maximum cor-need to meet earnings coverage requiremei.ts ($175,000,000 porate tax rate from 46% to 34%. The Companies expect of this amount is reserved for issuance pursuant to the that the reduced tax rate will reduce their provision for Company's revolvmg credit agreement referred to above) and income taxes that would otherwise have been charged to $308,000,000 against property additions. If Perry Umt 2 mcome in future years. However, the new law repeals the were to be terminated the resultmg reduction m property investment tax credit (except for certain transition property), eligible to be pledged would reduce this latter amount to lengthens the tax depreciation lives of certain electric utih.ty $138,000,000. property and requires capitahzat on of construction period Penn Power currently has a rate increase request pending interest for all new construction projects. In addition, the law before the PPUC w hich is designed to produce approximately also establishes a new methodology for computing the alter- $70,900,000 in additional annual operating revenues phased native minimum tax w hich, in effect, could cause the Com-in over a four-year period in equal annual installments. On panies to pay income tax on the equity portion of AFUDC, February 2,1987, the Administrative Law judge (ALJ) issued which is not taxable income under ordinary circumstances. his recommended decision to the PPUC in which he recom-After giving effect to the reduced rates combined with these mended a total increase of approximately $23,100,000 (an other changes, the Companies expect their cash payments increase of approximately 13%) to be implemented without for income taxes to increase in the near term from the levels 1 the proposed phase-in plan. The ALJ found that the costs of the past several years. To the extent that alternative mini-incurred in the construction of Perry Unit I were reasonable, mum tax payments exceed the normal income tax computa-that no adjustment for impruden.e should therefore be made, tion, that excess may be carried forward indefinitely as a and that recovery of depreciation expense and operating credit to normal income taxes payable in future years. j costs should be allowed. however, a number of other adjust-The FASB issued an Exposure Draft in 1986 which proposes ments were recommended, meluding an adjustment for a change to the accounting for income taxes. If the proposal " excess capacity by disallowing a common equity return on the were adopted, the Companies would be required to write portion deemed to be " excess.' Penn Power has filed excep-down their net deferred tax balances to reflect the new lower nons to the ALJ decision. A PPUC decision is expected m the income tax rates. Instead of increasing income due to this potential write down, the Companies would defer these amounts and include them as a reduction to cost of service in future rate proceedings. i I I l l l 1-20 l

Selected Financial Data onto toison 1988 1985 1984 1983 1982 (In shousands except per share amounts) Oprat:ng Revenues 31,741,900 $1.754.749 $1.637.104 $1.515.852 51.429.626 Operating income 392,357 380.354 342.713 302.751 269.640 tr ome Before Extraordinary items 410,828 370.685 339.333 272.400 195.571 Net irtcorne 410,828 370.685 339.333 272.400 215.729 Eaminge on Common Stock 359,825 318.073 290.694 227,843 181.4 % Earnirtgs per Share of Common Stock (bcW on weighted average number of s,. ares outstanding curing the year) Before Extraordinary items 2.47 2.45 2.50 2.22 1.89 Eamings on Cernnion Stock 2.47 2.45 2.50 2.22 2.13 Dividends Declared per Share d Common Stock 1 92 1.88 1.84 1.80 1.76 Btal Assets at December 31 7,902,704 7.290.417 6.690.098 5,960.374 5.247.138 Preferred and Preference Stock Subject to Mandatory Redemption 18_0,794 176.694 158.483 158.112 152.560 trigTorm Debt 2,781,590 2.691.615 2.449.502 2.132.137 2.005.436 imtghrm Obiqanons 859,900 739.291 822,234 759.843 656.655 Common Stock Data The Company's Common Stock is listed on the New York and M dwest Stock Exchanges and is traded on other registered exchanges. Price Ran9e of Common Stock 1988 1985 Fi.'s Quarter Hgh-Low 19-7/8 15 718 14 7/8 13-1/8 Second Quarter Hgh-Low 2 0-314 17 15 5/8 14 Third Quarter High-Low 22 112 18 16-1/8 14-3/8 Fourth Ouarter Hgh-Low 21 19 118 16-1/2 14-1/2 Yearly Hah-Lcw 22 112 1 5-718 16-1/2 13-1/8 Prces are based on reports puttshed in The Wa# Street Joumal for New Wk Stock Exhange Composite Transactons Classification of Holders of Common Stock as of December 31,1986 Holdersof Record Shares Held Number Number Individuals 179,548 88.72 55.322.214 36 93 Fiducianes 19.305 9.54 4.419.299 2.95 Brokers 78 0.04 566.775 0.38 Nominees 288 0.14 86.675,609 57.85 Banhs & Financiallostitutions 22 0.01 31.814 0 02 Insurance Companies & Other Corporations 1.440 0.71 1.634.904 1.09 Chardable, Religious & Educational Insbtutions 426 0 21 238,209 0.16 Pensians. Profit Shanng & Other investment Trusts 1.272 0 63 925.927 0.62 Total 202.379 100.00 149.814.751 100 00 As of January 31,1987, there were 201.421 holders Quarterly dividends of 48C and 47c per share were paid on the of 150,313.399 shares of the Company's Common Stock. Company's Common Stock dunng 1986 and 1985, respectiveit Informat on regarding retained earnings available for payment of cash dividends is given in Note 4t1 21

ConsoHdated Statements ef Income onto eaison For the Years Ended Decernber 31 1946 1985 1984 (In thousands, except per share amounts) Operating Itevenues C1,741,900 $1,754,749 $1.637,104 Operating Espenses and Tkness Op3 ration-Fuel 422,830 499,159 422.605 Purchased and interchanged power, net 39,388 30.802 55 559 Other operation expenses 275,984 271,142 267,288 Total operation 738,202 801,103 746,752 s Maintenance 137,542 129,295 129,313 Provision for deprec:ation and amortization 153,392 143,377 131,340 General taxes 143,441 136,206 136,880 Income taxes 176,966 164,414 150,106 Total operating expenses and taxes 1,349,543 1,374,395 1,294,391 Operating income 392,357 380,354 342,713 Other laceme and Deductions 2 Allowance for equity funds used dunno construction 208,360 176.471 152,567 Misce'laneous, net 18,666 27,458 28,928 locome taxes-cred;t 89,371 85.365 82,383 Total other income and deductions 316,397 289.294 263,878 Tbtalincome 708,754 669,648 606,591 Net Interest and Other Chargest Interest on long-term debt 327,970 321,017 267,391 Interest on long-term obligations 65,756 74.207 89,780 Allowance for borrowed funds used dunng construction, net of deterred income taxes (112,449) (111.240) (104,351) Giher interest expense 5,438 4,962 5.4 73 Subsid,ary's preferred stock dividend requirements 11,211 10.017 8,965 Net interest and other charges 297,926 298,963 267,258 Net income 410,828 370,685 339,333 Preferred and Preference Stock Dividend Ite<,virements 51,003 52,612 48,639 Earnings on Common Stock 8 359,825 $ 318,073 $ 290,694 luelghted Average Number of Shares of Common Stock Outstanding 145,527 129,926 116,171 Earnings per Share of Common Stock (based on weighted average number of shares outstancing during the year) 82.47 $2.45 $2.50 Dividends Declared per Share of Common Stock $1.92 $1.88 $1.84 The accomparyrng Notes to Conschdated Fmanc alStatements are an mtegralpart of these statements 22

Consondated Balanca Sheets omo toison At December 31 1986 1985 Assets on tremands; ,,9,,,,,,,,, In servce, at onginal cost $4,370,135 $4.248,800 Less-Accumulated provision for depreciation 1,401,520 1,279,373 2,968,615 2,969.427 Construction work in progress-Elecinc plant (Note 7) 3,941,558 3,349,998 Nuclear fuel 305,929 289,771 4,247,487 3.639.769 7,216,102 6.609.196 Other Property and investments 9,234 41,104 Current Assets: Cash 1,652 2,051 Temporary cash investments, at cost, which approximates market value 146,774 126.382 Receivables-Customers (less accumulated provisions of $2.750.000 and $1,319,000, respectively, for uncollectible accounts) 142,304 147,875 Gher 30,549 31,722 Materials and supplies, at average cost-Fuel SS,719 58,117 Other 50,826 45,953 Prepayments 80,681 50.635 501,305 462,735 Deferred Char 9es: Deferred fuel costs (Note 7) 4,357 12,741 Property taxes 58,384 56,064 Unamortized costs of terminated construction projects (Note 2) 63,193 73,783 Gher 50,129 34,794 176,063 177,382 S7,902,704 $7,290.417 CapitsNsation and LiabiNtles CapitaNsateen (See Consolidated Statements of Capitahzation): Common stockholders' equity $2,541,712 $2.234,156 Preferred stock-Not subject to man 1atory redemption 363,662 376,035 Subject to mandatory redemption SS,000 72,000 Pref:rence stock-Not subjed to mandatory redemption 50,000 50.000 Subject to mandatory redemption 23,432 34,032 Preferred stock of consolidated subsidiary-Not subject to mandatory redemption 41,905 41,905 Subject to mandatory redemptico 69,362 70.662 Long-term debt 2,781,590 2,691,615 5,939,843 5,570,405 Len916tm ObN9etions: Construction energy trust (Note 5) 500,000 400,000 Nuclear fuel (Note 5) 259,896 284,740 Capitalleases (Note 3) 100,204 54,551 859,900 /39.291 Current Llahnftles: Currently payable preferred and preference stock, long-term detA and long-term obhgations 154,310 157,543 Not:s payable to banks (Note 6) Accounts payable 154,221 147,212 ' Accrued taxes 66,798 55,590 Accrued interest 96,013 94,627 Cher 56,300 48,137 531,842 503,109 Deferred Credits: Accumulated deferred income taxes 239,805 181,247 Accumulated deferred investment tax cred:ts 234,105 201,345 Property taxes 58,384 56.064 Fuel costs recovered in advance 19,000 24.618 Gher 20,145 14.338 571,499 477,612 Comundtneonts, Guarantees and Contin 9encies (Notes 3 and 7) 87,902,704 $7.290,417 The cccompanysng Notes to Conschdated Financial Sta'ements am an untegralpart of these ba'ance sheets

Consolidated Statements of Capitalization miosaism s At December 31 1984 1985 Common StechheNere'Squetys on ms) Common stock. $9 par value. authonzed175.000.000 shares-149.814.751 and 137.089.271 Shares outstanong. reg ectwety (Nae 4a) 81,348,333 $1.233.804 Other paid in capital 722,1 SS 609.117 Retained earrungs(Note 4b) 471,223 391.235 Total common stockholders' equity 2,541,712 2.234.156 Optonal Redemption Pnce Nember of Shares Outstanding g,ga 1986 1985 Per Share (In thousands) Preferred Stoefr (Note 4c)-. Cumulatwe, $100 par value-Authonzed 6.000.000 shares Not Subsect to Mandatory Redempton. 390%-724% 973.350 973.350 $103 38-108 00 $102 034 97,338 97.335 7.36 % -8 20 % 800.000 800.000 $104 68-105.35 84.046 80,000 80.000 864%-912% 850.000 850,000 $104 32-106 84 89.806 85,000 85.000 Total not subiect to mandatory redempton 2 623.350 2.623.350 $275,886 262,335 262.335 Sut lect to Mandatory Redempt on (Note 4d)' 'dd8%-13 50% 717.290 737.970 $10524-112 00 $ 76.875 71,729 73,797 Rwsoption within one year (3,729) (1.797) L*d subpect to mandatory redempton 60,000 72.000 Cumulatne, $25 par value-Authorized 8.000.000 shares Not Subsect to Mandatory Redempton: $3.50 Senes 2.000.000 2.000.000 $28 75 5 57.500 50,000 50.000 Seres A 53.100 548.000 $25 00 1.327 1,327 13.700 ( Seres B 2.000.000 2.000.000 $25 75 51.500 50,000 50.000 hal not sub,ect to manoatory redempton 4 053 100 4 548 000 $110.327 101,327 113.700 Werence Stock (Note 4c): Cumulatwe, no par value-Auttezed 8400.000 shares ' Not Subject to Mandatory Peder4on $392 Senes 2.000 000 2 000.000 $3142 $ 62.840 50,000 50.000 Subsect to Mandatory Redemption (Nue de) $9500-$10250 Seres 20.700 23 400 $1.044 OG 1,070 00 $ 22.009 20,700 23/00 $180 Seres 459.110 981,@ $15.58 7.151 6,945 14.845 Rederecten within one year (4,7.13) (4 213; s s lotal subject to mandatory redempton 479 816 1.0 % 891 $ 29.160 23,432 34.032 Froferred Stee% of Conso# dated Su6sMiery (Note 4c): Cumulatwe $100 par value-Auttonzed1.200,000 shares Nd SWoct to Pandatory Redempton: 4 24W 316% 419 049 419 049 $102 98-105 20 . $ 43 654 4t908 41.905 Sub ect to Mandatory Redemption (Note 4d): i 8 24 % -1500 % 706 591 714.528 $103 29-114 23 $ 76 536 70,889 71 A53 Redempto1 werun one War (1,297) (791) g-Total subject to mandatory redempton 49,362 70._6_6_2 Lon y-bre Debt (Note 49 1 Fast mortgage bonds. Ohio Ed son Company-7 55% weighted average necert rate, due 1987-1991 117.116 198.766 13 21% weghted average nterest rate. due 1992-19% S26,215 380.215 9 47% weighted average interest rate, due 1997-?001 186,583 166.583 8 51% weighted average irmerest rate. due 2002-2006 201,913 201.918 10 99% weghted average mter est rate, due 2007-2011 318,245 318.265 10 39% weightert average interest rate. due 2012-20 *6 142,500 50.000 1,4 F2.597 1.31 f,.74 7 Pennsylvarua Power Conyany-10 25% wegirv d average irterest rate, due 1987-2008 229,244 251.622 e Total first mortgage br nds Secured notes and obligatons 1,701,841 1,567.369 Oho Edison Company-993% werghted aerage interest rate due1987-20f3 656,071 6;3.125 Amourt held by Trustee (66,519) SSS,071 546 606 Oho EdrtrqFinance NV-1725% weghted average etterest rate. due 1987 75,060 150 000 Pennsytvam Powe Company-100?% weighted average irterest rate, due 1998-2015 134,411 134.411 Amourt tyd by Twee _ ' (2,224) (3.592) 132,187 130 819 I Total secured rotes and obiqatons 883,258 827.425 t 3 ~ Unsecured noies of Orvo Edison Company,1059% weegNed average arterest rate, due 1987-2014 385,200 376A00 f mourt held by Tiraee, (26,901) (48,755) Total unsecuiers notes of Ord $ son Company 338,299 327.245 Wet unamortized occogronytt (20,623) (20 343) Long-term oect due w@n or pear (101 185) (10.081) 3 Total ong wm dett 2,781,590 2 691 615 head Capheusstjen $5,936,483 $5 570 405 The accompany *ng Noles to Consokdated Francal Statementm an vregralpart o,' t%se stamments. i i s 14 j

Consolidated Statements of Retained Earnings onio toison For tra Years Ended December 31 1986 1985 1984 (In thousands) Balance at beginn ng or year $391,235 $317,631 $241,314 Nd income 410,828 370,685 339,333 802,063 688.316 S80,647 Cash dividends on preferred and preference stock 50,693 52,573 49.100 Crsh dividends on common stock 280,147 244,508 213.916 330,840 297,081 263,016 Balance at end of year $471,223 $391,235 $317,631 Consolidated Statements of Capital Stock and Other Paid in Capital Preferrad and Preference Stock Not SubgK t to Subject to Common Stock Mandatory Redempeon Mandatory Redempton Number Par Other Paid-Number Par or Number Par or of Shares Value in CaDital of Shares Stated Value of Shares Stated Value (Dollars in thousands) Balance, January 1,1984 108,460,054 $ 976,140 $494.520 7,042,399 $404,240 2,744,254 $161,012 Sale of Common Stock 3,673,400 33,061 13,599 Dividend Reinvedment Plan 10,067,07' 90,604 23,333 Employee Stock Ownership Plan 2,661 24 12 Cap:tal Stock Expense (2,548) Sale of Senes A Class A Preferred Stock 2,050,000 51,250 Sale of 13.00% Preferred Stock 100,000 10,000 Conversions and Redemptions- $1B0 Senes 33,450 301 187 (33,450) (50E) $102.50 Senes (900) (900) a24% Senes (5,000) (500) 10.48% Series 252 (18,190) (1,819) 10.76% Senes 218 (20,000) (2,000) 11.00% Senes 23 (4,092) (409) Balance, December 31,1984 122,236,636 1,100,130 529,596 9,092,399 455,490 2,762,622 164,878 Sale of Common Stock 6,076,659 54.690 37,846 Dividend Reinvestment Plan 5,102,413 45,922 31,098 Cap!!at Stock Expense (2,427) Sale of Series B Class A Preferred Stock 2,000,000 50,000 Sale of 1350% Preferred Stock 200,000 20,000 Sale of 11.50% Preferred Stock 150,000 15,000 Conversions and Redemptions-Series A Class A 3,124,160 28,117 9,433 (1,502,000) (37,550) $1.80 Senes 549,403 4.945 3.080 (607,605) (9,190) $95.00 Series (1,800) (1,800) $102.50 Series (900) (900) 8.24% Senes (5,000) (500) 10.48% Series 259 (18,840) (1,884) 10.76% Series 221 (20,000) (2,000) 11.00% Series 11 (1,088) (109) Balance, December 31,1985 137,089.271 1,233.804 609,117 9,590,399 46!,340 2,457.389 183,495 Sale of Commm Stock 7,665,704 68,991 71,074 Dividend Reir.vastment Plan 3.528.014 31,752 37,091 Castal Stock Expense (1,099) Conversions and Redemptions-Series A Class A 1,029,392 9.265 3.108 (494,900) (12,373) $1.80 Series 502,370 4.525 2.853 (522,381) (7,900) $ 95.00 Series (1,800) (1,800) $102.50 Senes (900) (900) 8.24% Senes (5,000) (500) 10 48% Series (17,970) (1,797) 10.76% Senes 11 (2,710) (271) 11.00% Senes 1 (2,937) (294) Balance. Decembe 31,1986 149.814.751 $1,348.333 $722.156 9.095.499 $455.567 1,903.691 $170.033 The accompanyeng Not=s to Conscn, dated Fmanaal Statements are an otegralpart of these statements. 15

ConsoNdated Statements of Cash Now ontoeoisom l For the Years Ended December 31 1986 1985 1984 lIn thousands) % Acqgygggeog l Net incoine S410,828 $370,685 $339,333 Poncipal noncash items-Depreciation and amortzaton 180,337 174,107 142,260 Deferred income taxes 145,183 97,287 113,551 Investment tax credas, net 32,764 55,936 38,026 Provision for revenue refund 7,206 Allowance for equity funds used dunng construction (200,360) (176,471) (152,567) Deferred fuel costs, not 2,826 41,325 4,471 Deferred loss on reacquired debt (13,327) Miscellaneous 6,093 9,550 552 Net cash provided from operations 563,550 572,419 485.626 DMdend Perments: Common stock 280,147 244,508 213,916 Preferred and preference stock 50,693 52,573 43,100 Totalcash used for dividends 330,840 297,081 263,016 Mnancing Activities: Common stock issued 228,855 215,131 161,121 Less: Noncash conversions 19,747 45,575 488 Coramon stock cash proceeds 208,908 169,556 160,633 85,000 61,250 Preferred stock Long-term debt 314,344 212,915 238,000 Long term obligations 51,235 69,124 82,329 NQ change in funds held in escrow 89,995 123.458 131,653 Miscellaneous S15 (2,120) (2,029) 665,297 657,933 671,836 Ncacash obligations incurred (51,235) (69,124) (82,329) Total cash from new financing 614,062 588,809 589,507 Repayments-Preferred and preference stock 25,835 53,933 6,134 Less: Noncash conversions 20,273 46,108 506 Preferred and preference cash repayments 5,542 7,325 5.628 Long-term debt 212,581 107,590 76,868 Long-term obhgations 25,443 29,602 15.294 Total cash used for repayments 243,566 145,017 97,790 Net cash provided from financing activities 370,476 443,792 491,717 investing ActMties: Property additions 776,198 826,994 868,099 Principai noncash items-Allowance for equity funds used during construction (208,360) (176,471) (152,567) Deferred income taxes on allowance for borrowed funds used dunng construction exclucting nuclear fuel 87,658 86.310 77,870 Capitalized leases (53,050) (59,939) (67,697) Change in accounts payable (1,425) 34,710 (20,482) Long-term investments (19,500) Miscellaneous 1,672 170 3,801 Net cash used for investing activities 583,193 711,774 709.024 Net ircrease in cash and temporary investments S 19,993 $ 7,356 $ 5.303 The C::companynng Notes to Consolniated Fmanal Statements are an mtegralpart of these statements 26 J

ConsoNdated Statements ofikx:o onia eoiso.v for tha Years Ended December 31 1988 1985 1984 Generalihmest (Inth usands) Stats gross receipts S 74,253 $ 71,369 $ 71,044 Real and personal property 50,006 47,415 48,717 Social secunty and unernployment 13,778 12.545 12,649 Miscellaneous 5,408 4,877 4,470 Total general taxes $143,441 $136.206 $136,880 Prowisson forineonee Thuest Currently payable-Federal 8 5,589 $ 19,546 $ 5,778 Stata 2,841 4,382 2,616 Foreign SS 214 254 S,495 24,142 8,648 Deferred, net (see below)- Federal 145,695 93.585 108,154 State (512) 3,702 5,397 145,183 97.287 113,551 investment tax credits, net of amortization 32,784 55,936 38,026 Total provision for income taxes S188,442 $177,365 $160,225 laconee Stateneent ClassINeetion of Prowfsfon forincome Thues: Operating expenses $176,948 $164,414 $150,106 Other income (89,371) (85,365) (82.383) Aftowance for borrowed funds used during construction 98,847 98.316 92,502 Total provision for income taxes $188,442 $177,365 $160,225 Sources of Deferred Thu Expense: Allowance for borrowed funds used during construction, which is credited to plant S 98,847 $ 98,316 $ 92,502 Excess of tax over book depreciation, net SS,092 29,814 25.045 Deferred fuel costs, net (1,849) (19,055)- (1,805) Deferred interest on leased nuclear fuel, net (11.545) (5,488) (5,824) Other, net (6,562) (6.300) 3,633 Net deferred tax expense S145,153 $ 97.287 $113,551 ReconcEation of Federalincome Tha Expense at Statutory note to TbtelProvision for inconee Thzes: Book income before provision for income taxes $597,270 $548,050 $499,558 Federal income tax expense at statutory rate $274,744 $252,103 $229,797 increases (reductions) in taxes rE,sulting from-Allowance for equity funds used dunng construction, which does not constitute taxable income (95,844) (81.177) (70,181) Emess of book over tax depreciation 19,317 14.534 10,163 O(her, net (11,773) (8,095) (9.554) Total provision for income taxes $184,442 $177,365 $160,225 i i The axompanyrng Notes to Consohdated Fmancial Staternents are an mtegralpart of these statements 27

Note 3 to Consondated Nnancial Statements l 1-summary of SignMcant Accounting PoNcles: The Companies provide for depreciation on a straight-line The consolidated financial statements include Ohio Edison basis at various rates over the estimated lives of property in-Company (Company) and its w holly owned subsidiaries, cluded in plant in service. The annual composite rates for Pennsyhania Ibwer Company (Penn Ibwer) and Ohio Fdison electric plant were 3.6% in 1986, and 3.5% in 1985 and 1984. Finance N.V. All significant intercompany transactions have The Companies recognize as depreciation expense the been climinated. The Company and Penn Power (Companies) estimated decommissioning costs being recovered from their follow the accounting policies and practices prescribed by the customers applicable to their only nuclear generating unit Public Utilities Commission of Ohio (PUCO), the Pennsyh ania in service. Public Utility Commission (PPUC) and the Federal Energy Common Ownership of Generating Facilities-Regulatory Commiss. ion (FERC). ,l'he C,ompanies and other C,entral Area Ibwer Coord.mation Revenues-Group (CAPCO) companies own, as tenants in common, The Companies' retail customers are metered on a cycle various power generating facilities. Each of the companies is basis. Revenue is recognized for electric service based on obligated to pay a share of the construction costs of anyjointly meters read through the end of the month. owned facility in the same proportion as its ownership interest. The Companies' portions of operating expenses associated with these Jomtly owned facihues are included in the corre- .Ihe Company recovers fuel-related costs from.its retail cus-sponding operating expenses on the Consolidated Statements tomers through an electnc fuel component (EFC). The EFC of Income. The amounts reflected on the Consolidated llalance is an estimated fixed rate per kilowatt-hour me!uded on custm Sheet under utility plant at December 31,1986, include the mer bills for a six-month period and is based upon fuel-following: related costs for the preceding six-month period. Any over or under collection resulting from the operation of the EFC is Accumulated Constructen Canpanies included as an adjustment to the EFC rate in a subsequent $N $%rE proa$ss ra inNt ^ c,eneratm unas six-month period. Accordingly, the Company defers the dif-gn, nous,ngs, ference between actual fuel-rela.ed costs incurred and the W. H Sammis #7 $ 231.400 $ 46,700 S 1,000 68 80 % Bruce Mansf' eld amounts currently recovered fmm its customers.

1. 1, #2 and #3 708.800 184.000 1.100 50 68 %

Beae Valley #1 (a) 634.200 169.700 33.000 52.50 % Penn Power recovers fuel costs from its retail customers Beaver Valley #2 through an annual 'levelized' energy cost rate (ECR). The (Note 5) 1.598.600 41.88 % Per #1 and ECR, which includes adjustment for any over or under col-lection from customers, is recalculated each year. Accordingly, Facaties 1.817.000 35 24 % Perry #2 399.300 35 24 % Penn Ibwer defers the difference between actual energy costs Total 51.574.400 1400 400 53.850.000 y and the amounts currently recovered from its customers. li) Excludes nuclear fuenn process whnc't has not yet been assigned to a specific Reference,s made to N,ote 7 w. h respect to Penn Power,s i it nuclear une accounting for the cost of coal received from Quarto Mining M '"c'ud" c""* " cd**S *oo'c ** ' 8e'' "3#eY " Company (Quarto). Nuclear Fuel-Utility Plant and Depreciation-The Companies amortize the cost of nuclear fuel based on Utility plant reflects the original cost of construction, includ. the rate of consumption. The Companies' electric rates include ing payroll and related costs such as taxes, pensions and other amounts for the future disposal of spent nuclear fuel based fringe benefits, administrative and ceneral costs and allowance upon the formula used to compute payments to the United for funds used during construction (see AFUDC). States Department of Energy. Allowance for Fur'ds Used During Construction (AFUDC)- AFUDC represents the net financing costs capitalized to construction work in progress during the construction period. AFUDC is not capitalized on that portion of any construction 28

project included in rate base. The borrowed funds portion $81,000,000 of unused I'lC was available to offset federal reflects capitalized interest payments and the equity funds income taxes payable for 1987. If the l'IC is not utilized for portion represents the noncash capitalization of imputed 1987, the amount available to offset federal income taxes equity costs u hich are charged to construction. During 1984 payable for years after 1987 would be reduced to $64,000,000 the Company also charged AFUDC to certain projects uhich and would expire at the end of 2001. were completed but not yet included in rate base, in accord-g ance with a PUCO order. AFUDC varies according to changes The Compam.es trusteed, noncontributory defined benefit m the level of construction work in progress and.in the cost P'"'I " P '"S * **' *I* ** II I"II-".** **P Y**S' UP" I I of capital. The Companies compute AFUDC utilizing a net reumment, employees receive a monthly pension based on of tax rate, which is consistent with the rate treatment. The length of service and compensation. Pnor to July 1,1985, the AFUDC rate related to assets financed only through the Companies funded pension costs accrued using the frozen incurrence of long-term obh.ganons (see Note 5) is based on imual liabih.ty actuanal funding method. Effecu.veJuly 1,1985, actual interest accrued on the obligations dun.ng the period. the Compam.es changed to the projected unit cred.it method The annual rates used by the Company and Penn Power for for funding purposes and have not been required to make all other construction projects approximated 11% and 9.5%, pension contributions since June 30,1985. Contributions of respectively, during the three years ended December 31,1986. $10,300,000 were made during the first six months of 1983. Income Taxes-Pension costs in 1985 were reduced by approximately Details of the total provision for income taxes are shown on $6,500,000 due primarily to a change from 7.0% to 8.5% in the Consolidated Statements of'laxes. The deferred income the assumed average annual earnings rate of plan assets and taxes remit from timing differences in the recognition of other assumptions. revenues and expenses for tax and accounting purposes. ,Fhe Companies adopted the provisions of Statement of The Companies allocate the income tax benefit which results Financial Accounting Standards No. 87,

• Employers' Accounting from interest expense related to construction work in progress for Pensions,' as of January 1,1986. As a result, reponed net to income taxes-credit included under other income and income for 1986 was approximately $7,800,000 ($.05 per deductions on the Consolidated Statements of Income.

share of common stock) higher than it would have been For income tax purposes, the Companies claim liberalized under the previous accounting standard. depreciation and, consistent with the rate treatment, generally The following sets forth the funded status of the plans and provide deferred income taxes. The Companies expect that amounts recognized on the Consolidated Balance Sheet at deferred taxes uhich have not been provided will be collected December 31,1986: 4 from their customers when the taxes become payable, based upon the established rate making practices of the PUCO, the manai pesent me a oenem agaons: PPUC and the FERC. As of December 31,1986, the cumu-Vested benetts $252.616.000 Nonvesed benems 18 278 2 lative net income tax timing differences for which deferred nused beneM mgam 527as m income taxes have not been provided were approximately % nai gesent due a m ieced benemgam $356S83m $600'000'000* Plan assets at fa r value 496.464.000 Proceeds from the sales of certain tax benefits in accordance Plan assets in ens d propcted beeM mga on 139.481.000 Unrecognized net gain (26.284.000) 3 with provisions of the E.conomic Recovery,Iax Act of 1981 Unrecognized pnor sennce cost 294.000 are being amortized over the life of the related property. unrecognized net transmon asset (113.333.000) Proceeds attributable to investment tax credits were recorded Net penson assd 5 158.000 as additional deferred investment tax credits; the remaining amounts were recorded as reductions to utility plant in service. The Companies defer imestment tax credits (l'IC) utilized and amortize these credits to income over the estimated life of the related property. The Tax Reform Act of 1986 repeated the l'IC effecthe Januaiy 1,1986, except for certain transi-tion property. As of December 31,1986, approximately 29 m.

Noems kuwd) The assets of the plans consist primarily of common stocks, 2-1beminated construction n O2 United States gewernment bonds and corporate bonds. Net in January 1980, the Companies and all other CAPCO com-pension cost for 1986 was computed as follows: panies terminated plans to construct four nuclear generating units. Costs (including settlement of all asserted claims result-s2rvice cost-t,enetts earneo dunna tne penoa s13.210.000 ing from termination) unrecovered by the Company and Penn trearest on projeced bene 6t obkganon 28.371,000 Power as of December 31,1986, applicable to these units Raturn on plan assets (74.424.000) Caferred return on plan assets 35.666.000 amounted to approximately $51,604,000 and $11.589,000, Amortzaronof transmonasset (7.623,000) respectively. The Company is recovering these costs from its

• Pe"S*n cost S (4EN) PUCO jurisdictional customers through an increment to the The assumed discount rate and rate of increase in future allowed rate of return in rate cases and Ibnn I ower (and the compensation lemls used in determining the actuarial present Company with respect to its FERC jurisdictional customers) value of the projected benefit obligation were 9% and 7%,

is recovering these costs as an operating expense allowance. respectively. The assumed expected long-term rate of return There is presently an appeal by the Office of Consumer on plan assets was 9%. Advocate before the Pennsyhania State Supreme Court re-garding i enn Power's recovery of the costs of terminated Under the previous pension accounting standard, the projects through rates from PPUC jurisdictional customers. Companies' pension costs were $14,986,000 and $20,483,000 Although management cannot predict the outcome of this in 1985 and 1984, respectively. Of those amounts, $9,829,000 appeal, it believes the PPUC order permitting recovery of and $14,369,000, respectively, were charged to cperating such costs is lawful and should be allowed to stand. The expenses; the balances were charged primarily to constru" remaining periods of reemery for the Company and Penn tion. Such costs included the amortization of unfunded past Ibwer are approximately 6 and 7 years, respectively. Neither service costs on an actuarial basis over 30 years. The actuarial company is earning a return on the unamortized investment. present value of accumulated plan benefits at June 30,1985, Reference is made to Note 7 with respect to Statement of based on an 8% assumed rate of return, totaled $232,364,000, Financial Accounting Standards No. 90 (SFAS No. 90) in of which $209,898,000 and $22,466,000 represented vested connection with terminated construction projects excluded and nomested benefits, respectively; plan net assets available from rate base. for benefits at June 30,1985 were $407,476,000. The Companies provide a minimum amaunt of non. 3 4 eeses contributory life insurance to retired emploges in addition to The Companies lease a portion of their nuclear fuel require-optional contributory insurance features. Health care benefits, ments, certain transmission facilities, computer equipment, which include certain employee deductibles and copayments, office space and other property and equipment under cancel-are also available to retired employees, their dependents and, able and noncancelable leases. Consistent with the regulatory under certain circumstances, to their survivors. The Companies treatment, the rental payments for capital and operating pay insurance premiums to cover a portion of these benefits leases are charged to operating expenses on the Consolidated in excess of set limits; all amounts up to the limits are paid by Statements of Income. Such costs for the three years ended the Companies. Expenses associated with health care and life December 31,1986, are summarized as follows: insurance benefits for retirees amounted to $3,128,000, 1986 1985 1984 $3,785,000 and $3,597,000 in 1986,1985 and 1984, re,

1. N#

spectively, and are charged to income during the applicable interest on captahzed ieases s 7,188 s $13.524 payment periods. Amortzation of captalleases 14.687 12.704 15.283 All other leases 10.363 10.764 12.120 Total rental payments $32.238 533.377 540.927 Certain leases entered into prior to January 1,1983, which would be reflected as capital leases on the Consolidated llalance Sheets, have not yet been capitalized as permitted by Statement of Financial Accounting Standards No. 71. If they had been capitalized, total assets and liabilities would have increased by $23,639,000 and $35,554,000 at December 31, 1986 and 1985, respectively. 30

'Ihe future minimum rental commitments as of December 31, noted. Redemption of all preferred and preference stock issued 1986, for leases reported as capital leases and noncancelable within the past five years is subject to certain restrictions operating leases are: regarding refunding. The optional redemption prices shown on the Consolidated Statements of Capitalization will decline c one no to eventual minimums per share according to the Charter E 1987 $ 21.777.000 $ 7.612.000 Nhb 6j$$ The Convertible Adjustable Series A Preferred Stock is con-1990 18.030.000 6.465.000 vertible into the Companfs common stock only during a $M9 jdQ000 ,y* specified period each quarter and, based upon market price 7 ggo at the time of conversion, is converted to not more than 6.15 Totd rninstnurn lease payrnents $198.566.000 $128.017.000 Exx:utory costs 23.664.000 shares nor less than 2.08 shares of common stock for each Net rnarnurn lease payrnerts 174.902.000 share of preferred stock surrendered for conversion. The I"'*S' Prton 57.941M Company may, at its option, elect to purchase for cash, in P esert value of net rnnrnum lease $116.961.000 lieu of delivery of common stock, any Convertible Adjust-able Series A Preferred Stock surrendered for conversion, subject to certain limitations. 4-capitsNastion: (:) Common Stock-(d) Preferred Stock Subject to hiandatory Redemption-Through the Dividend Reinvestment and Stock Purchase Annual sinking fund provisions for the Companies' preferred Plan, holders of common, preferred and preference stock stock, which are retired at $100 per share plus accmed divi-can acquire additional shares of the Companfs common dends, are as follon: stock by automatically reimesting all or a portion of their dividends and by making optional cash payments. Purchases seies snares care Beginnin0 are made at a price equal to 100% of the average closing Ohio Edison-10.48 % 20.000 Decernber 1 (i) price for the Companis common stock for each of the five 10.76 % 20.000 January 1 (i) New York Stock Exchange trading days ending on the in-13 50 % 40.000 June 1 1991 Penn Power-vestment date. At December 31,1986, the Company had 5,195,721 shares of common stock reserved for issuance 11.00 % 4.000 January 1 (i) . under this plan, 1,584,300 shares reserved for issuance Q 3$ % $8, under a continuous shelf registration program,459,110 13 00 % 5.000 July 1 1990 shares reserved for possible conversion of the $1.80 Pref-1Q ,g g se 30 ber1 e crence Stock,846,448 shares reserved for possible conver-(,,g,,,,,,,n,,,,,,,,,,,,,,,,,,,,,gu,. sion of the Convertible Adjustable Series A Preferred Stock and 497,276 shares reserved for issuance through the The sinking fund requirements for the next five years are: payroll-based employee stock ownership plan. 1987 55.026.000 (b) Retelned Earnings-h h Under the Companis indenture, the Company's consolidated 1990 7.220.000 e 14.220m retained earnings unrestricted for payment of cash dividends on the Companfs common stock were $399,176,000 at December 31,1986. (c) Preferred and Preference Stock-At the Companies' option, all preferred and preference stock may be redeemed in whole, or in part, at any time upon not less than 30 nor more than 60 days notice, unless otherwise 31

Notes Wwmd) (:) Preference Stock Subject to Mandatory Redemption-The weighted average interest rates shown on the Consoli-The $102.50 Series and $95.00 Series each include provi-dated Statements of Capitalization relate to long-term debt sions for a mandatory sinking fund to retire a minimum of outstanding at December 31,1986. 900 and 1,800 shares, respectively, on July 1 in each year at "Ibtal secured and unsecured notes outstanding at December $1,000 per share plus accrued dividends. 'lhe $1.80 Series 31,1986 and 1985, exclude $29,125,000 and $1_8,866,000, meludes a provision for a mandatory s.nkmg fund to reure a respectively, of certain pollution control notes, the proceeds minimum of 100,000 shares on October i m each year at of w hich were then in escrow pending their disbursement $15.125 per share plus accrued dividends. The annual sink-for construction of pollution control facilities. The Companies' mg fund requirements are $4,213,00') for 1987 through obligations to repay certain pollution control revenue bonds 1989 and $2,413,000 for 1990 and 1991. are secured by several series of first mortgage bonds. A por-The $1.80 Series is convertible at any time into common tion of the unsecured notes outstanding are entitled to the stock at a price of $15.125 per share. Holders receive one benefit of irrevocable bank letters of credit of $213,885,000. share of common stock for each share of $1.80 Preference 'Ib the extent that drawings are made under those letters of Stock converted, subject to adjustment under certain credit to pay principal of, or interest on, the pollution con-conditions. trol revenue bonds, the Company is entitled to a credit on en e n pany p ys an an a ee of 5/8% to 7/8% (lMong-Term Debt-of the amounts of the letters of credit to the issumg banks ,the mortgages and the.ir supplements, which secure all of and is obligated to reimburse the banks for any drawings the Compames first mortgage bonds, serve as direct first thereunder. mortgage liens on substanually all property and franchises, other than specifically excepted property, owned by the 5-Long.Them ObNgations: Companies. Ohio Edison Energy kust(OEET)- llased on the amount of bonds authenticated by the Trustees OElsl', which finances part of the Company's irwestment in through December 31,1986, the Companies' annual sinking Beaver Valley Unit 2, has $500,000,000 of term loans out-and improvement fund requirements for all bonds issued standing. The Company has transferred its interest in Beaver under the mortgages amount to $31,131,000. The Company Valley Unit 2 (exclusive of common facilities and transmission expects to deposit funds in 1987 which will be withdrawn facilities) to OElsl', where the assets are used to secure OElsr upon the surrender for cancellation of a like principal amount borrowings. Under recently negotiated amendments, this of bonds, which are specifically authenticated for such pur-arrangement has been extended to the earlier of December poses against unfunded property additions or against pre-31,1988 or the in-service date of Beaver Valley Unit 2, with viously retired bonds. This method can result in minor in-amortization of the notes beginning in 1989. The Company creases in the amount of the annual sinking fund require-presently anticipates payments of $120,000,000 in 1989, ments. Penn Power expects to satisfy its requirements in $140,000,000 in 1990 and $80,000,000 in 1991. 1987 by certifying unfunded property additions at 166-2/3% The Company accrues interest applicable to OElsi' u hich is of the required amount. subsequently capitalized, net of income tax effect. The As of December 31,1986, the Companies' sinking fund effective average annual interest rates on OElsr borrowings requirements for certain series of first mortgage bonds and were 8.4%,9.8%, and 11.8% during 1986,1985 and 1984, maturing long-term debt for the next five years are: respectively. Nuclear FuelFinancing-sQasa Ohio Edison Fuel Corporation and Pennsylvania Power Fuel 1989 74,695.000 Corporation (corporations in which the Companies have no j990 1j9]'* ownership interest) provide funds for the procurement of 99 nuclear fuel on behalf of the Companies. The Companies also participate in arrangements wherein the Central Area Energy 'Irust (cal?I') finances the acquisition of nuclear material that will ultimately be used to fuel various CAPCO 32

generating units. Under ordinary circumstances, the Com-its $30,000,000 credit line. All of the Companies' current panies make payments for the nuclear fuel as it is consumed. lines expire December 31,1987; however, all unused lines Financing on behalf of the Companies of up to $303,000,000 may be canceled by the banks. (of which $293,000,000 had been utilized as of December

• • • • • • E"

"#*"Y 31,1986) is currently available through the fuel corporations, n m mmu np up t 0,000,001 Intemst rates either through revolving credit arrangements or the issuance on borrowings under the agreement vary depending upon of commercial paper, which is supported by bank letters of '""*"' """ " A' "# O*" utstanding and, at the option of the C,'ompany, ma credit, or a combination of both. Financing of up to $137,000,000 (of which $85,000,000 had been utilized as "E " E *"" "E E ** '" # * '*" "' ' of December 31,1986) is available to CAEl' on behalf of m asurements. The Company must pay commitment fees the Companies, subject to certain limitations. of 1/2% on the average daily unused portion of the credit The Companies accrue interest applicable to the nuclear agreement. In certain circumstances, borrowings under the fuel obligations (for fuel u hich is not included in utility plant agreement are required to be secured by the Company's first in service) which is subsequently capitalized, net of income mortgage bonds. At the Company's option, all obligations tax effect. No direct borrowings have been or are expected outstanding at December 31,1987, may be converted into to be made against the lines of credit available to the fuel an amortizable three-year term loan. The Company has not corporations; the fuel corporations have issued and have out-made any borrowings under this agreement. standing commercial paper supported by the lines of credit. 'lo the extent that borrowings are less than the $303,000,000 7-Commitments, Guarantees and Contingencies: available under these credit lines, the fuel corporations must Construction Pregram-pay commitment fees of 1/8% to 1/2% on the available por-The Companies' current budget forecasts reflect expenditures tions of the lines of cre4. They also pay fees of 5/8% to of approximately $1,700,000,000 for property additions and t 7/8% for the letters of credit on the aggregate amount of improvements from 1987-1991, of which approximately outstanding commercial paper. Interest rates on CAEF pur- $626,000,000 is applicable to 1987. These amounts include chase commitments vary from 1-1/8% to 1-1/2% over the the capitalization of AFUDC during the construction period interest rate apg. cable to certain dealer placed commercial only. In addition, the Companies expect to invest approxi-paper. The effective average annual interest rates applicable mately $204,000,000 for nuclear fuel during the 1987-1991 to nuclear fuel obligations were 8.0%,9.5%, and 11.9% period, of uhich approximately $41,000,000 is applicable during 1986,1985 and 1984, respectively. to 1987. The Companies presently expect to make payments applic-Reference is made to Tommon Ownership of Generating able to these obligations during the next five years as follows: Facilities' included in Note I with respect to the Companies' investments in Ileaver Valley Unit 2 and Perry Units I and 2, all CAPCO nuclear units. Perry Unit 1 is currently under-1987 $31,130.000 1988 33,344.000 going testing and 13eaver Valley Unit 2 is about 98% com-plete; the status of Perry Unit 2 is discussed below. The 000 ggg 1991 39.212,000 Company will be requesting rate recovery for its irwestments in Perry Unit I and llcaver Valley Unit 2, but it cannot pre-dict with any degree of certainty the outcome of the regula-6-Bank Lines of Credit and NovoMag Credit Agreement: tory process. The Companies have lines of credit with domestic banks that provide for borrowings of up to $50,000,000 at the pre-vailing prime or similar interest rate. Short-term borrowings may be made under these lines of credit on the Companies' unsecured notes. Penn Power is required to pay commitment fees that vary from 3/8% to 1/2% to assure the availability of a 4 33

Notes irmwJ) The CAPCO companies are continuing to review the status if construction of Perry Unit 2 is terminated, the Company of Perry Unit 2. Currently, no significam work is being per-would seek to recover its investment but cannot now predict formed on the unit. As of July 1,1985, the Companies w hether its investment in Unit 2 applicable to its PUCO stopped including AFUDC relating to Unit 2 in net income. jurisdictional customers will be recoverable. If no means of Until resiew of the status of Unit 2 has been completed, recovery of the costs of Unit 2, in the case of termination, there will be no defined schedule for its completion; accord-ucre available to the Company from its PUCO jurisdictional ingly, the construction estimates for the 1987-19M neriod customers and no other basis for recovery could be found or do not include any amounts applicable to Perry Umt 2 if anticipated, the Company would be required to write off the construction of the unit were to be resumed. Possible alter-portion of its investment applicable to its PUCO jurisdic-natives being reviewed with respect to Unit 2 include indefi-tional customers. As of December 31,1986, the Company nice suspension of construction on the unit, resumption of estimates that the maximum amount of such a write-off work on the unit and termination of the unit. In accordance would be approximately $210,000,000, net of income tax with the CAPCO arrangements, none of these alternatives effect. After giving effect to the final reduction in the maxi-may be implemented without the approval of each of the mum corporate income tax rate contained in the Tax Reform CAPCO companies. Act of 1986, this amount would increase to $220,000,000. Duquesne Light Company (Duquesne) has claimed a The Company does not presently anticipate that a write-off "de facto abandonment, for rate making purposes, of its of even this magnit,ide, if required, would affect its ability to 13.74%. interest in Perry Um. 2. Duquesne's decision was pay common stock dividends at current levels, and stud.ies t mdependently made and does not represent a decision on mdicate that the magnitude of any such wn.te-off could be the part of the Companies to abandon Unit 2 for rate making much smauer. Mspa.e as best cunent infonnan.on, a much or any other purposes. Although any future decision on the larger write-ff were required, depending upon the timmg status of Perry Um. 2 will have to take into account Duquesne. mvolved, such a wnte-off could temporarily affect the t s L,ompany,s ability to pay common stock dividends at current position at the time such a dec..ision is made, the L,o.npany does not now know what that position will be and conse-levels. Based on their experience to date, the Compan. ies would expect to recover their investments in Um. 2 with t quently has no way to presently assess its impact. respect to their FERC,j.. dictional customers if the unit uns.. As of December 31,1986, the Company and Penn Power were terminated. Penn Power also believes this should be the had invested approximately $343,500,000 and $55,800,000, case with respect to its PPUC jurisdictional customers, respectively, applicable to Perry Unit 2. Delay in the com-although Penn Power's recovery of the costs of terminated pletion of tbc unit can be expected to increase its total cost projects through rates is still before the Pennsylvania Supreme by amounts which are not presently determinable. If a deci-Court. Reference is made to SFAS No. 90 discussed below. sion were made to terminate Unit 2, certain costs u hich are currently assigned to Unit 2 would be reassigned, where Quarto Profeet-appropriate, to Unit 1. However, cancellation charges pay-The Companies, together with the other CAPCO companies, able to contractors and other costs of termination could be have entered into a long-term coal supply contract with Quarto incurred. Pending completion of the CAPCO review, the Niining Company. The CAPCO companies have also agreed Company is unable to predict whether the construction on to guarantee severally, and not jointly, their proportionate Unit 2 will continue or, if continued, on what basis such shares of Quarto's debt and lease obligations incurred w hile continuation will proceed. developing and equipping the mines. As of December 31,1986, the Companies' share of the guarantee was $190,526,000. Under the terms of the coal supply contract, which expires December 31,1999, the Companies must reimburse Quarto for their shares of the cost of operating the Quarto mines, including those costs associated with mine construction, w hether or not they receive coal from Quarto. These pay-34

ments will permit Quarto, over the life of the contract, to pollution in an upwind state causes nonattainment of air meet the debt and lease obligations it incurred w hile develop-quality standards in the dowmvind state. The petition com-ing and equipping the mines. The Companies' total payments plained of excessive particulate and sulfur dioxide (SO ) 2 under this contract, including amounts related to mine con-emissions from a number of sources in Ohio and other struction costs, amounted to $83,106,000, $92,532,000, states, including potentially all of the Companies' Ohio and $103,464,000 during 1986,1985 and 1984, respectively. plants. Seven northeastern states have appealed the EPA's Under the coal supply contract, the Companies' future min-decision to the U.S. Court of Appeals for the District of imum payments related solely to mine construction costs are: Columbia, asking that the decision be reviewed and reversed, modified or set aside. The Company, along with other electric utilities and others, has intervened in the case. The case was 1987 $ 26.930,000 1988 25,929.000 argued in December 1985 but a decision has not yet been f9$ rendered by the Court. The Company is unable to predict 1991 22,926.000 the outcome of these proceedings. Years thereaf'er 151.176.000 legislation has been introduced in Congress to address the Following the end of the development period, Penn Power so-called ' acid rain' problem. Various bills introduced would was ordered by the PPUC to defer recovery of the cost of require reductions in SO emissions from utility power plants 2 Quarto coal in excess of generally prevailing market prices. and other sources located in several states, including Ohio As a result, Penn Power began deferring a portion of the cost and Pennsylvania. The Company is unable to predict whether of Quarto coal, rather than including such costs in its ECR. legislation will be enacted and, if so, to what extent, if any, As of December 11,1986, Penn Power's deferred Quarto the SO emission limits at the Companies' plants would be 2 coal costs amounted to $4,343,000 Although the PPUC affected. Substantial changes in the SO emission limits 2 issued a subsequent order uhich found that Penn Power was could result in the need for changes in coal supply, significant not imprudent m minatmg and continuing the Quarto proj-capital investments in flue gas desulfurization equipment or ect, it prescribed a method for recovery of the current cost the closing of same coal-fired generating capacity to assure of Quarto coal and the Quarto coal costs Penn Power had compliance. If flue gas desulfurization equipment were to be deferred which could result in a substantial underrecovery of installed on all of their generating units to achieve compliance, Quarto coal costs. Penn Power n caled that order to the a circumstance that may be physically impossible because of Commonwealth Court of Pennsy%nia, but the Court upheld space limitations at certain of tIieir plants, the Companies the PPUC order. Penn Powet's requ :sted review by the estimate that the capital costs associated with such installa-Pennsylvania Supreme Court of the Commonwealth Court's tion could exceed $1,000,000,000. The Companies expect decision was denied. Afanagemem believes that the ultimate that any such capital costs, as well as any increased operating disposition of this matter will not have a material adverse costs associated with such equipment, would ultimately be effect upon the Company's consolidated results of operations. recovered from their customers. Environmentet Masters-In October 1983, the U.S. Court of Appeals for the District Various federal, state and local authorities regulate the of Columbia reversed several significant portions of the EPA's Companies with regard to air and water quality and other regulations on the methods used by the EPA to determine environmental matters. The Companies estimate that com. the amount of stack height credit for establishing individual pliance requires additional capital expenditures of approxi. s urce emission limits. In July 1984, the U.S. Supreme Court mately $80,000,000, w hich is included in the construction estimate given above under ' Construction Program' for 1987 through 1991. On December 5,1984, the federal Environmental Protection Agency (EPA) denied a petition from the Commonwealth of Pennsylvania and the states of New York and hiaine, which i sought to force the EPA to make findings under Section 126 of the Clean Air Act. Section 126 provides a remedy for a downwind state that can show adverse impact because air 35

snesee immen denied a utility industry request to review the Court of Appeals' s-suniniary et Guarterfy Financial Data (UnaudNed): decision. On July 8,1985, the EPA issued new stack height The following summarizes certain consolidated operating regulations to conform with the court's decision; the new regu-results for the four quarters of 1986 and 1985. lations have been appealed to the U.S. Court of Appeals for the District of Columbia by the Companies and others. The March June Sepember December Three Morths Ended 31.1986 30.1986 30.1986 31.1986 Ohio Environmental Pmtection Agency and the Pennsylvania ,,,,,,,no,,, Department of Environmental Resources must review the Operabog Revenues $461.451 $421.565 $434.079 $424.805 i emission limits under their respective State implementation 0P y'"9 Expenses 4 Plans and submit to the EPA for approval any revised limits Operating income 114,433 97.171 91,243 89.510 4 necessary to conform to the new regulations. Such review Other Income and could result in more stringent emission limits for some exist-Nynt and ing plants and increased capital costs and operating expenses. Other Charges 77.162 75.674 74,961 70.129 i The Companies are studying the regulations and are currently Net income $112.201 5 99.956 $ 96.460 $102.211 tmahle to predict their ultimate effect. Earnings on Common Stock 5 98.916 $ 87.106 $ 83.971 5 89,832 i Weighted Average Number Statement of Finaneli !ceounting Standards No. 90-of Shares of Common Stock Ouwandog 141.221 144.861 147.044 148 s81 The Financial Accou mng Standards Board (17ASB) recently Ea released SFAS No. 90,

• Regulated Enterprises-Accounting f omm

$.70 $ 60 S.57 $ 60 for Abandonments and Disallowances of Plant "osts? The Statement, which is effective for the Companies January 1, uarct June sedember oecember

• ** M "'"$Eaded 3' '985 4 '985 3Q 1985 31.1985 1988, will require the Companies to reduce the carrying value of the unrecovered costs of four nuclear generating units Operatng Revenues

$45 3 $N 498 3$.N1 $4 9% j which were terminated in 1980 (see Note 2) since the un-Operatng Expenses and Taxes 253.444 330.808 342.433 347.710 amortized costs are not included in rate base. This adjustment will not have a material adverse effect on the Company's $ In"co'" ns consolidated results of operations. The FASB has indicated Deductions 72.652 76.583 70,177 69,882 Net Interest and that it intends to issue during 1987 a new Exposure Draft of Otner Charges 73.780 73.467 76.169 75.547 ) proposed accounting standards to address rate phase-in Net locome $ 98.782 5 90.806 5 90.476 $ 90.621 l plans applicable to new generating facilities and possibly Earnings on Common Stock 5 85.866 $ 77.888 $ 77.188 $ 77.131 other related ma:ters' Weighted Average Number of Shares of Common Stock Outstanding 123.502 127.486 133.026 135.691 Earnings per Share of Common Stock $.70 $ 61 $ 58 5 57 j i i i i 36

Auditors' Report 'Ib the Stockholders and Ik>ard of Directors of As discussed in Note 7 to the consolidated financial state-Ohio Edison Company: ments, the continued construction of Perry Unit 2 is cur-We have examined the consolidated balance sheets and con-rently being reviewed by the CAPCO companies. Possible solidated statements of capitalization of Ohio Edison Company altern nys be.mg conW. ered indmic. Mnq suspendon, in

• "'.n n on o the Unit. Because tk (an Ohio corporation) and subsidiaries as of December 31, '

'!'"

• P "".'

i. cannot now predict if construction of Perry Un. '# ""*"Y""" E 1986 and 1985, and the related coasolidated st tements of it 2 will be income, retained earnings, capital stock and other pa.d-in terminated, and if terminated, whether the investment apph.- capital, cash flow and taxes for each of the three years in the cable to its PUCO j.unsdictmnal customers u ill be recoverable, period ended December 31,1986. Our exam.mations were made in accordance with generally accepted auditing stan-In our opinion, subject to the effect on the 1986 and 1985 dards and, accordingly, included such tests of the a counting consolidated financial statements of such adjustments, if any, records and such other auditing procedures as we considered that might have been required had the outcome of the uncer-necessary in the circumstances. tainties referred to above been known, the financial statements referred to above present fairly the financial position of Ohio Regulatory commissions are examining the impact on cus- /. Edison Company and subsidianes as of December 31,1986 tomers rates of nuclear generating units and are ra..ismg van-and 1983, and the results of their operations and the state-ous concerns, including the level of construction costs of such ments of cash flow for each of the three years m. the period units and the possible existence of excess generating capacitv. ended December 31,1986, m. conform.ity with generally ,l'hese concerns are likely to be addressed by the commis-accepted accounting principles which, except for the change sions regulating the C,ompan.ies uith respect to units in u hich (with which we concur) in accounting, for pension costs (see the C,ompam.es have an ou nership interest. Pennsylvam.a Note 1), have been applied on a consistent bas.:s. Power has requested, and the Company will be requesting, recovery for their respective investments in Perry iTait I and lleaver Valley Unit 2 in rate proceedings. The outcome of 4 the regulatory process cannot be predicted with any degree ARTIIUR ANDERSEN & CO. of certainty, and accordingly, we are unable to form an opin-ion as to w hat extent the Companies' investments will be New hk, N.Y. recoverable. February 4,1987 37

ConsoNdated Nnancial Statistics 1984 1%5 1984 1983 1982 1981 1976 GeneralFinancialinternation (Donats n thousands, except per share amounts) Total Operating Revenues 31,741,900 $1,754,749 $1,637.104 $1,515,852 $1,429,626 $1,279,649 $ 644,852 Oprabng income S 392,357 $ 380,354 $ 342,713 $ 302.751 $ 269,640 $ 252,381 $ 122.217 Eamings on Common Stock 8 359,825 $ 318.073 $ 290,694 $ 227,843 $ 181,496 $ 163,892 $ 82,777 P.ato of Earnings on Common Stock to Operating Revenues 20.7 % 18.1 % 17.8 % 15.0 % 12.7 % 12.8 % 12.8 % Times Interest Earned Before incwe Tax 2.46 x 2.34 x 2.34 x 2.31 x 2.02 x 2.11 x 2.22 x Net Utility Plant at December 31 87,216,102 $6,609,196 $5,945,549 $5.206.134 $4,522,733 $3,867,757 $2.115,798 Property Addibons S 774,198 $ 826,994 $ 808,099 $ 771,131 $ 774,233 $ 568,044 $ 325.553 Captahzation at December 31: Cornmon Stockholders' Equity $2,541,712 $2.234,156 $1.947,357 $1,711,974 $1,488.371 $1,229,044 $ 635,274 Preferred and Preference Stock Not Subject to Mandatory Redempoon 455,567 467,940 455,490 404.240 354,240 304,240 261,905 Preferred and Preference Stock Subsect to Mandatory Redemption 160,794 176,694 158,483 158.112 152,560 151,141 88.000 Longterm Debt 2,781,590 2,691,615 2,449,502 2,132,137 2,005.436 1,759,771 1,087,755 Total Captalizat;on 85,939,963 $5,570,405 $5,010,832 $4.406.463 $4,000,607 $3,444,196 $2,072,934 Captakzation Rabos at December 31: Common Stockhdders' Equity 42.8 % 40.1 % 38 9 % 38.9 % 37.2 % 35.7 % 30.7 % Preferred and Preference Stock Not Subrect to Mandatory Redemption 7.7 8.4 9.1 9.1 8.9 88 12.6 Preferred and Preference Stock Subject to Mandatory Redemption 2.7 3.2 3.1 3.6 38 4.4 42 Longterm Debt 44.8 48.3 43.9 48.4 50.1 51.1 52.5 Total Captahzation 100.0 % 100.0 % 100.0 % 100.0 % 100 0 % 100.0 % 100.0 % Long Term Obligations at December 31 8 859,900 $ 739.291 $ 822.234 $ 759,843 $ 656,655 $ 447,484 $ Cost of Preferred and Preference Stock Outstanding at December 31 9.86 % 10.00 % 9 87 % 9 63 % 9.17% 8.37% 7.84 % Cost of Longterm Debt Outstanding at December 31 11.05 % 11.45 % 11.52 % 10.82 % 10.69 % 9.99 % 7.50 % Common Stock Data Eamings per Average Common Share $2.47 $2.45 $2.50 $2.22 $2.13 $2.30 $2.14 Retum on Average Common Equity 14.9 % 15.2 % 15 9 % 14 2 % 13.5 % 14.6 % 14.0 % Dmdends Paid per Share $1.92 $1.88 $1.84 $1.80 $1.76 $1.76 $1.67 Common Stock Dmdend Payout Rabo 78% 77 % 74 % 81 % 83 % 77 % 78 % Common Stock Dividend Yield at December 31 9.8 % 11.5 % 13 6 % 14.7 % 12.6 % 15.1 % 8.1% PredEarnings Ratio at December 31 7.9 6.7 5.4 55 6.6 5.1 98 Shares of Common Stock Outstanding at December 31 (000) 149,815 137.089 122.237 108.460 96,082 78,676 39.856 Bcok Value per Common Share at December 31 $16.97 $16.30 $15.93 $15.78 $15.49 $15.62 $15.94 Market Pnce per Common Share at December 31 $19.50 $16.375 $13.50 $12.25 $14.00 $11.625 $20.875 Ratio of Market Pnce to Book Value per Share at December 31 115 % 100 % 85 % 78 % 90 % 74 % 131 % 38

Consolktated Operating Statistics 1984 1985 1984 1983 1982 1981 1976 Revenue From Electre Sales (Thousands) Resdertd S 615,262 $ 600.481 $ 571,878 $ 540,167 $ 497,941 $ 442,267 $232,433 Commercial 449,590 433.445 400.291 385.277 356.325 308.599 155,572 Industnal 449,392 476.257 469,112 421,736 383,535 381,162 195,311 0;her S4,343 64,708 57,921 69.278 67.828 53.993 31,013 Subtotal 1,578,589 1,574.891 1,499.202 1,416,458 1,305,629 1,186,021 614.329 Sales to Utdities 137,994 159,262 117,385 76,220 101,688 73.966 0.749 Total $1.718,583 $1,734,153 $1.616,587 $1.492,678 $1,407,317 $1.259.987 f,621.078 Revenue From Electre Sales-%: Resdertial

.d.8 %

34.6 % 35.4 % 36.2 % 35.4 % 35.1 % 37.4 % Ccmmercial 24.2 25.0 24 7 25.8 25.3 24.5 25.1 fndustre! 24.2 27.5 29.0 28.3 27.3 30.2 31.4 Other 3.8 3.7 36 4.6 48 4.3 5.0 Subtdal 92.0 90.8 92.7 94.9 92.8 94.1 98.9 Sales to UtJities 3.0 9.2 7.3 5.1 7.2 5.9 1.1 Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Kdowatt-Hour Sales (u, mons) Reedentra! 7,044 6,791 6.836 6,735 6.733 6,747 6,024 Ccmmercial 5,540 5.266 5,101 5.096 4.996 4.917 4,358 Irtdus2nal 8,533 8,751 9,161 8,386 7,708 9.352 9.262 Gaher 1,192 1,149 1.075 1,211 1.227 1,181 1,171 Subtotal 22,331 21,957 22.173 21,428 20,664 22,197 20,815 Sales to Utdities 5,835 6.929 4,591 2.917 3,361 2.465 387 Total 28,164 28.886 26,764 24.345 24,025 24.662 21.202 Custorners Served at December 31: Resdential 894,144 888,107 885,376 878.949 873.877 872,303 824.851 Ccmmercial 97,383 96.048 90.810 90.072 89,706 89,231 85.512 Industral 2,239 2.021 1,757 1,003 1,048 1,068 1,111 Caher 802 892 721 736 724 711 681 Total 994,588 987,068 978.664 970,;30 965.355 963.313 912,155 herage Annual Resdent;al kWh Usage 7,924 7,682 7,762 7.695 7,723 7,760 7,361 herage Resdential Prce per kWh S.738 8 84c 8.37c 8.02$ 7.40c 6.56c 3.86c. Cost of Coal per Mdlion Btu S t.44 $1.53 $1.59 $1.62 $1.75 $1.81 $0 93 Generating Capability at Dtumber 31: Coal 89.1 % 89.1 % 89.1 % 89.2 % 86.2 % 86.3 % 87.8 % Od 3.0 30 3.0 3.0 6.3 6.2 8.3 Nuclear 7.9 7.9 7.9 7.8 7.5 7.5 3.9 Total 100.0 % 100.0 % 100.0 % 100 0 % 100.0 % 100.0 % 100.0 % Scurces of Electro Generation: Coal 91.0 % 89.3 % 90.4 % 89 8 % 93.8 % 89.9 % 94.4 % 0;l 0.1 0.2 4.9 Nuclear 9.0 10.7 96 10 2 6.1 9.9 0.7 Total 100.0 % 100.0 % 100 0 % 100.0 % 100.0 % 100.0 % 100.0 % Peah Load-Megawatts 4,243 4,084 4.093 4,148 4.073 4,148 3,817 Numtar of Employees at December 31 7,383 7,496 7.611 7,702 7,885 7.669 6.241 39

Stockhokter Information st nn.04.rProfs. cone.ceine stockn.Id.r s rvie. At year end,202,379 stockholders owned 149.8 million For the convenience of stockholders, the Company has toll-shares of Ohio Edison common stock. Approximetely 30 free telephone numbers to provide information and assist-percent are women,25 percent are men and 34 percent ance. Stockholders are encouraged to call 1-800-321-0468 are joint holders. The remaining 11 percent represents in Ohio, or 1-800-633-4766 outside Ohio, on hionday through trusts, corporations, institutions, brokers and other invest-Friday, except holidays, from 8:00 a.m. to 4:30 p.m., eastern ment groups. time. Callers in the Akron area and in foreign countries should use (216) 384-5509. When calling, please ask for Stock-Nearly 67 percent of common stockholders own less than holder Services. 300 shares. They live in all 50 states and many foreign countries. Stockholders may also write directly to Stockholder Sersices, Ohio Edison Company,76 South N1ain Street, Dividend and ikx Information Akron, Ohio 44308. Effective the first quarter of 1987, the Company's lloard of Directors increased the quarterly common stock dividend AdditionsIInformation to 49 cents per share, or $1.96 on an annual basis. For Ohio Edison Company common stock is listed on the New each quarter of 1986, the lloard declared common stock %rk and hiidwest stock exchanges and traded on other dividends of 48 cents per share. registered exchanges under the *OEC" ticker symbol. News-p pers generally use the symbol OhioEd'in stock listings. All common, preferred and preference stock dividends paid in 1986 were taxa' ole for federal income tax purposes. The Form 10-K, the 1986 Annual Report to the Securities and ' lax Reform Act of 1986 has made major changes to the Exchange Commission, will be sent without charge to ftderal tax laws, some of which may be of particular interest stockholders upon request. For a copy, please write to to stockholders. Gregory F. LaFlame, Secretary, Ohio Edison Company, 76 South hiain Street, Akron, Ohio 44308. Effeco.ve January 1,1987, the Act terminates the lower tax rate that the tax law had granted to long-term capital gains. So after 1986, long-term capital gains are taxed at the same Ohio Edison Company rates as ordinarv income. Also, the $100/$200 dividend ex-76 South hiain Street, Akron, Oh,o 44308 i clusion has been eliminated starting v l'h the tax year 1987. Attentmn Iransfer Agent For information regarding these matters, plus the many other changes that may affect your tax situation, we suggest Registrar: that you consult a tax advisor. National City llank Akron One Cascade Plaza, Akron, Ohio 44308 Dividend Reinvestment Plan Ily the end of the year,66,745 stockholders, representing 30 percent of all stockhok! cts, were enrolled in the Com-pany's Dividend Reinvestment and Stock Purchase Plan. They reinvested $51.3 million in dividends and made optional cash payments of $17.5 million to acquire 3.5 million shares of common stock in 1986. Annual neeeting of stockholders Stockholders are invited to attend the 1987 Annual Alceting on Thuisday, A[ til 30, at 10 a.m. in the Company's General Office auditorium in Akron, Ohio. Those not attending can vote on the items of business by filling out and returning the proxy card mailed to each stockholder approximately 30 days before the meeting. 40

f Ofafo h Dhectors and Marsagensent s w.aes, eer. o m e.r. news.s m e r. Donald C. Blasius. Chairman andChiefEmstite Ofarof. ~ Justin T. Rogers, Jr. Anthony N. Gorant ' thd&nt diron Disiden " C# # "' ^"'"' C'""#' "I" ' Victor A.' Owoe Gary hi. Stair GnmiidakdIndsmia, Inc., Cdambas, y,.,,;,,;y, g,gg,,, g,, p;,ig,, Wie (asrcondinoners, hiukn applianas,. laundyprosca andfirArn rahinen). Douglas W. Tschappat . James E. hiarkle

Member

Nominansg Committee, Fmstste lice hundent Lale EricDisidon

~ 8""*" O""i""- Lynn Firestone hialcolm E. Cash ' Dr. Lucille G. Ford - &nior17a hviant : Man $ddDitinon "" h'#d'"#l"*"*"#' M ~ #"""d'" AA'#"dc Wi' David R. Gundry Robert L. Kensinger Saior17alwsidat Marion Ditiden - Chairman, Nominanng Geminee; Nember, Mnaue Caminu. Robert J. NfcWhorter N. Rod hionahan

1. '"I*' 'I' *d*"'
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Robert L. Lo'ughhead Chairman oftAs Board, hrssdentand. Russell J. Spetrino - Robert E. Dawson CAiefExecutitt ofcerofHiiram Sted ~ lia lhadarand Start Ditison Corporanon, Heinon, Hest livginia (mel GeneralGunal David C. Bixler, Jr D'w/wa). Chairman, Co=%". Ronald D. Best Himrn Ditidon Commime; Member; A&tCommitur

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Glenn H. hieadows _ Peter A. Fetterolf hrsidentandChiefEmsnte Ofarof 'E U"E**** " " - McNeil(Wio) Corporation, diron. Ohio ' - (twrious mans}raurrdproduca). Member: Frank E. Derry ' Gmpenation Commitar, Adit Commitar. I7ce nrsident ' William R. hiiller John A. Gill Retired,Jamerly 17a henkst of I7ce lhudent . GotvrumentalhrsoundRdation1, The 5,{ f'** Goodyear Tirr andRubber Company, diron, Ohio (rabberandrriandpraluca). Member; Compasanon Committee. David L. Yeager - "" #*d"' . John Nelson ' ChairmanofthBoardandChiefEzersties hfark T. Clark OfarofCommmialShearing, Inc., Trrasurer hugsken, Ohio (engineerrdmetalcompo-William A. Daniels ann). Member; Gmpensation Commitae. (,pg,,,. [,/7 Gregory F. LaFlame j of,f g4j, gjj,,,, Member; Fia.ince Gmaime. ""#'I Warren G. Fouch justm I'. Rogers, Jr. gg,,,,, g,,,,,gf,,. nridentofWio Edison andChairman of the Boardofin absidiary, thusrhenia ^ Joanne hiattin Itavr. Chairman, Finana Gmime; AsistantSarrtory Newber: Nominating Commitas. Theodore F. Struck, II Douglas W. Tschappat AdstantTrrasurre EXKNtilt $7a hrsident of Obio Edison. y L, gagner Frank C. Watson sdstant Comptrotter - hrsidat of The kngsnan HHJingand Fagimming Compans, hugstoern, Ohio (nonJnousalloys). Chairman, Adit ~ Omnitar: Member; Nominanng Gemime. William C. Zekan Chairman ofthe Boardandnrsidat ofd. &halman Inc., dkron, 0hio (aanmrplasticcompounds). Member; k &t Conomitke. as, sersm.rfen. Fred H. Zuck 't

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