PY-CEI-NRR-0834, Forwards Annual Financial Rept for 1987

Forwards Annual Financial Rept for 1987

ML20148N663
Person / Time
Site:	Perry
Issue date:	03/29/1988
From:	Kaplan A CLEVELAND ELECTRIC ILLUMINATING CO.
To:	NRC OFFICE OF ADMINISTRATION & RESOURCES MANAGEMENT (ARM)
Shared Package
ML20148N564	List: ML20148N559 PY-CEI-NRR-0834, Forwards Annual Financial Rept for 1987
References
PY-CEI-NRR-0834, PY-CEI-NRR-834, NUDOCS 8804070209
Download: ML20148N663 (1)

Text

r l TH E C L EV E L A N D E L ECT RIC IL LU Mit4 ATIN G C O M P A N Y PO BOX 97 m PEAAY. OHIO 44081 e TELEPHONE (216) 259-3737 m ADDRESS-1o CENTER AOAD Serving The Best Laration in the Nation PERRY NUCLEAR POWER PLANT Al Kaplan VICE PRES 80ENT NUCLEAR GAOUP March 29, 198S PY-CEI/NRR-0834 L U.S. Nuclear Regulatory Commission Docun:ent Control Desk Washington, D. C. 20555 Perry Nuclear Power Plant Docke t No. 50-440 Annual Financial Report-1987

Dear Sir:

Attached is the 1987 Financial Report submi tted by Ce nterior Energy Corporation. This report satisfies the conditions as specified under 10 CFR 50.71(b) .

If you have any questions, please feel f ree to call.

Very truly yours, Al Kaplan Vi ce President Nuclear Group AK: c ab Attachment i cc: T. Colburn l

K. Connaugh ton 1 USNRC, Region III l

l i I 8804070209 880329 0 PDR ADOCK 050 I

l l

ighlights of 1987

• Davis-Besse Nuclear Power Station

• The Public Utilities Commission ,

was available 84 percent of the of Ohio granted four rate incrases ,

time, the best operating per- totaling $104 million per year to l

• Beaver Valley Unit 2 achieved .

formance in the plant s 10. year our operating subsidiaries.

commercialoperation on November 17 A day later, Perry histon.

• Completion of Beaver Valley Unit 2 l

l Unit I went commercial.

• Customers set a new record for and Perry Unit 1 enabled us to l electricity demand onJuly 22. stop issuing new consmon sack.

• Centerior Energy completed a The peak demand of 5,173 f

$1.7 billion sale and leaseback of niegawatts was three percent generating units on September 30.

higher than the previous record. ,

it was the largest transaction of  !

this type in electric utility history

• A Syhunia, Ohio family became

and helped us retire 5860 million of our one millionth customer in Slay. T l high cost debt and preferred and preference stock.

j i ,

1 inancial Summary  %

• 1987 1986 Change  ;

Earnings Per Share of Common Stock . . $ 2.82 5 3.04 (7.2) f Dividends Declared Per Share of Common Stock . 5 2.56 $ 2.49 2.8 Book Value Per Share of Common Stock at Year End . 5 22.10 5 22.13 (0.1)

Common Stock Share Owners at Year End . .

207,755 210,293 (1.2) ,

Common Stock Shares Outstanding at Year End(000) ,

140,706 135,197 4.1 l Operating Revenues (000) $ 1,9 4 5,541 51,917,730 1.5  ;

Operating Expenses (000) , 51.561,931 51,557,925 0.3 L Net income (00()) . .

$ 390,353 5 391,893 (0.4) -

Return on Average Common Equity 12.8 % 13.7 % (6.6) l>

Kilowatt hour Sales (Slillions of Kilowatt hours)  ;

Residential ,

6,659 6,527 2.0 l Commercial 6,350 6,239 1.8 i Industrial . .

11,985 11,4(s 5.0  !

l Other . 1.348 1.151 17.1 I Total . . 26,342 25,326 4.0  ;

t Employees at Year End . . 8,891 9,306 (4.5) (

l Quarterly Range of Centerior Energy's Common Stock Prices W !st'  !

t l 2nd 224 M 25%

1 1 3rd 22% M 2*%

4th 22% 1254 W !st 21% m 24%

2nd 15 m22%

3rd 15 m184 r 4th 15% M18% i 5

Qtr

/8 15 20 25 30 l

• Centerior Energy 3 Common stak traded for the fin,t time on Aptd 30,19%

i i ( l

ear Share Owner: and staff. We are vigorously contesting this ruling and will appeal the order to the Ohio Supreme Court.

For Centerior Energy,1987 was a year of solid progress. A major challenge is to obtain rate increases that will We took aggressive actions to resolve many problems; improve our financial performance without harming other challenges remain. customers. In early 1988, phase in proposals were filed with the PUCO. Under these innovative proposals, The foremost challenges concern the resolution of the customers would not pay immediately for the bulk of various issues that bear upon improving earnings and our new generating capacity, even though they would cash flow and determining appropriate long term get the immediate advantages of the lower fuel costs and dividend policy. improved reliability that result from using that capacity.

During our first full year of existence, we We will continue to increase efficiency and improve our Competitive stance, but the PUCO's future actions in

• Completed a large nuclear construction program, allowing us to recover operating and capital costs of

• Set new performance records at the Davis Besse our new nuclear units hold the key to our continued Nuclear Power Station, profitability.

• Diligently cut operating costs, Another way to hold down electric bills is to squeeze l

• Executed the largest sale and leaseback of generating every possible benefit out of the Cleveland Electric-units in electric utility history and Toledo Edison affiliation. For example, centralizing

• Revitalized efforts to improve service to customers. additional functions at Centerior Energy enabled us to offer a voluntary early retirement program that was These accomplishments provide the cornerstone for accepted by 544 employees (nearly six percent of our future growth. They position us to operate successfully in today s highly competitive energy business. We are workfoM concentrating on improving our financial situation now Where achievements are concerned, the employees of that the nuclear construction program is behind us. Centerior Energy have received far less credit than they deserve. Our employees have strongly supported We also can devote more resources to retaining existing corporate cost cutting efforts while maintaining an customers and to attracting new businesses to Northern excellent level of customer service and continuing to Ohio. We are not just a utility that provides reliable f nd time to help make their communities a better place electricity; we are a valuable source of information, to live. They give definition to the care and concern for research and advice. In particular, we will continue t which Centerior Energy stands.

help industrial customers operate more efficiently and compete more effectively in the global marketplace.

Sincerely, Completion of the construction program was a vital g step toward achieving the long term success of youc Company. As a result, we expect cash flow and the Robert M. Ginn quality of earnings to improve significantly over the Chairman next few years. The downside is that 1988 earnings are expected to be lower than the $2.82 per share earned Richard A. Miller in 198, although any decline is anticipated to be President primarily in noncash accounting credits.

Febmary 22,1988 Future earnings also may be affected by several other factors, including The Public Utilities Commission of Ohio's attempt to disallow about $800 million of the construction costs of Perry Unit 1. Our share is about

$ 410 million. The disallowance was considerably higher than recommendations of the PUCO's consultants 2

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Year of Progress problems that can result from ncreasing Sales reliance on one fuel source. Nuclear power provides a hedge against the in 198', your Company completed costly emission control expenditures Increased sales will spread our fixed its extensive capacity construction that contemplated acid rain legis- costs over more kilowatt hours and program and realized greater- lation would require. reduce our need for rate increases than expected benefits from the We expect kilowatt hour sales to first calendar year of the affiliated In 198~, nuclear power provided 25 increase an avenge of 1.6 percent operations of Cleveland Electric and percent of our generation and coal- per year over the next 20 years.

Toledo Edison. Events over which fired units ~5 percent. As we rely Innovative rate designs. knowledge we had less control, especially in increasingly on our existing nuclear of customers' businesses and the regulatory arena, did not turn units in the future, the percentage providing superior service are the out as well. of generation provided by nuclear ways we intend to increase sales.

power will rise. However, coal will remain our pnmary fuel source.

Nuclear Program Progress Innovative Rate Designs On consecutive days in Nover.iber. Our rate structure can be modified A Delicate llalance Beaver Yallev Unit 2 and Perry Unit I so customers can use the particular were brought into commercial With completion of the new units operating characteristics of their operation. Our third nuclear unit, c mes a new challenge: earning a facilities to lower their electric Davis-liesse, recorded the best year fair return on our investment by energy costs Following are three in its 10-year operating history achieving a delicate balance betwr in examples of how we have retained the need of customers for reason. oly existing business and added These three nuclear units assure priced electricity and the need or new bustness Northern Ohio of a rehable electricity share owners for improved financial supply that not only will serve the performance by the Company. We A Cleveland area titanium producer growing needs of our current have developed a three pronged decided not to close a large sodium customers, but also will help att act stre. cay to do this- plant after Cleveland Electric new businesses to our service area . An innovative sales improvement created a rate design that lo, vers the The availability of a reliable supply program, customer's rates in any month when of electricity will become increas- the plam surpasses predetennined

• An aggressive cost containment ingly important in the 1990s when energy usage levelt 5 odium is used program an<J various regions of the country are as a catalytic agent in making titanium.

expected to experience shortages.

• A creatiw ute modenu.on Without this special rate structure, I'"8" * '

the producer probably would have The balanced mix of generating Tbm programs are discuued in the bought sodium elsewt.cre and closed capacity will enable us to avoid the the 28 megawatt facility,.

following sections.

A special contract for additional load en. bled a metals manufacturer to restart an arc furnace to make ferro silicon The unusual operating charactenstics of the furnace enabled 5

us to offer energy prices that were by mid 1988, will add eight mega- In 1988, we will switch from postal extremely competitive with rates watts to our load, card billing to envelope billing. This available to the customer's plants in will enable us to insert a return other regions and in other countries. We helped improve productivity at envelope for the convenience of The restarted are furnace added the plant of a maker of specialty customers to pay their bills. We also

$660,000 a month to our revenues molds and precision patterns. After will be able to insert a new newsletter and 50 new jobs to the Ashtabula getting advice from Toledo Edison with monthly electric bills. This is a County economy. and the Center for Materials Fabri- cost-effective way to inform cation in Columbus, the manufacturer customers how to get the greatest Another special rate design helped installed a full scale computer aided value out of the electricity they use.

attract a steel company to Toledo. design and manufacturing system.

That company plans to start building We have added customer service a $150 million steel rolling millin We have long been active in offices in several communities to 1988. This will eventually add 33 promoting economic development make it easier for customers to pay In Northern Ohio. Now, more than bills and arrange for electric sen ice.

megawatts to Toledo Edison's load.

ever, we are helping industrial These offices also enable us to customers increase their pro- distribute helpful tips on such topics Knowledge of Customers. ductivity by getting the utmost out as the most effective use of electric Businesses of the dollars they spend on electric appliances. In 1988, we will take energy. Such efforts will help fulfill this convenience even more directly Our marketing representatives work, our pledge that businesses will not to customers by. has.ing a customized hard to understand the operations and needs of customers. They hig e ectr c s-appearances at shopping centers.

combine this knowledge with their expertise in electricity applications to advise industries on new pro-

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• Providing Superior Service endeavors. All employees are aware duction techniques that can reduce The third strategy for increasing of their responsibilliles to the their costs, enhance their competitive sales is to provide the kind of service customers who depend on us, and stance and add to our sales.

that makes customers eager to do the daily actions of employees reflect business with us. that care and concern. The net We are assisting with installation of result of providing superior service the world's first commercial plasma In the residential sector, our sales is an increase in kilowatt hour sales torch technology at the General eff rts stress the convenience, that improves the Company's Motors foundry near Defiance.

c mf rt and value provided by bottom line.

Plasma torches can yield tem.

electricity, with special emphasis on peratures in excess of 10,000 all electric living and outdoor degrees Fahrenheit while the limit lighting. We also will continue infor-in fossil fuel combustion is about mational programs to help pmple 2,800 degrees E This will facilitate use PPliances more efficiently.

the melting ofiron and the processing of other materials The plasma torch, which is expected to be in operation 6

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ontaining Costs The affiliation cnabled the opcrating Edison sold 92 percent ofits interest companies to increase coordination in Beaver Valley Unit 2 for $715 of electricity dispatching. This, million. Toledo Edisor would not Reducing operating costs is a key to along with the addition of new have been able to sell and lease back improving financial performance capacity, allowed us to retire one of that much capacity without our and minimizing rate increases. the five units at Cleveland Electric's ability to bolster Toledo Edison's Significant cost reductions achieved Avon Lake Power Plant. An en- credit rating with Cleveland Electric's in 1987 undt tscored the success of gineering study concluded it was stronger rating. The resulting icwer the Toledo Edison-Cleveland Electric more economical to de.ommission interest cost was another example affiliation. Stost of these savings the 192-megawatt unit than to 01 Toledo Edison customers reaping would not have been possible for spend money to keep it operating the benefits of the affiliation.

either company if they still operated independently The transaction will result in the u rem va!of ur Bruce afansfield Store long range decision making Our standing in the financial investment from rate base (the was centralized at Centerior Energv's c mmunity was strengthened by a property value upon which regulators headquarters. This centralization financial restructuring We redeemed allow us to earn a return). The and other steps to eliminate redun-or refunded $860 milhon of high-cost ponion of Beaver \* alley Unit 2 that dancy allowed the implementation bonds and preferred and preference we sold will not be placed in rate of a voluntary early retirement stock in 198'. This reduced our base. Instead, we will pay rent to program. Nearly six percent of the workforce retired. resulting in an annual interest and preferred and initial annual savings of $28 million preference dividend requirements in payroll and benefit costs. by 5123 million. Me the chart on Embedded Costs of Long-Term Debt this page for the impact on our and Preferred and Preference hck embedded costs of capital Our & f nd Awsudi Generation dnpatching. coordination of power plant operations and stronger balance sheet showed 5165 m$

engineering and tecnnical support milhon less in long term debt, 's- ,',

were consolidated at Centenor preferred and preference stock at Energy, as was planning for sub. the end of 198~ than at year end M l" $

1986 We expect to redeem at least I stations and transmission lines The operating subudianes continue to another $150 million of debt nd 's; be responsible for day to-day preferred stock in 1988.

operation of power plants and for m

• A considerMe ponion of this debt customer related activities This arrangement helps Cleveland Electric a eq ret ement pnyram was g5 y*

made possible by the saic and lease-and Toledo Edison retain the back of generating units. We sold Yr /

customer good will they have /%0 6 virtually our entire interest in the 2 4 8 to 12 developed over the past century three unit Bruce Stansfield coal. m a ta fired plant for 51 billion. Toledo wmuee o i m heJJed os ts oflong :crm Jcht and fylenrJ andf~rgerem e sp r k han hen reducedfrom th tr l'M5lvak let e!S throld redem;tu ns and rdunJngs 9

the investors for the right to continue Over the next five years, construction to use the genet? ting capacity. expenditures should be about $1.9 liemoving these investments from billion (see the chart on this page). An A oderating Rates rate base will permit the placement important part of the construction of the capital coste of Perry Unit I program will involve the renovation and Beaver Valley Unit 2 in rate base of existing generating units to in February 1988, the Company witbout the substantial rate increases extend their usefullives and to proposed a rate moderation plan to that o.herwise would be required. Increase their operating availability. phase the construction costs of in effect, the sale and leaseback This is a lower cost option than the Perry and Beaver Valley units transaction gives customers a long- building new generating units. into rate base. Our ownership share term budget plan to pay for is $4 billion. The rest is owned these units. We do not expect to issue any new and leased by our utility partners common stock in the foreseeable in CAPCO (the Central Area Power The Mansfield sale enabled us to future. The dilution of per share Coordination Group) and other realize a significant capital gain and earnings from new common stock investors.

to use investment tax credits that sales that had been necessary otherwise could not be used at this has ended. Under the rate moderation approach, time, minimizing the tax on the Cleveland Electric revenues would capital gain. Despite this progress, financial increase 9.5 percent and Toledo problems remain. Dividends paid Edison revenues would rise 7.2 Our financial situation willirnr rove on common stock were $2.56 per percent in the first year. These as a result of completing construction share in 1987, substantially higher increases would cover other costs of the nuclear units. For the five year than cash flow per common share of doing business as well as a period 1983 87, construction (see the chart on page 13). Further- portion of the nuclear construction expenditures were 5 4.5 billion. more, earnings in 1988 are expected investment. Under normal pro-to be lower than the $2.82 per share cedures, any rate increase would earned in 1987. Future dividend not go into effect before December action will be determined on a 1988. We are, however, seeking to Actual and Forecast Construction quarter to quarter basis in light of negotiate an agreement earlier.

Expenditures teslag mImmen the then recent financial results and l l 1 evaluation of the corporation's future To put Perry and Beaver Wiley into 92 M l+

earning ability and cash flow. That, rate base in one step would result in vi gu m s b in turn, depends to a significant a rate increase of about 30 percent w gk, degree upon the success of efforts for our customers. We realize that i

,i to obtain regulatory rction to assure price increases of that magnitude e i I" to the maximum extent possible the could put industrial and commercial

, inclusion of the investment and customers at a competitive dis-rNy ,

operating costs of Perry and Beaver advantage, as well as be burdensome w a Wiley in rates over the next several y, { l l l l l l years (see the chart on page 14).

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to residential customers We filed increase granted in mid 198& In Perry Disallowance notices in February 1988 for rate December, the PUCO granted an inJanuary 1988, the PUCO ruled incredes of that nugnitude to protect additionalincrease of $28.8 million our legal rights $lowever, our intent that $628 million of the costs of per year. For the first 18 months, building Perry Unit I were "im-is to work with The Public l'tihties howevet, the increase will be only prudendy or unrenotubly incurred" Commission of Ohio and other inter- 51' million on an annual bois since Thk disallowance applied to costs ested parties to reach agreement on it will be offset by the "payback" of incurred through the fuelloading our rate moderanon plan. revenues pres iously collected date of March 21,1986 The 5TCO under Ohio's construction work-We are not relying solely upc n rite aho required an upward adjustment in progresslaw increases to produce the added to this amount relating to allowance earnings we need The aggressive in May, the Pl'CO granted Toledo for funds used during construction marketing and cost-cutting programs (AFL,DL.). AFUDL, is a noncash Edison a $43 million emergency rate described previously are import mt inerene. In December, that increase credit to income that compensates elements of our strategy Future rat for money invested in facihties and a $22. million emergeng rate increde requests. as he always w hich are not yet in rate base. ,A,e increase granted in February 1985 estimate th:st this additional AFL,DC-been the case, will depend upon were made permanent by the the success of these efforts We will related amount could bruig the total Pl'CO The December ordet also need a Pl'CO approved p:an to deal approved an additional $4 milhon disallowance to $800 million, with with the balance of our nuclear about $41n million being our share.

per year, investment We believe we can keep the average rate increve near the Over the past five years, the average expected rate ofinnation oser the pnce paid for electricity by Cleveland .

next decade Electric customers has increased Che Oh now and Imidends less than one percent per year The Paid rer Common Share average price paid by Toledo Edhon% .s C 3 '

Regulatory Arena customers he increned 3.2 nercent g ir . _

a year over that period. The annual The Pl'CO gramed disappointing i of nuanon from 1983 198" wn '/

rate increec3 to Cleseland Electric 3.3 percent.

~

- -~

i and Toledo I:dison m 198~ ~

,l

, i 1

Inadequate rate increecs os er the .-

In March, Clneland Electric receised 3, _ _

a $39 8 milhon annualincrease a past several years coupled with the

,S!

I high cost of completing .ne nuclear l the second part of a twomep .,  !

construction program have con- V r ~'

m M d  !

tnbuted to the decime in the amount  ! I and quahty of Centerior Energvi -

w  !'

, g ^. g 4 I

earnings i tihtie3 with inadequate -_

rates are pour financial riskt Their j j l borrowing cos,s go up because their n/ i  ; i

/s o i >

credit ratings are low cred Like all ' 3 4 g.g ,

other expenses, these costs ultimately w .- . .o .. suse : ~, .~

are renected in customers' electric weJ on a wn .ohamd reue...ent or bills 50 customers save money in pc rwres or c:creuna nectnc and ucao I a.wn the long run when ttihties are allowed to charge reasonable rates. .1:t of our rm ara IW arnme rusnicJ qf noncash azz% an,emrj, ass u wa turma wentnwnon al rt>G and sam mg durm Carbflvu did not at er du udends m 1 A t 1+6 and IM lion et er cash flou Imjm t J nc,tri) 31 f.crt ent m IW and n caftoed tu contmue so sm;m e sigmnant:y 13

The PUCO ruling was in sharp The PL'CO also is investigating the The Nrset crance we demonstrated con 0ict with an earlier order by the reasonableness of $1.2 billion of in completing our huge construction Pennsylvania Public Utility Com- costs incurred from the March 21, program will see us through the mission ir. a Duquesne Light 1986 fuel loading to the start of challenge of securing a return on Company rate case. TheraPUC commercial operation on November this inves' ment.

determined that all of:he costs of 18,1987. In another Duquesne Light Perry through fuelloading were rate matter, a Pennsyh ania admini. The trist/um of providing a reliable prudent. The PUCO's disallowance strative law judg- ruled in January supply of electncity for Northern also was much higher than the 1988 that there was no imprudent Ohio will be evident in the 1990s recommendations of its own con- spending at Perry during that period. when economic growth in some sultants and staff. regicos is sherncircuited by The PUCO aho is studying the shortages of electrichy.

We will appeal the PUCO's decision prudency oflleaver Wiley Unit 2 con-to the Ohio Supreme Court. Among struction The Pennsylvania admini. Thepcxtbility to change in a o;her thmgs, we will cite incon- strative law judge found inJanu:iry changing business world was sistencies and errors in the ruling- 1988 that $372 million (eight per. exemplined by the affiliation. With For example, the PUCO determined cent)of the cost of building the the benefit of operating experience, that Cleveland Electric "was not Unit was imprudently spent. The we have increased centraliation imprudent in its management" of and efficiency Greater employee PUCO will review the Penns) h ania issues related to General Electric investigations as part of that process. mobility among the subsidiaries Company, des'3ner of the Unit's creates a "cross polhnation" that reactor. The PUCO also conceded assures the highest quality operation its $264 million disallowance in throughout the organization.

connection with GE issues was not The commitment to provide based on a determination of the A utstanding service for residential, adequacy of GE's perforrnance. oving f orward With Nevertheless, the PUCO found that Confidence c mmercialandindustrid customers is reDected la all corporate activities Cleveland Electric was responstble for the alleged costs of G E related delays In the highly competitive energy The IP80s v/ill go down in the business, an electric utility's greatest pages of our corporate history as an auet is a satisfied customer. We will extrem-ly difficult decade. Never. continue to ment that asset.

Im estment Mt in Rate llase and theless. the completion and im e<,tment in Ltc lia ,e a." '

bcensing of our nuclear units gives

,  ; j us cause fcr optimism about our

[.: ei n } x ta . ,

future. The next several years will

• % 1. Mce,l . ' ' ! I

{ provide a bndpa u a future that will es b;hr k.21  !

! be rewarding not only for Centerior l

I Energy, but for all of our con-9 b d.e h 1' 4

1

.4 l

l l

. stituencies There are many reasons d3 b des;st' I . for this confidence:

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uditors' Report To the Sh.tre Owners and Board of Direttors of Ccnterior Energy Corporation:

We base examined the consolidated balance sheet (PUCO) and if necessary an appeal to the Ohio and consolidated statement of cumulative preferred Supreme Court regarding Perry Unit I cost disal-and preference stock of Centerior I:nergy Corporation Iowances ordered by the Pl!Co.

(an Ohio corporation) and subsidiaries as of Decem her 31,198' and 1986, and the related consolidJted outcon f unher Pt:CO investigations re-statements of resuhs of operations, retained earnings garding the prudency of construction costs at Perry and source of funds invested in plant, facilities and Unit I and Bmer Valley l' nit 2.

special deposits for each of the three years in the 3, l he catcome ot f uture Pt'CO regulatory proceed-peraxi ended December 31,1981 Our examinations ings to establish a rate phase-in plan to recover were made in accordance with generally accepted the investments, lease obhgations and deferred auditing standards and, accordingly, included such costs relating to Perry l' nit 1 and Beaser Valley tests of the accounting records and such other audit-l' nit 2.

ing procedures as we considered necessary in the circumstances. We did not examine the consolidated 4.1he resolution of poteno d excess capacity issues.

fmancial statements of The Cleveland 1:lectric illuminating Company, a compant acquired by dwr Perry Unit 2 udl be completed and Centerior in 1986 in a transaction accounted for as a w ther dw inmunent um uhunately be rnom pooling of interests, for the year ended December able in r.nes chayd to cunomert 31,19xi such statements reflect total operating res - As a result of the untertainties referred to above, enues constuuting approximately "nm of CenteriorN management can give no assurance th.a the full in-consohdated operating revenues for the Scar ended veMment in these units and a return thereon, applica-December 31,19si T hese statements were ex ble lea .e rental obligations and deferred costs will amirxd by other authtors w hose report thereon has ultimately be recusered in rates charged to been turnished to us, and our opinion expreued cuqomers.

berein, insofar as it relates to the amounts included for liie Cleseland 'llettric illuminating Company for in our opinion, based .pon our examinations and the that period is based solely upon the report of other report of other auditors referred to abose, and subject auditors The opinion of the other auditors is subject to the effects on the financial statements of such to the outcome of regulatory uncertainties with re. adjustments, if any, as might h.ne been required had spect to Perrv l' nit 1, Perry linit 2 and lleaser Valley the outcome of the untert tinties discuued ahme l' rut 2 insofar as they apply to The Clescland 1:lectric been known, the financial statements referred to l

Illuminating Company. abose present fairly the consolid.ned financial posi- l non of Centerior 1:nergy Corporation and subsidiaries l As discussed further in Notes 3 and ,, sigmficant -

as of December 31,198' and 1986, and the consoli-uncertainties exist with respett to the recuserv of dated results of their operahons and source of f unds investruents, lease obligations and deferred costs re .

insested in plant, fau.lities and special deposits for lating to Perry L,mts 1 and 2 and lleaser \,allev t,m.t 2.

each of the three years in the period ended Decem- l including:

ber 31,198', all in conformity with generally ac

1. The outcome of a request for rehearing pending cepted accounting principles applied on a consistent before T he Public l'olines Commioion of Ohio basis.

Arthur Andersen & Co.

Cleveland, Ohio l'ebruary 1",1984 l

l'

ummary of Significant Accounting Policies General added to the b.nc rates for electric senice. This f actor n designed to recuser luel costs from cthtoin Centerior linergy was organized in 1985 atul acquired erv lt is (lunged semianntully alter ,1 hearing before The Cleseland 1:lectric illuminating Com;uny .ind the I'l'C( L Sulnidiaries (Cleveland Electric) aini lhe Toledo l'.dison Company ( Toledo Edison ) on April 29,198h 1.uel This businew (ombination w as .in ounted f or as a pooling of interests The historical tuuncul state The Centerior Utihties deter the differences between ments of Cleveland Electric ain! Toledo 1:dison actual tuel cosa md estinuted f uel com cum se-lCenterior Utihties) h.nc been combined ind re being recosen d mon ctatonwh lb mm bw E l stated. The consolidated financial statements .dso in ep, we,, with hM n l.ned n wim v clude the account, or centerior 1:ncrgy's wholly ow ned subsidian, Centerior Senice Company (ser 'i he co ,t of fowil f uel is clurged to fuel expeine sice Company I, which was itkorporated in 1986 The b.ned on inventory us. ige. ~l he cost of nut le.ir fuel, Sen ice Comp.iny prt 6:de% at co' t. m inagement, fi. inchiding interest, is charged to f uel cAperne based tuncul, adminntratn e, Ungmeeting. legal and other on the rate of consumption. Estinuted future nuclear sen nes to Centerior l'nergy, Clevel.ind Llet tric and f uel disposal costs . ire being recusered through the loledo lihson The Centerior l'Ohties operate as b.ne ratet sepaute comjunics en h sening the customers in its senice area The hrst mortgage tw unts, other debt Carrying Charges and Deferred Operating obhgations ,md preferred and preterence stot L of the INpenses Centerior l'hhties mntinue to be outstanding securi ties i $t t he s,..cnterior l,tihhes All unmhcant in t he Pl'C() h.n .iuthorized the Cenic ior l'tihties to tercionpany items bas e been chmicated m defer interest carn mg costs, current operating et

( un soh d at ti m penses (includmg rent.il pay ments) and depreciation for tiener Valley I'mt 2 from its conunertial in Centerior 1:nctgy and the Centerior l~tihties follow senice date through 1)clember 31,1988 or until that the l'mlorm system of Aloiunts prew ribed by the l mt% cosa are included in rates, w hit heser o(curs reler il l'ncrgy Regul.non Comnuwinn and adopted hrst The Pl:CO also has authori/cd the Centerior by 1he Pubhc l'Ohnes Conunission of Ohio l'ulities to deler currt nt operating expenses and de

( Pl'Co l. T he senice Company follows the l mtorm preciation f or Perry l' nit I f rom june 1,19x' through sy stem of Act ounts 'or Mutual Senit e Comlunies as 1)ct ember 22,1981, the d.uc w hen these wsts be prew nbed by the s x unties and I Achange Conunis gan to be recosered in rates, and has authori/cd the sien un 'er the Publit l'o ht) r n.' hng Comp.m> M t of deterral of mterest and equay carry ing cosa, cu lu 19M sisc of those associated with iiperating expenses and l he Centerior i,tihtirs Jre membe,s ut the Central deprecunon, f or thn l' nit trom June 1.19s'ihrough l Area Pow er Coi,rdm.ition Group i C APCO ) Other I)erember 31,19x' and deterral of mic est carning (tWts lrtim jailliary 1,19MM thr(High ()cccmlier 31, inembers include I)lh[ut she 'aght (ilolpan) ( 1)u 1988 or unal sm h interes: carning ( osts are included gliesnt ) ( >hii > lihu iii Ciunpany i () hit > l'divin ) aint In rate % wiliclleser t't L ilts hrsi l he Pl'C() deter Penn9 1sania Power Company ( Pennsy lva nu nuned that Perry I'mt I u as considered "used and Power ) l he mecibers hne c instruard and oper.nc generJtii>n and tr.unmissi )n t 'rilities [tir the the (it tisef ul' lin M.4) 31,198' hir regiil.ittin piirJu nes fiir hn.lOcul Ieju srting ptirlh Wes, t he .Inmunis def erred t he C Al'(.( ) (i nu panies h)r Fern l' nit I purstlant to the Pl'C() alc(lunting R es enues ordcIs h ise been inchided in prtiperty, plant and equipment through the Nosember 18,198' wmmer-Customers are billed on a mon bly (p le b.ni, f or (ial in senice d.ne. Subsequent to tlut d.ne, amount *,

their energy colotlinptl(ut b hed tin rate % hedub s delerted !use been Ieubrded as deterred (Iurges

.iuthon/cd by the Plu) l hew ies ennes are n- t he plt () did not authon/c deferol of any equity (orded in the auountmg penod donng w hit h meters carry ing i osts atter November l' 198' for lic.ncr

.if e read. eM ept hir tile [H )rtitm t t reventics u hh h ate Y illey l' int 2 tir alter I)cceinber 31,19H' It)r Perry detened under the nurror wnstrut oon work m l'mt 1see Note ' for a diw ussion of regul.uory progress ( CW IPi law dminsed below A luel tat tor n nutters rel uing to our investments m these l' nits.

1H

Depreciation and Amortization For certain property, the Centerior Utilities received investment tax credits which have been accounted for The cost of property, plant and equipment, except for as deferred credits. Tax credits utilized are reflected the nuclear generating units, is depreciated oser as reductions to tax expense over the hfe of the their estimated useful lives on a straight-line basis. related property. See Note 8 for federal income tax Annual straight line depreciation provisions ex details and a discussion of a new accounting standard pressed as a percent of average depreciable u:ility for income taxes.

plant in service were 3.8% in 1987,3.6% in 1986 and 3.5% in 1985. Depreciation expense for the nuclear Interest Charges unas is based on the units of production method.

This includes provisions for future decommissianing U""'0*' "" I""8 '""' Mt rep ned on the watement costs. These provisions are estimated at f luults f Operations does not include interest on

$122,000,000 in 1986 dollars for the Davis llesse nucku fuel oMgadons intnew on nudm fud Nuclear Power Station (Davis.Besse) and $72,000,nno obhganons for fuel unda construction is capitalized.

for Perry Unit 1 and $63,000,000 for Beaver Valley See N te 5.

Unit 2 in 1987 dollars. There are no restrictions on the use of the amounts currently. being recovered Property, Plant and Equipment from customers through rates for decommissioning of Property, plant and equipment are stated at original Davis nesse and Perry Unit 1. The sale and leaseback cost. Included in the cost cf construction are items agreement for Beaver Valley Unit 2 requires th such n related payroll : axes, pensions, fringe bene-external funding of the leasehold interests' share of fits, managemeat and general overheads and an al.

the Unit's decommissioning costs starting by Septem' lowance for funds used during construction her 1992. See Note 2. ( AFUDC L AFUDC represents the estimated compos-ite debt and equity cost of funds used to finance Costs associated with four CAPCO nuclear generatinM construction. This noncash aHowance is credited to units cancelled in 1980 are being amortired and ncome, except for AFUDC for Perry Unit 2. Since July recovered in rates through 1991 in accordance with 1985, Per~ Unit 2 AFUDC had been credited to a PUCO rate orders. The PUCO does not allow the deferred intome account. Effective January 1,1988, Centerior Utilities to carn 2 return on the unamorti/ed we discont'nued the practice of accruing AFUDC on balance. A new accounhng standard will require the Per y Unit 2. See Note 3. The AFUDC rates, net of discounting of this babnce in 1988. This discount- the income tax effect, aseraged 10?% in 1987 and ,

ing will not materially unpact our financial 10.6% in 1986 and 1985.

statements.

I Maintenance and repairs are charged to expense as 1 incurred. Certain maintenance and repair expenses 1 Federal Insome Taxes for Perry Unit I and Heaver Valley Unit 2 have been deferred pursuant to the PUCO acccunting orders Toledo Edison and Cleveland Electric have deferred discussed abuse. The cost of replacing plant and the federal income taxes for the differences between equipment is chaged to the utility plant accounts.

straight.line depreciation and tax depreciation for 4

The con of property retired plus removal costs, after property additions since 19'3 and 1976, respectively.

deducting any salvage value, is charged to the accu.

In addition, the tax effects of certain other timing '

differences have been deferred This treatment is died govien for depeciadon.

consistent with the methods used for rate making .

purposes. The Centerior Utilities have also deterred Mirror Construction 4,ork m. Progress the tax effect of the net gains and loss relating to the The Ohio mirror CWIP law requires that revenues sale and leaseback transactions. See Note 2. The authorized by the PUCC and collected as a result of remaining timing differences are not deferred. They including CWh' in rate base be refunded in c ubse.

are recognized for book purposes, and in rates, in the quent period af ter the projec*, i included in rate base.

year they affect taxes payable. At December 31,1987, such amoums are deferred and reorded as refund

'he cumulative income tax timing difference for obligations to customers AFUDC continues to be which deferred income taxes base not been prosided capitalized during the construction period.1 he de.

amounted to $412,n00,000. Based on PUCO and ferred revenues are then recognh ed as operating rev.

Chio supreme Court decisions, such taxes can be enues in the Results of Operations over the period of recovered in future revenues. the refund 19

i

~ nagement's Financial Analpis Results of Operations creases in the aserage number of slures outsunding also (ontributed to the declines in per share resuhs.

Operating resenues incre.ned by 1.5% in 198',

following increases of 3.8% i.' 1986.uul t'% in 1985. Al'l't)C and defened caming charges luse repre.

l he # 2',000,000 increase in electric revenues in sented an incre.ning propmnon of caniings 198' Irvin 1980 resillted frotn an IH9,lH)n,lmn it). Il81% in 198',105 3% in 198h and 89.5% in 1985.

crease in base rates aint other revenues and a At the same time, c.nh llows hae been impacted by

$ Hi.onn,ono increase from kdowatt hour saies growth the cost of additional debt aint equity thuncing for offset by a $56,000,000 decreaw in fuel unt recovery the completion of the two nuclear units Alit:1)C for res enues and a $ 40,000.000 decrease for nurror the lic.ner Valley l: nit J investment was discontinued CWlP retutui pnnisions w hen this llmt became operanonal in November 198' Al'Cl)C hir the l'erry (Init I i!Mestment w.n l Kilowatt hour sales increawd by n. in 198' fo' lowing discontinued on January 1,1988 punuant to a Pl:Co l J11 illcrease (d 18 b in 198h .ind a slight increase in accounting order. subsequellt to these tw() d.it e s, l 1985 sales to industrial customers increased by 5% interest carrymg (harges on these innestments are in 198' from the lesel in 198h and 1985 Industrul being credued to m(ome at a rate lower than the full sales growth was broad based, particularly ;n the steel Al'l:1)C rate. Consequently, carnings are expec ted to sector. Residential and commercial sales iacreased be lower in 1988, although the quahty of carnings 2% and 1.8%, respet tn el), in 198' from 1986 levels, and cash flow are expected to improse.1)elerral of Irgely because of a substantu!!y wanner than nor- interest carrying durges wili be discootinued as the nul sununer in 198' l.ower f uel resenues in 198 ? im esunenn are recogni/cd in r.ite b.:se.

resuhed hom increased use of our nuclear units

()))erating expellses ilu reased by t).3% in 198', ".M in 198o and 53 in 198;. t he int reases in operating Intlation continues in atlect our business. Oser the expenses it) 1985 Jnd 1980 were derned parth frtMn d,rce year peritid l')SS 198 t)ur aser.lge electric the ettet ts of an 18 monto ouuge at 1)nis llewe-rates lute inue.ned less than the Consumer Price Thn otitage resuhed m the use of more uul and Index. In this period, nu rc ises in the cost of labor, puttlused power at umt prices w hich exceeded the nuteruls ,md services used in operanons were moder-umt price of nucitar tuel generation. Other operanon ated by a downward trend in the cost of uul.

and Inalnten1nte expenses 111 l985 alnl 19NU in crCJsed p.lucipall) It)r the ref urbishtnellt (if I)nis l he citet t ()l intl.ititill tin the (lat *)f Inul h (d (Hir ncW liesse in 198', f uel and purt h.ned pow er expenw f.uihties has yet to be recogni/cd in the rate nuking dropped .is I).b n llewe ca"le b R k on hne and Perry pro (ess. Generally, we hac to raise neW capiul to l? nit i .md Dener Valley I'mt 2 went into seruce, meet growth needs at intl.ned costs of construction T he reduction m f uel and purch ned power expense, and to replace worn out items t higher replacement lower federal income taxes and savmgs from cost costs. Il rate adlustments f.nl to c ompensate for tho redlR tion pringlJfin were ab(>ut t)llsel by sa!c and ct at ()[ new ( apit.il. Jn er(nitin lif our return on eqtlilY leaseb.n k rental expense and higher units of produc w dl occur As a resuh, there w ill be a conti.iuing need tion deprecunon at I)nis Besse for r.uc increases Parni!)Ms per share wt're $2 8210 IV8', dow n '.2% W e o m ttu n e (t) seek adeqty[e ,gn { time ly rate in from I4 o n in 1980 and 14.n lower tlun $3.29 m uc.ncs for the Cemerior l'nhties md a regulatory 1985. l he sale of Clcs eland I'le( tric's ste.un sy stein envirt mment w hich is resp )lnne t( the ettect i)f infla reiluted 198' carnings by 13 cents per share in tion on our imestment 20

esul f Operatiot s Centerior Energy Corporation and Subsidiaries l'or the years ended December 31, 1987 1986 1985 uhouunds V Mlut euept per shue am ,unm Operating Revenues 1: lect ric . $ 1,932,170 $ 1,90 6,"' $ 1.828,131 Steam heating and gas 13,371 12.053 18,866 1,945,5(I, 1.91 78n 1.866.99' Operating Expenses Fuel and purch.ised power . 470,466 522.281 510,861 Other operation and taaintenance 6(2,594 5 5 0,8' + 450.376 Depreciation and amorti/ tion. 214,421 141,009 141,333 Taxes, other than federal income taxes . 2 d8,480 195,96' 182,016 l'erry L' nit I and lleaver Valley l' nit 2 deferred operating expenses (87,623) - -

l'ederal income taxes . I14,593 1i' '94 163.362 1,561,93_1 1.55'.925 1,4i',961 Operating Inn;me 383,610 359.805 399.436 Nonoperating income Allowant e f or equity f unds used during (onstruction . 297,239 298,'81 260,632 Other income and deductions, net . (30,665) ( x,108 ) 5.825 Loss on steani system sale * (27,156)

Perrv 1: nit I and lie.ner Valley tJnit 2 carrving charges . 30,30's i ederal incorre taxes credir 121,122 116.422 86. " 5 399,813 10'.095 353,232 Income ;iefl>re Interest Charges. 783d53 '66.400 752.2h8 Interest Charges Long term debt. 425,577 39',206 360.912 short term debt 6,834 6.812 5,917 Allowance for borrowed funds used during construction . (125,446) (114.038) tex.' " )

306,9(5 289.980 268.052 Income After Interest Charges 476,488 476.920 4 H ;,216 l' referred and preference disidend requirements of subsidiaries , 86,145 85.02' 82,829 Net inc ome $ 390,353 $ 391.89 3 $ 401,38' At erage Number ol Common h > arcs outstandung (tlwnnamb). _ 138,345 _ _12 8,9 2 '_ _

___l21.898 l'arntngs l'er Common share. $ 2.82 $ 3 os $ 3.29 Dit idends Declared l'er Common Abare $ 2.56 $ 2 49 $ 2.20

• t he one tinie loss on the steam system sale redt.ced earnings per conunon share by 13 (ents in 198" see ite 11.

The acconpanying notes and sun. mary of ugnificant accounting policies are an integr.il p.ut of this statement.

21

.o. e anagement's Financial Analysis Capital Resources and I.iquidity purchase $38,oon.nno of preferred and preference

%.e carry on a continuous program of constructing stock during the same pern>d We expect to hnance externally about one halt to two tlu. rds ut. these re.

I - :

dew !JCilities and modifying existing IJcilities to meet l

anticipated demand for electric sersice and to com. quirements see Note 12 for further information con ply with governmental regulations l.he capital re- cerning the hrst mortgage bonds and the preferred l .

quirements for this construttion program over the and preferente stock of Cleveland Electric and Toledo 1:dison. Our available short term horrowing three year period 1985 198, totaled approxinutelv -

arrangements are explained in Note 13.

$3,ono non,noo, excludmg nuclear fuel. .l.his amount includes AITDC. The capital re(piired to tin ince our our ability to meet our tin.mcing needs depends upon construction program is obtained from funds gener- the Centerior 1:tilities obuining su!)icient and timely ated internallt as well as from external sources rate increases and upon availability of capital. See About 66% of the construction program capital re- Note ' f or docussion of rate increase requests 1 he quirements for 19ss. and 1986 was raised through availability of capital to meet our external financing bank borrowing and sales of securitiev Our 198,, needs depends upon such f actors as financial market hnancing activity included the issuance of user conditions, earnings, our ability to pay din.dends, the 5.;IH),f dHl shares iif Centeritir Energy comnn>n stock size of our construction program and our credit through share owner and employee stock pl. ins, ratings in 198;. rating agencies lowered their ratings which raised about $ 103.000,000 see Note 12 on certain securities of the Centerior l'tilities This Cleveland Electric issued $3 0,;on,non of tirst mort- made our cost of capiul more expensive. In April gage bonds and $ 5,000,000 of preferred stoc k. .I. o 1986, standard and PooiN Corporation further low-ledo Edison issued $2;o,000,000 of unsecured notes cred its ratings on the nrst mortgage bonds and pre ferred stock of Clestland Electric to Bull- and 11B + ,

and debentures, $;o.ono,ono o.f preterred stock and

$ + 1,000.000 of tirq mortgage bonds. In September respectivelv. 5tandard .md Poor's Corpor.uion raised 198 , w e sold and leased hat k tertain interests m four Toledo Edison's hrst mortgage bonds and preferred generating umts as discussed in Note J A substan 40 mungs to dw sune wls how naings luw ti.il pt >rthin til the net priweeds frt >in these tiainac O(>t C hanged through 198~ 5tandard and Knir's rates tions has been used to pav portions of short term debt Ti iled( > Fdnon's unsecured ntites llB + . .\ha>dy's in incurred to finance the construttion program, to sestors 5erute rates Cleseland Electric's bone and redeem outstanding sec urities, to pay our t onstruc- preferred stock 1.ul and Toledo Edison's bonds non program costs and for gen;ral ci>rporate pur Baa3, unset ured notes Hal and pref erred not k Ha2.

pihes The reinainder t,f the furids friini the site acid our finanting psdicy is t<> in.i;ntain, as near n pr .t ti leaseback transactions will be used for our construc cable. a capitali/.uion strut ture of som el". conunon (H)n pringrJm. HUndattirY and optional redempth)n sttK k equit), a maximuni til 181 debt Jntl lt h 12" requirements md general corporate purposes. preferred and preterente tot k. At ) car end 198', the In addition to our conuruction program f unding re Company's censohdated capitalir.nion consisted of quirements t as discuwed in Niite 3 ), lles cland I,let ill com!ntin stoc k equilt 19" dehtand 101 pre tric and Toledo Edison will reqmre $ 4 l'.noo,uno and n and pakwnw qui

$ 615,000,n00, respectacly, for the retirement of I or discussion of the cash flow impat t of the lax debt and preferred stock during the 19xx 1992 pe Ref orm At t of 1980, see Note x riod. Clescland Elet tric also is reqmred to affer to 22

etained Earnings Centerior Energy Corporation and Subsidiaries l'or the years ended December 31,

__1987 1986 1985

( thouun.h of d. ,llars i Balance at Beginning of l' ear. $ 893,616 $ 820 'it} $ 689,179 Additions Net income 390,353 391,893 101,38' Deductions Common stock dividends declared. . . (352,715) (319.023) (269,80i)

Other, prinurity preferred sto(k redemption expenses of subsidiaries (22,643) (10) (6)

Earnings Reinvested During the Year 14,995 '2.860 131,57' Balance at End of )' ear. $ 908,611 $ 893.616 $ 820.~56 Source of Funds Invested in Plant, Facilities and Special Deposits for the years ended December 31, 1987 1986 1985 uhouunds of deru Provided from Internal Sources Net Income ...

$ 390,353 $ 391,893 $ 401.387 Principal Non-Cash items:

Deprecution and amortization. net 193,616 141,009 111,333 Deferred federal income taxes , (272,133) 86,'30 69,881 Investment tax credits, net 132,699 (39,109) l> >ss (>n steam system sale . 18.483

.... 27,156 ---

Allowance for c'quity funds used during construction . (297,239) ( 298,'H 1 ) ( 260 A3 2 )

Funds Provided from Operations 174,482 281,7 1 2 3'o,452 Common stock diddends .... .. ... (352,715) (319,023) (269,806)

Net proceeds frc.n sale and leaseback transactions 1,690,816 -- -

Net proceeds from steam system sale. ... .

... 7,000 - -

Increase in reserve for Perry l' nit 2 allowance far funds used during constructica ..

... ... 80,653 63,52; 30,122 Net change in working capital and other au,unts ( 4 fs,208 ) 3 i,so2 (38,720)

Allowance for equity f unds used during construc tion . 297,239 298,'M1 200.032 Funds Prmided from Internal 50urces. 1,8 19,2(37 359.82' _ 352,982 Provided from External Sources sale of s,ecunties.

Common stock , 102,724 2n8,383 175,28' Preterred stock . .. 123,313 103,968 '9,000 first mortgage bonds . 411,500 325.000 385,9'o Net change in other debt ..

166,542 86,306 111,188 Net change in pollution control construction funds 26,96 f 56,4i9 ( 2,5 i 4 )

Net (deucase) increase in short term debt . (9,197) 16,Ho' ( l',9'8 )

Net (increase) decrease in temporary cash investments. (50(,720) 102,917 12,3 i i Redemption of bonds, preferrt d and preference stock . (881,258) (12',825) (121,296)

Net increase in other nonrcurrent liabilities . 21,888 'n .12 3 '6,496 l unds Provided from External 50urtes (5(5,244) H 6 6. i 28 'o1,46' Total Aources of funch. $ 1,301,023 $ 1.206.2 5 5 $ 1,0 51,419 Invested in Construction Expenditures . .. .. ..

$ 933,744 $ 1,120,01' $ 9s3,750 Deposits in Trust, prinunty sale and loaschat k proceed. 374,085 --

(Decrease) Mcrease in Nuclear fuel Inventory (3,806) 86.238 'o,699 Tta! int esti J In }'lant, Factlllies and hjon tal !)cfronts . $ 1,30 (,023 $ 1.20(n 2 5 5 $1,oSi,449 The A t ompanying nr >tes and sunun ta of ugnihcant A(ounting pilnics are an Integra! jurt of ;hese stairments.

23 l

l

Balance Sheet Centerior Energy Corporation and Subsidiaries 1)n ember 31.

19M7 1986_

Assets (thouunth of dollus) #

l'roperty, I'lant arul L terpmn i nt l'Ohty plant in scruce . ... $ N,349,696 $ 4,639,5 6 2 Less. accumulated deprecution and amortization 1,324,646 1.467.662 7,025,250 3.271,880 Construction work in progrew . 224,679 a ,510.962 Perry L'oit 2. 783,02N '01.579 M,032,o S 7 H.4 85,4 21 Nuclear fuel, net of amortization. . . 609,5(5 613,351 Other property, leu au umulated depreaanon . 46,805 39 213 H,6M9,307 9,13',985 3pecial Deposits Polludon control construction funds, unexpended ... 1,775 28,'39 i Depmits in trust, primarily sale and leasebac k prmeeds . 374,085 l 375,860 28,739 1 Ctirrcrit Aucts Cash and temporary cash investments 612,775 106,794 l Amounts due trom customers and others, net . 208,214 192 '31 l Materials and supphes, at average cost 65,910 4i,536 Fouil fuel insentory, at average cost 7',,665 62,422 Taaes apphtable to suureding years. 202,396 155,3'3 Other 22,216 10,5'4 1,185,174 572,430 DsfericJ Owges --

l'n amortized (osts of terminated protects . 46,224 60,109 Accumulated deferred federal income tnes. 493,473 29,214 l'namortized loss, lleaser Valley L nit 2 sale 134,475 L'namortized low on reacquired debt 59,74 H 1,736 Carrung charges and nuclear operating expenses 89,(r14 Other 209,3_0( 13'. MH 1,03 2,31 H 22Ha l' Total Auets . $ 11,2H 2,659 $ 9,06?,571 Ca italitation and l_iabilities lapitall:atluri Common shares, without par ulue (stated ulue of $ 191.I'2.000 arui in ? 892.000 for 19x? and 19m, respec tn elv h IMO,oon.oon author ired 140706,000 and 135,19'.000 outstandmg in 19x' and 19%,

respecovely $ 2,200,4 49 5 2,09','25 Retamed earnings 908,611 N93.616 Common stock equity. 3,109,060 2.991,341 I rrierred stos k With nundatory redemption provisions . 330,188 665,014 w ithout mandatory redemption prosisions . 457,334 406,021 Preterence stock. with mandatory redemption prousions. 13,797 22,8o0 Long term debt . 3,718,249 3,'92302

-7,628,62H_ ',675,5's Oth< r Nonc n rrent liabilities Kefund obhgations to custoniers . ... .... 3 3,(u)

Other, pnmarily nuclear fuel lease and trust obhgations . 598,084 609,196 Cte rrent liabilittes 0 5 * I b"*4" Curr nt portion of long term debt and preferred stock . 59,768 55,359 Current portion of lease obligations . 71,396 53,4'o Notes payable to banks and others . 36,732 45.929 Accounts payable . 1 H 5,070 1bo.xxs A(crued tnes . 326,2(>M 193,119 Accrued interest . . . . 93,351 92,15 x Daidends declared . 15,3 4 H 15,'24 Accrued payroll and ucanons . 27,308 31,o" ,

Refund obligations to (ustomers , 13,000 -

Other 28,561 2',062 M 56,802 69 4,'M Deferred c.redsts -

l'namortized ins estment tn (redits . 399,3 (R 293.6's Accumulated Jeferred federal income ines. ..... 672,817 526.981 Reserse for Pete; l' nit 2 all0 A2nc e for funds used during c onstruc tion . 174 300 93.96' L oamortized gain, Itruce t.wheld Plant ule. 739,910 Wirr 179,470 73.431 2,166,145 988,034 Total Capitahrati in and liabihtles - $ 11,2 H 2,659 3 9,96'.5'l The accompanying notes and st,mrr.ary of significant accounung Imlicies are an integral part ut thn statement 24 I

. _ _ _ _ _ _ _ 1

tatement of Cumulative Preferred and Centerior Energy Corporation and Subsidiaries Preference Stock 1987 shares Current Deceniber 31 Outstanding Call Prig 1987 1986 obouunds of douam Cleveland Electric Without par value, 1,000,000 preferred and 3,000,000 pref-orence shares authorized Subject to mandatory redemption (lew current maturtties):

Preferred:

$ '.35 Series C 200,000 $ 103.00 $ 20,000 $ 21,000 88 00 Series E 36,000 1,015.91 36,000 39,000

'5.00 Series F 16,666 1,000.00 16,666 33,333 80.00 Series C, 8,000 1,000,00 8.000 16,000 145,00 Series 1i 19,590 19,590 23,156 145 00 Series ! .'3,624 -

23,624 27,562 113.5 a 5eries J ,

23,200 113.50 Series K 10,000 10,000 10,000 Adjustable Series M 500,000 106.'6 49,000 49,000 9.125 Series N '50,000 109.13 '3.96x 74,968 250,848 316,217 Preference:

. 5 0 Series 1 13,'97 1,000 00 _13 '9' 22,800 Not subject to mandatory redemption:

Preferred:

'.10 5eries A 500,000 101.00 50,000 50,000

' 56 5e s B -450,000 102 26 45,071 45,0'1 Adiustable 5ei,es L 500,000 106.34 48,950 48,950 Remarketed Series P '50 101,500.00 '4.313 -

21',334 -

141,021 Toledo Edison

$100 par value preferred, 3,000,000 shares authorized, $25 par value prefened, 12,000,000 shares authoored, and $25 par value preferente, 5,000,000 shares authori/ed none out st.md mg Subject to nundatorv redemption (less current maturities):

$100 par $ 11.00 . 50,000 103.50 5,000 5,499 9.3' 5 . 183,100 105.43 18.310 20,005 13 25 -- -- --

11,268 12 65 - - - - -

18,225 1i 80 - - --

28,800 25 par 3.' 5 - --

30,000 3.'2 - --

35,000 2 81 2,000,000 2' 81 50,000 --

73,340 148,797 Not subject to mandatory redemption:

100 par 4 25 160,000 104 625 16,000 16,000 4.56 50,000 101.00 5,000 5,000 4.25 100,000 102.00 10,000 10,000 i 8.32 100,000 103.54 10,000 10,000

' 6 150,000 103.37" 15,000 15,000

' 80 150,000 102.60 15,000 15,000 10.00 190,000 101 00 19,000 19,000 25 par 2 21 1,000,000 25.)0 25,000 25,000 2 365, 1,400,000 28 45 35,000 35,000 4 28 - - -

2 0,04)0 3.I' .. ... 1,200,000 30 9' 30,000 30,000 series A Adjustable 1,200,000 --

30,000 30,000 Series B Adjustable . 1,200,000 --

30,000 30,000 C.enterior Energy 26c,000 260 000 Without par value, 5,000,000 preferred shares authorized, -- --

Total l' referred stock tt oth .11andatory Resh mption l' rot isions $ 3 Ao,188 $ no;,014 Total l'rtferred htot k to it/~mt .\tandatury Knicmj>non l'ror triorn $ 45'.3 % i $ no 4.021 Total l*rc[ercru e htock at oth .\tandatory Redemption l'ror abioru , $ l3 '97 $ 22,800 The accompanying notes and summary of signihcant actounung lulicies are an mtegr.d pan of this statement.

25

. otes to the Financial Statements (1) Property Owned with other Utilities and Investors The Centerior Utilities own, as tenants in common with other utilities and those investors who are owner-participants in various sale and leaseback tranuctions (lessors), certain generating units as hsted below. Each owner owns an undivided share in the entire unit. Each owner has the right to a percentage of the generating capability of each unit equal to its ownership share. Each utility owner is obligated to pay for only its respective share of the construction and operating costs. l:ach lessee is obligated to pay for the related lessor's share of those costs. Property, plant and equipment at December 31,1987 includes the following f acilities owned by the Centerior Utilities as tenants in common with other utilities and lessors In- Plant Construction Sen ice Ownership ownership Pow er in Work Generating Unit Date Share Megawatts source Service in Progress uhouunds of doHars) la Senice:

5eneca Pumped Storage 1970 80.00 % 305 Hydro $ 58,29" $ Si Eastlake Unit 5 . 1972 68 80 416 Coal 119,596 30,878 Perry Unit 1 & Common F acilities . 1987 51.02 615 Nuclear 2,'87,331 -

Beaver Valley Unit 2 &

Cornmon Facilities (Note 2) . 1987 26.12 218 Nuclear 1,350,801 9,388 Construction suspended (Note 3):

Perry Unit 2. Uncertain 51.02 615 Nuclear -

783.028

$ 4.316.023 $ H23.34 8 The accumulated depreciation for seneca at December 31,1987 was $16,000,000. Deprec iation on all other plant in service owned with others has been accumulated on an account basis with all other depreciable property rather than by specitic units of depreciable property. The Centerior Utilities' share of the operating expense of these generatmg units is included in the Results of Operations Ghio Edison and Pennsylvania Power hase agreed to purchase 80 megawatts of Cleveland i:lectric's 375 megawatt ownership interest in Perry Umt 1 over an 18 month period The purchase commenced with the commercial operation of the l'oit m November 198' (2) Utility Plant Sale and Leaseback Transactions Unit. The sale price w as $ 715,000,000. On the same

, pua m ase duw intatwa in the twu on september 3n,198', Cleveland 1:lectric sold es.

plants back to Toledo 1:dison (with Clescland Elec.

sentially all of its 4,, o megawatt undivided tenant in '""""I "" ' #' } " "

common interests in Unih 1,2 and 3 of the coal-hred llrute Mansfield Plant ( Mansfield Plant ). Cleve The Centerior Utihties are amortizing the applicable land Electric had owned 6 5%,26 M% and 2 6 47%, deferred gains and loss associated with these vies of I l

respectively, of those three units The sale price wa, utility plant user the period of the lease terms.

$ 62 5.500,000 On the same day, the purchasers leased I uture minimum lease payments under these operat.

those interests ba k to Cleseland Electric (with To ing leases at December 31,1987 are summarized as ledo I:dison as to lessee) for a term of about 29% follow s:

s ears. Year Amount t th ,uunds of dollars)

Also on September 30,19M', loledo I disoh sold 1988. I I 2 2.UDO essentially all of its 29 4 megawatt undivided tenant 1989 18 2 ""U in common interests in Units 2 and 3 of the Mansheld -

Plant. Toledo Ednon had ow ned 17 3% and 19.91%, 39g j gg,nya respectively, of those tw o units The ule price w." Later Years 5.020.000

$ 398,100.000 On the ume day, Toledo I:dison aho Total I uture Mininuun sold about lx 26% of Beaser Valley Unit 2 Toledo Lease Payments $ 5.8'5 M00 Edison had owned a 19 91% (165 megawatts) undi vided tenant m (ommon interest in Be.ner Valley T he amount recorded as rental expense for the Mant Unit 2 and h.n retained about a 145% interest in the held Plant leases was $32.ltio,otui in 1987 Rental 2n

costs for the 11eaver Valley Unit 2 lease of Al UDC), plus any cancellation costs, less any equip.

318,300,000 in 1987 were recorded in a deferred ment usable elsewhere and less any resulting in charge account. saving, would have to be w rinen off. We estimate that The Centerior Utilities are responsible under the such a write ofh bned on our inuwtnwnt in tMs Und lenes for papng all tnes, insurance premiunn oper. as of Deceinber 31,1981 wouM he bun about ating and maintenance costs and all other similar I d 8'UW""

costs for all interests in the Units sold and leased in April 1986, Duquesne announced that it no longer back. The Centerior l'tilities may incur additional needs the capacuy of Perry l' nit 2. Duquesne is costs in connection with capital improvements to the continuing to pay for us 13m ownership share of Units. The owners (lessors) may elect to make addi. nuintaining Perry Unit 2 while construction is suo tional equity investments with respect to the cost of pended. Duquesne has adsised the Pennsylvania Pub-any capital improvements on terms to be agreed he l'tilities Conunission (PaPUC) that it will not upon. The Centerior Utilities have options to buy the agree to resumption of construction of Perry Unit 1 interests back at the end of the leases for the fair We do not know what arrangements might be made market value at that time or to renew the leases for a between Duquesne and the other CAPCO compa minimum of two years Additional lease provisions nies if they want to complete Perry Unit 2 and proside other purchase options along with conditions Duquesne does not change its position.

for mandatory termination of the leases (and possible repurchase of the leasehold interests) for obsoles. (4) Nuclear Operations and Contingencies cence and esents of def ault- Dartwesse Nuckar Power station In 198', the PUCO ordered a refund of certain re-(3) Construction and Conu.ngencies placement fuel and purchased power costs incurred Construction Program and collected from customers during aa outage at The esumated cost of our construction program for DJVi* Ile"e in 1985 and 198i plus interest. T he the 19881992 period is i1,900,0n0,000, inc luding refund requirement was based on the PL'CO's conclu-AFUDC and excludmg nuclear fuel. should more sion that the outage was a result of imprudence in the stringent environmental regulations be adopted, par- management and mainten.mce of Dasis liesse by ticularly in the area of acid rain pollution mntrol. Toledo Edison The amounts of the refunds are ap construcoon program costs for thn period are not proximately $33,595,0n0 and $32,563.ono for Toledo expected to mcrease substantially. However, such Edison and Cleveland Uectric, respectively. T he re-costs could mcrease substantially thereafter. No funds are to be made to customers over a period of 18 amount is included for Perry Unit 2 because as con months beginning in February and March 1988, struction has been suspended. respectively, through operation of :he fuel cost ratr adjustment We have appe.ded the order to the Ohie Pe rri f 'n't J supreme Court. 'T he refunds will reduce cash flow in Perry Umt 2, exclusive of the facilines to be used in 1988 and 1989 up to the time of any reversal by the common wah Perry Unit 1, is about ut complete. Court and could require fmancmg in addition to that including its share of the common facihties it is which otherwise would be required. The refunds about 58% complete. Construction of Perry Unit 2 was will not adversely affect future results of operations as suspended in 1985 by the CAPCO companies pend adequate reserves base been pcovided.

ing future consideration of several alternatives which in January 1986. the Nuclear Regulatory Commission include resumption of full construction with a re. (NRC ) undertook a review of the design and opera vised estimated cost and completion date, mothball tion of nuclear reactors designed by Babcock &

ing or cancellation None of these alternatives may be Wdcox (!!&W) at several plants, includmg Davis implemented without the approval of each of the Besse. The NRC stafi has wncluded that the Il&W-CAPCO companies. designed reactors can continue to operate safely if Perry Unit 2 is cancelled, the Centerior Utdities wdl w hile its review is being done. The outcome of the seek authorization from the PUCO to recover their NRC's review and its impact on us cannot be respectne investments in the Unit in rates We have predicted.

no auurance that recosery would be allowed in the In December 1986, the state of Ohio and an organi/a j event of such a cancellanon, if and when it were to tion each separately requested the United 5tates appear probable that recovery would not be allowed, Court of Appeals for the $ixth Ciremt to present the then our investment in Perry Unit 2 (includmg operation of Dasis Besse until the NRC has reviewed r

the off site emergency plan for Davis Besse. That The lease and borrowing rates are based on bank Court has not yet ruled on these requests but has prime and commercial paper rates. The amounts capi-ruled in our favor in a similar proceeding involving talized included interest charges incurred by the -

Perry Unit 1. lessors amounting to $ 38,000,000 in 1987,

$39,000,000 in 1986 and $38.000,000 in 1985. Under l'erry Unh I the leases, rental payments are made as the fuel is Perry Unit I was placed in commercial operation on burned in a reactor. The estimated future lease amor-November 18,1987. Although the Unit is in commer. tilation payments based on projected burn are cial operation, petitions are pending before various $ N ,000,000 in 1988, $ 79,000,000 in 1989, judicial and regulatory bodies to halt the operation of $78,000,000 in 1990, $93,000,000 in 1991 and Perr/ Unit 1 or modify or terminate the operating $106,000,000 in 1992. As these payments are made, license. We believe these petitions are unlikely to the amount of credit available to the lessors is re-succeed See Note 7 for a discussion of regulatory newed and becomes available to 6 nance additional matters relating to our investment in the Unit. nuclear fuel.

Heat er Valley UnH ? At December 31,198?, a total of $628,000,000 is committed under the leases and the trust for nuclear Beaver Valley L' nit 2 was placed in commercial opera. material and costs of processing it into fuel for the tion on No" mber 17,1987. See Note 7 for a discus ~ Centerior Utilities. This includes nuclear fuel in the sion of regulatory matters relating to our investment Davis liesse, Perry Unit 1 and Beaver Valley Unit 2 in the Unit. reactors with remaining payments of $51,000,000,

$86,000,000 and $ 59,000,000, respectively, as of De.

Other Nuclear h'isks

,,9e7 37 3 9g Our interests in four nuclear units (Davis liesse, Perry Units 1 and 2 and Beaver Valley Unit 2) are also (6) Nuclear Insurance impacted by activities or esents beyond our control.

Operating nuclear generating units have experienced The Price Anderson Act ( Act) limits the liability of unplanned outages or extensions of scheduled out- the owners of a nuclear power plant. T his limit is ages because of equipment problems or new regula- covered by private insurance amounting to tory requirements. A major accident at a nuclear $ 160,000,000 and an amount provided by an industry facility anphere in the world could cause the NRC to assessment plan. Under the plan, if any unit in the limit or prohibit the operation, construction or 11- United states has an incident with looes in excess of censing of a nuclear unit. private insurance, up to $5,000,000 (but not more than $ 10,000,000 per unit per year in the even' of (5) Nuclear Fuel more than one incident) must be contributed for each The Centerior Utilities hase lease and trust arrange, licensed nuclear unit in the country by the licensees ments to 6 nance nuclear material and fuel. This nu of each unit to cover liabilihes arising out of the clear fuel inventory should provide an adequate inciden:. Ilased on our present ow nership and lease-supply lasting into the mid 1990s. Substantial add . hold interests in our three operating nuclear units, tional nuclear material must be obtained in the future our maximum potential assessment under these provi.

to supply fuel for the remaining useful lives of sions (aouming the other CAPCO companies were to Davis Besse, Perry l' nit I and Beaver Valley Unit 2. contribute their proportionate share of any auess-More nuclear material and fuel would be required if ment) would be $9,770,n00 per incident but not Perry Unit 2 is completed more than $19,540,000 per calendar year.

The maximum amount that the Centerior Utilities can Certain provisions of the Act expired on August 1, 6 nance under one set of nuclear fuel leasing arrange 1987. Ilowever, until new legislation is adopted, the ments is $ 495,000,000. It consists of two long term prosisions of the Act relating to the industry assess-leases that allow the lenders to cancel their Snancing ment plan and the hmitation of liability will con-commitments after three years' notice. The Centerior tinue to apply. We cannot predict what action Utilities' share of the maximum amount available Congress or the President might ultimately take re-under another arrangement, which includes leases garding pending legislation or the Act. If the Act is and a trust combined, is $ 173,000,000. This arrange- modi 6ed to increase or eliminate the liability hmit, ment is subject to cancellation by the lender after our potential awessment in the event of a nuclear one year's notice. incident could be signincantly increased.

l i )

8 1

l

we have insurance coverage for damage to our prop. Unit I cost as CWIP in rate base. The new rates went erty at Davis Besse, Perry and Heaver Valley (includ- into effect in late December 1987.

ing leased fuel and clean up costs) in the amount of in December 1987, the PUCO granted Toledo Edison

$1,925,000,000 for each site. Damage to our property an increase in electric rates of $t000,000 annually.

could exceed the insurance coverage by a substantial In addition, the order made permanent the February amount and thereby have a material adverse effect 1985 and Auy 1987 emergency rate increases. The on our Snancial condition and results of operations in j rate increne includes a signiticant portion of the the periods following the loss. If the property dam- requested annualized operating costs for i erry Unit 1.

age reserves of one of the insurers are inadequate t The rae incmase ako reflects inclusion of a ponton cover claims arising out of an accident at any nuclear of Perry Unit I cost as CWIP in rate base. The new site in the United States covered by that insurer, we rates went into effect in late December 1987 are obligated to pay retrospective premiums up to

$ 14,467,000 for the current policy year. In c nnecti n with the February 1985 rate order, Toledo Edison was ordered to record a portion of its Insurance coverage is also held for the cost of any Al UDC accruals to a reserve account (rather than to i replacement power purchased after the occurrence of neome) in an amount sutlicient to offset the in-certain types of accidents at our nuclear units. The crease in after tax earnings resulting from the rate amount of the coverage is limited to 90% of the increase. At December 31,1987, this AFUDC deferral estinuted difference in replacement power costs per amounted to $38,000,000. It is expected that when week during the 52 week period staning 26 weeks Perry Unit 1 is considered for full inclusion in Toledo after an accident and 45% of such estimate per week Edison's rate base, the PUCO will either reduce rate for the next 52 weeks. The cost and duration of be by the amount of the reserve or include such i replacement power could substantially exceed the amount in rate base. If the latter option were chosen, insurance coverage. Ako, if the insurer's reserves are future revenues would be reduced by the interim inadequate to cover claims arising out of accidents at revenues collected, including carrying charges, over '

any nuclear units in the United States covered by a period equal to the period the interim rates were such insurance, we are obligated to pay retrospective n effect.

premiums up to $3,n42,000 for the current policy vear.

The Office of Consumers' Counsel (OCC) requested a rehearing objecting to inclusion of Perry Unit 1 (7) Regulatory Matter, operating costs in each of the rate decisions. The OCC ako filed a second request for rehearing in each

1. d

• rate case on other maters. The Centerior Utihties and During the three years ended December 31,1987, the other interested parties ako hase requested rehear.

PUCO granted increases in electric rates to the ings. The PUCO denied the requests for rehearings Centerior Utihties as follows: with respect to the h.clusion of Perry Unit I operat

, d )

Date Company rN og costs. The PUCO also acted on the other re- l t %uunas at que W ageg m War vs Mn uM in dollan) some of the requests. The OCC appealed the issue february 1985 Toledo Edison $ 22,700 raised in its first requests for rehearings to the Ohio i

Alarch 1985 Cleveland Electric 19,500 supreme Coutt and has requested a sta) relating to June 1986 Cleveland Electric 37,000 inclusion of such costs. The Centerior Utilities and l March 1987 Cleveland Electric 39,600 the other parties filing requests for rehearing may also May 1987 Toledo Edison 43,000 appeal to the same court if the PUCO denies their December 1987 Cleveland Electric 28,800 respect ve requests We beliese OCC's request relat' December 1987 Toledo Edison 4,000 ing to inclusion of Perry Unit 1 operating costs is l In December 198', the PUCO granted Cleveland unlikely to succeed. l Electric an increase in electric rates of $28,800,000 annually, llowever, this increase will be reduced by #d " M**" Ud '" N #"' kd' I'""""""

$ 11,800,000 on an annual basis for : priod of about in February 1988, the Centerior Utilities filed notices 18 months for the return of monies collected from of intent to request rate increases with the PUCO.

customers under the mirror CWIP law. The rate in. Generally, when a new electric generating unit is, or crease reflects inclusion of a significant pan of the is about to be, placed in commercial service, the  ;

requested annualized operating costs for Perry Unit 1 Centerior Utilities request a rate increase to recover l and the continued inclusion of a portion of Perry all allowable costs, including cunent operating ex I 29 l

l T

penses, depreciation, interest and a fair return on for Utilities and intervenors in early March 1988 to their investment in the unit. Because of the size of begin discussions on the phase in propwlt it is our their ownership investments in Perry Unit I and Bea- intent to work with the PUCO and other interested ver Valley Unit 2, the Centerior Utilities have pro- parties to reach an agreement sooner than December posed to the PUCO a gradual increase in their rates. 1988, the earliest time when, under normal proce.

These increases would "phase in" full recovery of all dures, any rate increases from our expected March such costs over a 10-year period. These plans would 1988 applications would go into effect.

defer costs in their initial years, but would ultimately The propmed phase in plans are expected to satisfy provide for full recovery of all allowable costs, in- the accounting standard for phase in plans. If the cluding all costs deferred pursuant to PUCO account' PUCO does not approve the phase in plans of either ing orders. of the Centerior Utilities or if a phase in plan is Cleveland Electric's plan includes a request for an approved that does not meet the accounting standard, initial increase in base rates which, when coupled our results of operations and financial condition with a reduction in revenues from a decrease in the would be adversely affected to the extent that allow.

fuel cost recovery factor and the return of CWIP- able costs, including all costs being deferred pursu.

related revenues, would result in revenues being ant to PUCO accounting orders, are not being 9.5% higher than 1987 revenues, or $125,000,000 currently recovered.

annually, followed by nine annual increases Toledo Edison's plan includes a request for an initial increase U ##"'idl Oi8dIl0'Cd"CC O/#"(icd' I"###5f"U in base rates which, when coupled with a reduction Depending on the ultimate outcome of prudency in revenues from a decrease in the fuel cost recovery investigations and the related appeals, we may have to factor and the impact of the February 1985 emer. write off the disallowed costs or discontinue accruing gency rate increase, would result in revenues being post in service carrying costs on a portion of our 7.2% higher than 1987 revenues, or $45,000,000 an. Investments in Perry Unit I and Beaver Valley Unit 2.

nually, followed by nine annual increases. In each of See Note 3 for a discussion of Perry Unit 2.

the phase in plans, the amounts of the annual in- In January 1988, the PUCO issued an order stating creases following the first year have yet to be final- that approximately $627,800,000 of Perry Unit I con-ired. They will be designed to provide for the full struction costs were imprudently incurred or were recovery of allowable costs relating to our inveuments unreasonable and that the Centerior Utilities' shares in Perry Unit I and Beaver Valley Unit 2. Also, as an of these costs of about $320,000,000 must be written alternative to the phase-in plans, the Centerior Utili off and not included in their respective rate bases.

ties inch ded in their notices of intent requests for The PUCO's investigation covered the perkxl of time approximate 30% rate increases which reflect the in starting with the decision to build the Unit through creases necessary for full recovery of our investments the date of fuel load on March 21,1986. Approxt.

In Perry Unit I and Beaver Valley Unit 2 on a mately $4,153,000,000 in construction costs of Perry l nondeferred basis. Unit I were incurred during this period. The order l Rate applications reflecting the phase in plans and the also stated that further adjustments will be required to nondeferred alternatives are expected to be filed with ccrrect the additional AFUDC component to reflect the PUCO in March 1988. As a part of these applica subsequent delays in the in-service date and to reilect tions we are considering proposing the transfer of a additional AFUDC associated with certain issues, portion or all of Toledo Edison's leased Beaver Valley The preliminary estimate of this additional amount, Unit 2 capacity entitlement and aw>ciated ' ental based on the methodology used in the PUCO's order, obligations to Cleveland Electric for an undeter- is $174.100.nno. The Centerior Utilities' share of this mined period. The applications also will seek to amount is about $89,000,000.

recover our investments in facilities other than Perry specifically, the PUCO concluded that Cleveland Unit 1 and Beaver Valley Unit 2 and higher operating Electric performed its project and management re-and capital costs. Irrespective of any action the PUCO sponsibilities in an aggressive and effective manner, may take with respect to these applications, addi- except for about $298,900,000 of costs w hich could tional rate increases may be requested in future years have been avoided through improved management to recover our other investments in facilities and and decision making, $263,600,000 of costs result-higher operating and capital costs- ing from delays caused by General Electric Company The Chairman of the PUCO has stated that the PUCO in connection wuh the design and construction of will sponsor a settlement conference with the Center. the nuclear steam supply system and $65,300,000 of 30

coats resulting from delays caused by another con- financial, regulatory and technical considerations re-tractor. Although the PUCO concluded that Cleveland sulting in additional costs of $312,000,000 to Electric did not act imprudently with respect to the $ 188,000,000 but did not characterire these delays latter two costs, the PUCO concluded that these costs and costs as avoidable. The adminiurative law judge should be disallowed. recommended that these costs be allowed. We and The PUCO will also consider the prudency and rea. Duquesne do not agree with the administrative law sonableness of Perry Unit 1 construction costs in. Judge's recommendations regarding disallowances or curred after the fuel load date which are estimated to with Canatom's conclusions with respect to avoida-be about $1,200,000,000. ble costs. Duquesne will challenge these recommen-dations in appropriate PaPUC proceedings. Neither We believe all of our expenditures for Perry Unit 1 the administrative law judge's recommendations nor were prudently incurred and that the PUCO's findings the Canatom report are binding on the PaPUC, the were in error, We have requested a rehearing with PUCO or the Centerior Utilities, and any decision of the PUCO and, if the request is denied, will appeal the PaPUC will not be bmd ng on the Centerior the order to the Ohio supreme Court. We cannot However, the PUCO also will es m i reasonably estimate the amount ofloss,if any, that investigate the prudency of the costs of the Unit and may result from the resolution of this matter. Accord-will review the Canatom report in determining ingly, we have not written off any of our investment whether to disallow the recovery by the Centerior in Perry Unit 1 at this time. If the PUCO's decision is s fany f then costs f the Unit. If it were to not reversed on appeal, we would be required to "PP" ' P" ' " ' ' " * " " ""YP"C"" "8' I"#

write off the disallowed amounts.

tuted by the PUCO, that recovery in rates of any In January 1988, in a Duquesne rate case, a Penn' portion of the construction costs, including a full sylvania administrative law judge recommended t return thereon, of Beaver Valley Unit 2 will not be the PaPUC that there be no disallowance of Perry Unit allowed, then our share of such costs would have to 1 constru%a costs incurred from the time fuel was be written off To the extent a disallowance is attrib-loaded until the Unit began commercial operation. uted to our leasehold interests in the Unit, we would The recommendation is not binding on the PaPUC' Nye m record a loss pravision for the deferred and the PUCO or the Centerior Utilities. future lease rental payments.

In his January 1988 recommendation, the administra tive law judge also recommended that the PaPUC l'I'CO Reserre Capacity Standards disallow $372,0n0,000 of Beaver Valley Unit 2 con- In November 1987, the PUCO issued an order adopb struction costs w hich were incurred during the period ing a reserve capacity policy. The policy states that an until fuel was loaded and were determined to be the appropriate generic benchmark for an electric util-result of imprudent management by Duquesne The ity's reserve margin is 20% A reser e margin exceed-total estimated cost of the Unit is $ 6,7no,00n,0n0. In ing 20% gives rise to a presumption of excen j

his recommendation, the administrative law judge capacity, but may be appropriate if it benefits the considered the report submitted by Canatom,Inc., customers or relates to unique system characteristics.

the engineering firm selected by the PaPUC to evalu- Appropriate remedies for excess capacity (possibly are Duquesne's management of the construction of including disallowance of costs in rates) will be fleaser Valley Unit 2 and to conduct an audit of determined by the PUCO on a case by case basis. We related project costs. Canatom concluded that Du. believe that the Centerior Utilities' reserve margins, quesne performed most of its duties in a reasonable both before and after Perry Unit I and lleaver Valley manner, with the exception of certain engineering. Unit 2 went into service, are reasonable and prudent related and other matters which increased the cost of under the circuinstances and are not excessive, al.

Ileaver Valley Unit 2 by an amount ranging from though they are expected to exceed the 2n% bench-

$219,000,n00 to $271,000,000. Canatom concluded mark for the foreseeable future. However, we are that those costs could have been avoided. The admin- considering proposing the transfer of Toledo 1:dison's istrative law judge recommended a disallowance of Heaver Valley Unit 2 leased capacity entitlement to about $89,000,000 of the costs which Canatom had Cleveland Electric. Moreover, since we are proposing concluded were avoidable and recommended a disal to phase in our investments in these Units, we be.

Iowance of $283,000,000 of costs which were not lieve capacity not in rate base should not be included considered avoidabl- by Canatom. Canatom also con- in the 20% test. We believe that, after giving effect to cluded that the CAPCO companies delayed the con- these proposals, our reserve margms for each com-struction of Beaser Valley Unit 2 due to capacity, load, pany wdl not exceed the 20% benchmark. We cannot 31

predict what,if any, determinations will be made with cited to ine amount of federal income tax recorded on respect to generating capacity in the Centerior Utili- the tx>oks a4 follows:

ties' rate applications to be filed in March 1988. For the years ended liowever, if the PUCO disallows a portion of our 19M7 1986 198s investment because of an excess CJpJcity finding or ,_g, g gg does not permit us to earn a full return on our thwk income Before fed-investment, the disallowed amount may have to tw eral income in , 8468.9s9 gsso g . - , _s 2__9 2 s s60.x.o3 mg written otT- Tn on thok Income at statutory Rate . $ 187,319 8233,814 $ 257,969 Dit idersds and Firtartclal Urtcertairtites increase (Decrease) In Tn Due to.

Permanent rate increases granted in 1987 Jud recent AFUDC and Carrying years by the PUCO have been significantly lew than chuges . (184364) (189,896) (165,328) the amounts requested. Our Board of Directors de. ^"cle'2'ed DeP'"I W ation . 15,Hs2 5,361 4,336 clared a quarterly dividend of 64 cents per share of other items (26,166) (17,907) ( 2n390 )

common stock on JanuJry 5,1988, the same amount Total rederal income Tu as the previous quaner. 'This action was taken prior to Expense (credo) 8 (7329) $ 3:.372, -i 76 .3_H7 the PUCO order disallowing a portion of Perry Unit I construction costs future dividend action by our rederal income in expense is recorded in the Results 11oard of Directors will be decided on a quarter to- of Operations as follows:

quarter basis after evaluation of financial results, for the years ended potential earning capacity and cash flow in light of the December 31, anticipated outcome of our plans to phase in Perry 1987 1986 1985 Umt I and Beaver Valley Unit 2 construction costs, U h"""d' "' d"" " )

gpc,gg the potential for any material wrie off of our invest- current Tn Prosnion $ 203313 $ N',8n2 8 H5,309 ment in nuclear facilities and other i.atort changes in A(cumu-lated Deferred fed The likelihotxt of the occurrence of any of the ruaner$ col Income m descrdsed in Note 3 "Construction and Contingen. Accelerated Depre cles - Perry Unit 2", Note 4 "Nuclear Operations cuHon and

^ W'U" and Contingencies - Other Nuclear Rbks", Note 6 g]"', "" g', r , "2'I " 3"'2 #

and this Note 7 whicn could have a financial impact est charges . . 15.233 17 742 17,172 on us cannot be determined at this time. it.tsed on our wie and teasebak current financial condition and level of annual in- m63M4) -

n{

p l come, a write o!T of our investment in Perry Unit 2 or pense 11,6x 5 33+? 2.224 our insestment in Perry Unit 1 ordered to be disal Deferred Cw!P lowed pursuant to the PUCO's January 1988 order R"V""""'- (3H 577) ~ ~

Unbilled Resenues (19,'706) - -

would have a maten.al adverse etTect on our results of Perry Una 1 oper operJtions in the period in which it were to occur ating i spenses . 29,490 - --

and on retained earningt Any write off resulting from Other items (22,030) (4,264) 1/,61 the occurrence of any other of these matters could Inse$nent Tu credus 21 o a69 26,'89 have such an effect depending upon the magnitude of tow Chyd to @ r-such write off. Iloweser, such a write-otT relating to ating Expenses. 113393 147,796 163,362 Perry Unit 2 or Perry Unit 1 individually would not Nonoperating income reduce retained earnings suthciently to impair our current In Prousion ( xH,93 4 ) ( 101,1u2 ) (84,016)

C ability to declare dividends but together could have $"j,"y such an ellect. A w rite off due to the occurrence of any trai Inwmc in one or more of these other matters could, depending Dnis llewe Replae upon the magnitude and timing of such a write oft, ment emer ( 29,1 s t ) (6.0268 -

0:het liems t rtn3 4 ) t 9.29 4 ) (J.7%9I reduce retained earnings suthciently to impair our ability to declare disidendt Total I ederal Income Tn gy.nse (Credd ) $ ('3.29,) 8 41_3 '2

_f 'M. H' (8) rederal Income Tas Apprmimately $27,000,000 of unused investment in rederal inc ome in, computed by muhipl)ing the credits are available and nuy be used to redute income before tnes by the st.itutory rates, is recon. future in obligationt 'lhe unused credus espire in varying amounts in 2001 and 2002. Utilintion of 32

these unused credits is limited by provisions of the N[1 Tax Reform Act of 1986 and the level of future taxable Pension Costs:

income to which such credits may be applied. Service cost for twnefits earned dur-The Tax Reform Act of 1986 provided for a 40% ing the period. . .... .. $16 Interest et on projected benern 6 average income tax rate in 1987 and a 34% income tax ligation . . ..... ... .. .. 3 .,.

rate in 1988 and thereafter, the repeal of the invest- Actual return on plan auets . . (37) ment tax credit, scheduled reductions in investment Net amortiration and deferral . . . . .

[14) tax credit carr) forwards, less favorable depreciation Net pension cost. . .. (3) rates, a new alternative minimum tax and other items. VE ROP cost . . . . .... .. . . . ,. 26 These changes have resulted in an increase in tax payments and a reduction in cash flow during 1987.

Net pension and YEROP costs . .

M Most of the increase in tax payments is because the The following table presents a reconciliation of the alternative minimum tax reduces the amount of in- funded status of the plans at Decemtwr 31,1987 vestment tax credit allowed as an offset to federal minom "I DoHm income tax payable.

Actuarlat present value of benefit obli-In December 1987, a new accounting standard for gations:

income taxes was issued The standard requires a Vested benefits . . $321 change in the accounting and reporting for income Nonvested benefits. . 43 taxes from a deferral method to a liability approach. Accumulated benefit obligation . 364 We do not anticipate adopting this standard before Effect of future compensation levels. I16 the effective date of January 1989. The liability ap Total projected benefit obliganon . 480 proach establishes accumulated deferred income tat Plan assets at fair market value . . . . . . 610 liabilities for amounts recorded either net of tax or tJnfunded (surplus) projected benefit after tax and flow through accounting items and ree- obligation . , . . . (130) ognizes the effect of any changes to the income tax tJnrecogni7ed net gain due to rates. The change will result in a significant increase variance between assumptions and ex.

to the accumulated deferred income tax liability perience (4) reported on f he balance sheet However, the increase t'nrecognited prior service cost.

in this hability wdl be primarily offset by an increase tJnrecognized VEROP cost (6) to a regulatory auet account also on the lulance Transition awet at January 1,1987, sheet. We do not expect the adoption of this standard being amortized user 19 years ISH to hase any signi6 cant effect on our net income. Net accrued pension cost included in other deferred credits on the Italance (9) Retirement income Plans and Other sheet . . , ,. 5 25 Post Retirement liene6ts Assumptions used for the actuarial calculations sum-4e sponsor noncontributing pension plans which mari/ed above are as follows; settlement (discount) coser all employee groups. The amount of retirement ,.,b. long term rate of annual compensation rate benents gen-rally depends upon the length of ser increase - 5% and long term rate of return on plan vice. L'nder certam circumstances, benefits can begm. ,. %

a w ets as early as age 55 The plans also proside certain death, medical and disability bene 6ts. Our funding At January 1,1986, the fair market value of net assets policy is to be in compliance with the Employee available for plan benefits was $550,000.n00 and the Retirement income Security Act Guidelines vested and nonvested actuarial present value of ac-In 1987, we adopted the new standard for accounting Cumulated plan benefits was $ 26',n00,0nn and for pensions. Also, during 1987 we oftered a Volun. $26AOR000, respettively, assuming a '% discount tary Early Retirement Opportumty Program (VEROP) rate and long term rate of return on plan auets.

which was accepted by 54 4 of the 589 eligible I,lan awen wasist primarily of investments in com employees at an estimated cost of $31,800.000. Pen- mon sto(k, bonds, guaranteed investment contracts sion and early reurement program costs for the 3 ears md M m 1985 through 1987 were $21,400.000, $1H.100,noo ,

and $23,300.000, respectnely. Net pension and early in 1986, we tvgan to fund the pmt retirement medi retirement costs for 1987 were comprised of the fol- cal benefits and premiums in prior years such costs lowing components: were recorded when paid The total amounts funded 33

in 1987 and 1986 were $850,000 and $ 1,100,000, 1987_ 1986 19Hs respectively. "

Comnmn sim k.

Public Sales. --

4.000 3.0W)

(10) Guaranteen Disidend Reimestment aoJ...

Stock Purchase Plan 4.591 4,597 5.967 Under two long term coal purchase arrangements, Employee savmxs Plan. x16 486 437 Employee Purt hase Plan . 61 -

107 Cleveland Electric has guaranteed the loan and lease Kev Emplowe in(emiw obligations of two mining companies Toledo Edison SIW k Plin . - 1 22 35 is also a party to one of these guarantee arrange ~ 1978 Key I mployee stm k opnon Plan. s9 lu e ments. This arrangement also requires payments to Total Common stoik the mining compiny for any actual out of-pocket idle sales ...... 5.528 9.217 9.589 t ractional Shares and Other mine expenses (as advance payments for coal) w hen Adjustments on tuhange the mines are idle for reasons beyond the control of of shares -

(34) -

the mining company. At December 31,1987, the I'""'Y * #' (39) "') ~

Net Change . 5,509 9.166 9,5H9 principal amount of the mining companies loan and .--

lease obligations guaranteed by the Centerior Utili Cumul ne Pr f tre i i f ties was $106,000,n00. subjett to Mandatory Re-demption The Centerior Utilities have also guaranteed the debt 32ies obligation of a supplier. At December 31,1987, the Cleseland Lieunc principal amount of the dcht obilg.ttion guaranteed Preferred by the Centerior l'tih. ies t was $ 1,000,000. Adiustable senes M . - -

500 gy_ igg 3enes 3 _

750 _-

Toledo Edison (11) Sale of Clescland Electric Steam System Preferred

$25 par $2.H1 2,000 - -

Cleveland Electric sold its steam system on December Retirements 30,198' for $ 7,000,000. A net after tax low of ap Cleseland Llectric proximately $18.000.000 reduced Nonoperating in- Preferred come in the Results of Operationt This one time low reduced earnings per common share by 13 cents in 8

g[ M (([ ,

's ou series F.

(17) g (17) -

I$ g 1987. The sale will not hase a materiil impact on future results of operJtiont jf [" fl","' O 14 $ 00 Series ! .

$ (2)

(4)

(

4$

[l 113.50 senes J . (29) -- -

(12) Capitah. ration Preference-

$7?.50 series 1 (9) (11) (11)

(a) Capital Stock Transactions Toleda Ednon Preferred Shares sold and retired dunng the three years ended 8100 par $ 1100. . (5) ts) ts) I December 31,1987 are listed below. Common stos k activity prior to April 29,1986 has been adjusted to [{ {-

32 6s.

(1] 4 (17 )

(1903 (in) -

reflect Cleveland Electnc's 1.11 exchange ratio and 14""- (3"0) - -

Toledo EdisonN one for one exchange ratio for new 25 ;ur s 75 . (l.200) -

~ ,2 .

3 gi,4nn3 _ _-

Centerior Energy shares Net change . 656 444

( 1. 41 ? )

Ct.mulatne Preferred Stmk of subsidianes Not sub tect to Mandatory Redempnon sales Cleseland Ilectrit Preferred Remarketed senes P . 1 - -

Toledo I dnon Pre ferred

$25 par Adiusrahle senes A - -

1,200 Adtustable series B . -

1.200 -

j Retirements Toledo Edson Preferred

$25 par $4 JM (WM)

Net Change t N'1 1.20n i .2no

=,p === w 34

(

No new shares of common stock will be issued for the (d) Cremrdutir e Preferred and Preference Stock Dividend Reinvestment and stock Purchase Plan or Amounts to be paid for preferred stock which must be the Employee Savings Plan. Shares required for the redeemed during the next rive years are $10,000#00 two plans are being acquired in the open market. In years 1988 through 1990, $30,000,000 in 1991 and $20,000,000 in 1992. In addition, Cleseland Elec.

(b) Common Sbarcs Rescrr edfor hsue tric must offer to purchase preferred and preference stock having a total redemption price of Common shares reserved for issue under the Em- $38,000,000 n 1988.

ployee Savings Plan and Purchase Plan were e annual nundatmy redemWon proens are as 3,183,583 and 139,309 shares, respecthely, at Decem, follows:

ber 31,1987 Annual Mandatory Redemption ProvNons Stock options to purchase unissued shares of common $ hares shares at Begin Price t ers' r stock under the Key Employee incentive Stock Plan g Qo , n,ing and the 1978 Key Employee Stock Option Plan werc granted at an exercise price of 100% of the fair Cleveland Electnc market value at the date of the grant. The Key Em P'#I#d playee incentive stock Plan expired in June 1987. No I g[ 5c 1 8 additional options may be granted under the 1978 75 00 series r. -

16.667 1985 1,000 Key Employee stock Option Plan. The exercise prices 80.00 series G -

8.000 1984 1,n00 of option shares purchased during the three years 145 00 ScMC5 Il I 782 -

1985 1 000 14 5.00 senes 1. . 1,969 -

1986 1,000 i ended December 31,1987 ranged from $14.09 t 113.50 senes K 10.000 -

1991 1,000

$20.73 per share, after adjustment fer the exchange Adiustable Series M 100 000 -

1991 100 ratio. Shares under outstanding options held by em. 9125 $cncs N 150.0"O -

1993 100 playees were as follows: Preference-Key Emplovce 77.50 senes 1. ~ 11,400 1984 1,000 incentive Stock Plan Toledo Ednon 1987 1986 1985 Prderred Options Outstanding $100 par $1100, S N, --

1979 100 t at December 21 9 375. 16,65n -

1985 100 shares ,

- 30,636 58,517 25 par 2 81 , 400,000 -

1993 23 Option Price , , . -

$ 20.2 4 $16.75 to

$20 21 1he annualiied cumulative preferred arid preference  ;

dividend requirement as of December 31,1987is 1978 Key Employee stock Option Plan $73S00goa 1987 1986 1985 The preferred dividend rates on Cleveland Electric's Options Outstanding Series L and M and Toledo Edison's Series A and II l at December 31: fluctuate based on prevailing interest rates. The divi.

I shares 391,769 481,290 601,256 dend rates for these issues averaged 7.89 % 7.48 % .

Option Price . . 4 e to ) to t 8.55% and 9.43% respectively, in 1987. The dividend rate on Cleveland Electric's Remarketed Series P, which was issued in juh 1987, averaged 8 66% in

• i (c) Eqttsty Distrtbution Restrictions 3yg;_ l At December 31,1987, consolidated retained earn. Under its articles of incorporation, Toledo Edison ings were comprised almost entirely of the undistrib. cannot issue preferred stock unless certain earnings ,

uted retained earnings of the Centerior Utilities. coserage requirements are met. liased on earnings for substantially all of their retained earnings were avail, the 12 months ended December 31,198?, Toledo [

~

able for the declaration of dividends on their respec Edison could issue at December 31,1987 approxi-tive preferred, preference and common shares. All of mately $336,000,000 of additional preferred stock at ,

their common shares are held by Centerict Energy. an assumed annual dividend rate of 11%. Any re- i quired write-off by Toledo Edison of its plant invest- ,

A loan or advance by a Cen:erior Utility to Centenor ment could adversely affect its abdity to issue i Energy requires PUCO authorization unless it is additiorul preferred stock. See Notes 3 and 7. The i made in the ordmary course of business operations in issuance or additional preferred stock in the future  !

which the Centerior Utility acts for Centerior Energy. wdl depend on earnings for any 12 consecutive 35  ;

months of the 15 months preceding the date of issu. Long term debt matures during the next five years as ance, the interest on 111 long term debt issued and follows: $50,000,000 in 1988, $150,000,000 in 1989, the dividends on all preferred inues. $208,000,000 in 1990, $204,000,000 in 1991 and

,m,000 in M2, There are no restrictions on Cleveland Electric's abil-ity to luue preferred or preference stock or Toledo The nwngages of Cleveland Elcetric and Toledo Edkon's ability to inue preference stock. Edkon constitute a first mortgage lien on substantially all their property and franchises owned. bcluded With respect to dividend and liquidation rights, each from the lien are enh, securities, acounts receiva-company's preferred stock b prior to its preference ble, fuel, supplies and, in the cne of Toledo Edison, stock and co nmon stock, and each company's prefer- automotive equipment.

i ence sta k is prior to its common stock.

The h=uance of additional first mortgage bonds by Cleveland Electric h limited by two provisions of its (e) long Term Debt and other florrou a.ng Arrangements mortgage. One relates to txmdable property cover-4 age of the bonds and the other to earnings coverage of Long term debt, leu current maturities, for the interest on the Nmds. The amount of additional i

Centerior Utilities is as follows; bonds issuable will depend upon unb(mded bor"i First mortgage vonde able property, earnings and interest on the b<mds g then outstanding and to be hsued. I'nder these limits, of Average December 31, Cleveland Electric would have been permitted to Year of Maturity Interest Rate 1987 1986 hsue approximately $803,000,000 of additional Oh wrwh of donan) bonds at December 31,1987 1988. , ,

4.00 % $ -

$ 15,000 1989. 3 00 20,000 20,000 The luuance of addnional nrst mortgage bonds by 1989, 15.25 40.000 40,000 Toledo Edison ako is limited by prosisions in its 19H9, 14.375 50,000 So,n00 mortgage similar to those in Cleveland Electric's 1990, , .  ?.125 60,000 60,000 mortgage. The mortgage also permits the issuance of

[ [ 5 35h00 re un ng n an amant eq to retM MA 1991 , 14 00 25,000 ' 5,000 2

w hich have not semd n the bnn for the inue of 1

1991, 15 625 -

35,000 other bonds Under these pros bions at December 31,

1991 , 15 00 70,000 70,000 19H' Toledo Edimn would have been permitted to

1992. 15 25 20,000 20,000 inue approximately $241,000,000 of nontefunding d

1992, 16 125 -

60,000 bonds and $ 24,000,000 of refunding bonds.

1993 1997 8 '6 3'N,7 50 559,882 1998 2002. 8 15 100,72x 115,998 Certain unsecured loan agreements of Toledo Ednon 2003 200' ,

9 '9 269A75 284,'45 contain cosenants limitmg to 65% of total capitali7a 2008 2012., 9 29 6's.650 946,098 tion (as defined) the total of its short term debt in 2013 2017 ., 10.30 872,550 5'2,550 exce ss of $ 150,000,000 and funded debt, limiting i 2018 2022, 9 02 205,300 93,800 i secured tmancing other than through nrst mortgage 2,825,453 3,o68,0'3 bonds and certain oth(t traraattions and requinng Term bank loans H 'xt f oledo Edtun to m4ntain earnings (as defined) of at nerage rate, due 1989

] ' least 1.5 times interest n us hrst mmtgage bonds.

2 K833

'l Notes,10 H3% ave: age The earnings coserage ratio applies to $349,500,000 rate, due 1989 1997 35',000 2 " ,000 of unwcured loans and wn I t Decendx131, Debentures,11.25%, due 198

1997 125,000 Any required write offs of the Centerior l'tihties' plant

]

Pollution control notes, incestments could significantly affect their abihty to 4

9 69% asenge rate, due inue additional debt. See Notes 3 and 7.

223,290 19M9 2015 223.800 Other - net , , H340 8,696 Total Long Term Debt

_$ M_l % 249 {92d02 l

i I

l j 36 J

l

(13) Short Term Borrowing Arrangements any unused borrowings. T he inter - t borrow.

Our bank credit arrangements at December 31,1987 ings is 0.375% to 0.625% (dependng i sage )

were as fo!!ows: above the rate w hlch specified banb pay for Eurodol.

Cleveland Toledo seruce lar depmits in the London interbank markets.

Electric Edison Comp.mv Total Ohousands of &,nm) At December 31, 1987, Cleveland Electric had ibnk 1ines of $ 37,000,000 of comro/rcial paper outstanding. Com.

Credit , $ 152,300 $ 69,350 $ 13,00n $ 234,rdo clevohing l'n- merdal pagr outuanding b backed by at lea 4 an derwnung equal amount of unused bank lines of credit.

Facility - 25,000 -

25.000 Eurodoilar Tole'l0 hit $Un 8

, ,, Toledo Edison's annital cominitment fees ratige from ment 26,000 - - 26,000 0.25% to 0.5% on most of its lines of creda. The rest There were no borrowings under these bank credit of the lines of creda hase informal compenuting arrangements at December 31,1987 balance arrangements. llanks expe(t Toledo Edison to maintah) average deposits equal to 5% of the line of short term borrowing capacity authorized by the Pl'CO is $300,000,000 for Cleveland Electric and "# #P#" " I* # # * "* " *# #

1

$ 150,000,000 for Toledo Edkon *"' E "P# "N "## #

Edison and are not restricted legally, Cler clan <l Electric Most borrowings under Cleveland Electric's short. Toledo Edison aho has s commercial paper program.

term bank lines of credit require a fee of approu.

MM Dt mk R mately 0.3% per year to be paid on any unused portion of the lines of credit. For those banks without Centerior Aertice Company fee requirements, the average daily cash balance in fees for the service Company's lines of creda range the bank accounts satisfied informal compensating from 0% to 0.375% There are no informal compenut-balance arrangements.

ing balance arrangements for the banks which do Any borrowings under Cleveland Electric's Eurodollar not require a fee, agreement are made and paid back in t'nited states dollars. There are no requirements that compenuting C#"'# 'I" N " i 'dh "

balances be maintained at the banks involved. Ilow. No formal short term borrowing arrangements were ever, a fee of 0.1H75% to 0.375% per year k paid on estabhshed for Centerior Energy in 1987 or 1986, 1

(14) Quarterly Results of Operations (Unaudited) '

The following is a tabulation of the unaud ted quarterly results of operations for the two years ended December i 31,1987 Quaners ended March 31 June 30 vpt 30 Dec.31 l py (thausands of dollm, encept pr shue amounu) l Operating Revenues $ 4 M7,494 $ 483,995 $ 561,0'6 $ 412,971 I

Operating income $ 101,514 $ 102,565 $ 131,772 $ 47,759 1 Net income ... .. ... $ 106,936 $ 93,794 $ 128,305 $ 61,31H l Average Common shares (thouunds) . 135,926 137,661 139,552 14n,596 Earnings per Comm' ' hare .. $ .79 $ .68 $ 92 $ .44 Dividends PC per Common share $ .64 $ .64 $ .64 $ .64 1%6 Operating Resenues , f iM 4,229 $ 142,502 $ 520,752 $ 470,2 47 Operating income . . . . $ 100,326 8 80,56H $ 113,133 $ 65,98 Net Income .. ... ... $ 99,5 49 $ 81,'8? $ 11 M,125 $ 92,432 Average Common shares 'thouunds) 126,732 12M 052 129,19' 131,519 Earnings per Common share ... . $ 79 $ 66 $ .91 $ 70 Dividends Paid per Common share , , $ 60 $ 41 8 .64 $ .64 Operating resenues and operating income for the quarter ended December 31,198' were reduced by approd-mately $32.000.000 and $ 1H,n00,000, respectively, resulting from the deferra' of C% IP in rate bue revenues collected in print quarters such deferrah were ottset by the recording of Af l'DC as dhcussed in the sumnury of Significant Accounting Pohcies w hich resulted in no change in net mcome.

Quarterly results of opers, ions for the quarter ended December 31,198' ditter from the unaudited amounts preuously returted because of year end adjustments and rec tauihcations m de following the receipt of Febnur, 19M P!:CO atcounting orders for Perry t! nit I deferred costs and carrytog crurges as dncuoed in the summary of Accounting Pohcies.

S'

_ __ J

inancial and Statistical Review Centerior Energy Corporation and Subsidiaries Operating Revenues (thousands of dohrs)

, &eam Total Tucal Taral lleanng opetanng Year Rnalenru) CornrnercuJ Industral Other R et ad WhcJesale ihtrx & Gas Revenues 1987. $629 663 $ 531682 $689 959 $ 56 457 $1907 761 $24 409 $ 1932170 $13 371 $1945 541 1986. 599 445 516 614 675 682 101 655 1 893 396 11 381 1 904 777 12 953 1 917 730 1985. 566 666 4SS 269 667 450 92 710 1 812 095 1.6 036 1 828 131 18 866 1 846 997 1964. 548 136 454 092 536 036 87 279 1 725 543 14 866 1 740 409 24 324 1 764 733 1983. 546 351 440 142 599 881 83 047 1 669 421 18 421 1 687 842 25 399 1 713 241

!977. 287 742 220 919 348 767 37 772 895 200 21 857 920 057 15 749 935 W)6 Operating Expenses (thousands of Johrs)

Perry Una i

& Beaver Fuel & Operanun Depmunun Taxes Valley Federal Tcnal Purt hued & & Other T.un Unn 2 frx wne Oper.nng Year Pus er Mainmunce Arnorn rarxo FIT Ikferred Taus E u penses 1987. $470 466 $642 594 $214 421 $208 480 $(87 623) $113 593 $ 1 561931 1986. 522 281 550 874 141 009 195 967 -

147 794 1 557 925 1985. 510 844 450 376 141 333 182 046 -

163 362 1 447 961 1984. 453 192 404 314 145 245 178 915 -

197 766 1 379 432 1983 454 018 384 077 145 334 172 093 -

184 157 1 339 679 1977 426 183 167 252 62 872 77 936 -

53 829 788 072 Income (thousands of dollars)

Pust federal frxorne Other in-servx e irxorne BcGe Irworne Opranng A FU DC- frwurne- Carrying Tan- Interne Internr Af UDC- Aher Year incorne Lpry Net Charge Geda Charges C harges Dett ._ Lerne 1987. $383 610 $297 239 $(57 821) $39 303 $ 121 122 $783 453 $132 411 $(125 446) $176 488 1986. 359 805 298 781 (8 108) -

116 422 766 900 404 018 (l14 038) 4'6 920 1985. 399 036 260 632 5 H25 -

86 775 752 268 366 829 (98 777) 484 216 1984. 385 301 213 157 11 556 -

69 434 679 448 310 265 (75 975) 445 158 1983 373 562 152 637 5 422 47 492 579 023 258 449 (53 796) 374 370 1977 147 734 60 035 4 771 18 473 231 013 103 138 (32 508) 160 383 Income (thousands of dollars) Common Stsk (dollars per sharr & 1)

Preferred & Average Return un Prefererne shares Average kuck Net Oursraraleg* Equiry Di .wierals Bwk

] Year Divalends inarne

( rhuuunds ) Farnings

• W) Ib lared' Value '

l 1987. $86135 $390 353 138 395 $ 2.82 12.8'4 $2.56 $ 22.10 1986. 85 027 391 893 128 927 3 04 13 7 2 49 22.13 l 1985. 82 829 401 387 121 898 3 29 15.7 2 10 ' 21.50 l 1984. 78 349 366 809 107 622 3 41 16 4 229 20 64 l 1983 68 555 305 815 98 240 3.11 15.7 2.19 20.21 1977 33 425 126 958 46 750 2 72 14.7 .74 19 26 NOTE: Data for years prior to 1986 ne the result of combining and restating Cleveland Electric and Toledo Edison data.

"Outstanding shares for the periods prior te April 29,1986 have been adjusted for Cleveland Electric's 1.11 exchange ratio and Toledo Edison's one-for one exchange ratio for Centerior Energy shares.

"1985 Dividends Declared declined because Toledo Edison's first quarter 1986 dividend declaration was delayed from its usual date in 1985 to January 1986 in order to synchronize Toledo Edison's dividend declaration and payment schedules with Cleveland Electric's prior to the affiliation.

38

Eleuric Sales (millions of KWH) Electric Customers (year end) Residential Usage A verage Avnage KWH Prxe Revenue Per Induunal Per Per KWH Cusromer Year Residenrul Commetual Industral Whoicule Other Total kesidennal Commenal & Oiher Tvial Cuwomer ( cents ) ( dollars )

1987. 6 659 6 350 11 985 399 949 26 342 903 365 90 148 12 240 1 005 753 7 217 9.46c $685.43

_ 1986. 6 527 6 239 11 409 242 909 25 326 898 5H3 87 947 12 012 99H 542 7108 9 IM 654 99 1985. 6 309 5 952 11410 331 865 24 867 892 727 87 442 12 023 992 192 5900 8 98 622 08 1984. 6 404 5 794 11 441 307 871 24 817 888 816 85 825 11 850 986 491 7 035 8 56 603 92 1983. 6 327 5 606 10 641 340 854 23 768 886 024 05769 11 557 983 350 6 967 3 64 603 22 1977 6 074 5 240 12 350 1 097 793 25 554 863 323 79 457 11 044 953 834 6 893 +74 326 87 load (megawatts) Energy (millions of KWH) Fuel Operable Capaury Fuel Cost Ar Time Net Per LtFxienq-Of Peak 1.al Capaury C""r*Y C""*"d Purdused KWH BTU Per Year Peak " ' Mad Factor Vs ) Margin IT ) Fussd Nutlear Tucal Pos er Tural ( < curs ) KWH 1987. 5 955 5173 63.6T 13.14 20 878 6 897 27 775 600 28 375 1.53t 10 461 1986. 5 199 5 021 63 0 34 22 694 24 22 718 4 552 27 270 1.79 10 292 1985. 4 539 4 512 69 1 59 21 610 1964 23 574 3 283 26 857 1.85 10 313 1984. 5 338 4 659 66 1 12.7 19 950 4 303 24 233 2 350 26 583 1.71 10 349 1983 6 21H 4 71' 63 1 24 1 19 4M7 4 M95 24 382 1 28' 25 669 1.72 10 419 1977 5 552 4 '34 65 5 14.7 23 862 463 24 325 3 113 27 438 1 21 10 364 investment (thousands of dollars)

Tural Uribry Auumulated cmstruitmn Nudear Prvgrty, Unbry Mant in Depreturm a Net Work In Fuel and Plant and Pian Tural Year %ervue Amort trar m Plant Ot her ' "

Procress Fqomment Add- ms A ucts 1987. $8 349 6% $1324 446 $7 025 250 $1007 707 $656 350 $8 689 307 $ 933 744 $11282 659 1986. 4 639 542 1 367 662 3 2'l 880 5 213 541 652 564 9137 9M5 1 120 017 9 967 571 1985. 4 481 451 1 264 931 3 216 520 4 280 584 564 276 M 0613M0 983 750 9 002 119 1984 4 281 M56 1 163 994 3 117 862 3 526 9'M 485 207 ' 130 047 938 509 8 049 712 1943 4 180 192 1 04' 318 3132 M74 2 '10 352 392 26H 6 235 494 'H4 715 6 921 890 19 " 2 35x o'6 582 613 1 S 463 1 014 372 53 279 2 843 114 481 022 3 247 056 Capitahzation (thousands of dodars)

Preferred Preferred &

Suk Prefereme u nhuut Suk muh comru Mandatury Mandatory Im g-Suk RedernNm Redernpa;n Term Year Equuv 7 Prous.ons Pronsms if 7 DM 4 Total 1987 $3109 060 414 $457 334 67 $343 985 44 $3 718 249 499 $7 628 628 19 x4 . 2 991 341 39 404 021 5 48' 814 '

3 '92 402 49 7 675 578 1945 . 2 'to 094 39 374 02) 5 468 306 7 3 43H 928 49 6 991 353 1984. 2 403 234 39 344 021 6 450 646 7 2 993 " O 48 (> 191671 1983 2 065 340 39 314 021 6 412 002 8 2 503 859 47 5 325 222 197' 955 616 34 245 071 9 195 000 '

1 380 179 50 2 775 866

• *

• Capacity was reduced because of extended generating unit outages for renovation and improvements in 1981 (720 mw),1985 (1J90 mw) and 1986 (856 mw).

198 6 and prior restated for effects of capitalization of nuclear fuel lease and financing arrangements purst. ant to Statement of Financial Accounting Standards 71.

39

Board of Directors t RicharelP Anderson, President and Chief Executive Sister.lfary.lfarthe Reinharel, SND, President of Officer, The Andersons Management Corporation, a Notre Dame Cc;iege of Ohio in Cimveland.

grain, farm supply and retaihng firm. Paul,11. Srnart, President of The Toledo Edison Leigh Carter, President and Chief Operating Officer of Company and Executive Vice President of the Company.

The BFGoodrich Company, a producer of chemicals,

//crbert E. Stran bridge, Director and retired Chairman plastics and aerospace products. Also Chairman of of The fligbee Company, a department store in Tremco, Incorporated, a manufacturer of specialty Northern Ohio.

chemical products, a w holly owned subsidiary of The BFGoodrich Company. Williarnf. Williarns, Chairman and Chief Executive Thornas A. Commes, President and Chief Operating Officer of The Sherwin-Williams Company, a manufacturer of paints and painting supplies.

Chester Det enou, Chairman and Chief Executive I

Officer oP heller-Globe Corporation, a manufacturer of automotive parts and assemblies, electrical equipment and radiation and environmental monitoring equipment.

c Estu in D. Dod</, Retired Chairman and Chief Executive Officer of Owens-lllinois, Inc., a ommittees of the lloard manufacturer of glass, plastic, paper and glass-ceranuc products. ytyecutjg e Aug;g Nominating Robert.lf. Ginn, Chairman and Chief Executive OffUer Williams, Chmn. Ginn, Chmn. Mosier, Chmn.

of the Company, Centerior Service Company, The Dodd Anderson Anderson Cleveland Electric illuminating Company and The Kauli Strawbridge Carter Toledo Edison Company. Reinhard Commes Roy H. Hohlt, Retired Chairman of White Consolidated Finance Devenow Industries, Inc., a manufacturer of products for the CONEPHSdllo" Miller, Chmn. D< xid home, principally major apphances, and machinery Carter, Chmn. Anderson UIRD and equipment for industry. Devenow Commes lloldt

1. ' (' *-" Kaull George //. Kardt, Chairman and Chicf Executive Officer Williams lloidt Reinhard of Premix, Inc., a developer, manufacturer and fabricator Strawbridge of thermoset reinforced composite materials W liiams Richard A. .lfiller; President of the Company and Centerior Service Company.

Frank E. .lfosier President of BP America Inc. and President and Chief Operating Officer of The standard Oil Company, a producer and refiner of petroleum products.

J 40

_ - - - - - - 1

xecutives of the Company and Subsidiaries Centerior Energy Corporation Operating Companics Chairman and The Cleveland Electric illuminating Company Chief Executive Officer . . Robert.lf. Ginn Chairman and President . Richard A. Afiller Chici Executive Of0cer. . Robert.\f. Ginn Executive Vice President . Robert). Farling President . Robert]. Farling Executive Vice President . Paul.lf. Srnart Senior Vice President . . Alan D. Irright Senior Vice President . Lyrnan C. Phillip5 Vice President 41arketing . . Gary) Greben Vice President Vice President-Nuclear . Alrin Kaplan

& General Counsel Victor E Greenslade Vice President-Finance, Vice President Finance and Administration & Legal . . John S. Lericki Chief Financial Officer EdgarII. JianganS Vice President-Distribution Trea<urer Gary 31 flattkinson & Services. Williarn K. ofcClung

.%cretary . E. Lyle IYpin Vice President-Power Supply . Richard A. IUterka Secretary & General Counsel . CarlE. Chancellor Controller . Rayrnand).firousek Centerior Sen ice Company Treasurer Terrence R. 3foran Chairman and Chief Executive Of0cer . . Robert Af. Ginn President . Richard A. 3 filler The Toledo Edison Company Senior V(e President-Finance Chairman and and Chief Financial Of0cer . . EdgarII. 3fangans Chief Executive Of0cer. . Robert 31. Ginn Vice President-Fossil President . Pau/ 31. Snsart Operations & Engineering . RichardI? Crouse

) Executive Vice Presideitt . Lyrnan C. Phillips Vice President-Nuclear 3furray R. Edelman Senior Vice President--

Vice President Engineering & Operations . RichardI? Cr'use

& General Counsel Victor E Gre mslade Y ce President-Vice President-System Customer Operations . Dat id L jfonsean Engineering & Operations William D. Afasters V ce President 41arketing . Thomas 31. Quinn Vice President-Administration . Stanley E. Wi>rthein Vice President-Finance Vice President-Governmental

& Administration . Donald /l. Saunders

& Public Affairs . Alan D. Wright Vice President-Nuclear . Donald C. Shelton Controller Paul G. Busby Controller . James I? Afartin Treasurer . Garr31. Ilarrkinson Secretary and Treasurer . Jennifer 31. Shrtt er Secretary . E. Lyle Irpin 1

(~

41

hare Owner Information Dividend Reinvestment and Stock Purchase Plan Stiare Owner Inquiries The Company has a Dividend Reinvestment and Stock Communications regarding stock transfer requirements, Purchase Plan which provides share owners of record and lost certincates, dividends and changes of address should customers of the Company's subsidiaries a convenient be directed to Share Owner Services at the Company.

l means of purchasing shares of Company common To reach Share Owner Services by phone, call the l

stock by investing a part or all of their quarterly dividends following numbers: [.

as well as making cash investments. In addition, Weal alls in individuals may establish an Individual Retirement Cleveland area 642-6WO or 4 G 2400 l Account (IRA) wh:ch invests in Company common stock l through the Plan. Information and a prospectus relating OutJde Cleveland area 1-800 a33794 [

! to the Plan and the IRA may be obtained from Share Please have your account num%r ready when calling.

l Owner Services at the Company.

l Audio Cassettes Available Form 10 K Share owners with impaired vision may obtain audio The Company will furnish to share owners, without cassettes of the Company's Quanerly Reports and Annual charge, a copy of its most recent annual report to the Report. To obtain a cassette, simpiv write or call Share l Securities and Exchange Commission (Form 10-K) and, Owner Services. There is no charge for this service.

upon payment of a reasonable fee, a copy of each exhibit to Form 10 K. Requests should be directed to the Secretary of the Company- Executive Offices l

Centerior Energy Corporation 00 Oak Tnt Boulevard, independence, Ohio independent Accountants }

Telephone Number (;.16) 4 C3100 ,

Arthur Andersen & Co.,1717 East Ninth Street '

Cleveland, Oh;o 44114 Mail Address Centerior Energy Corporation Common stock P.O. Box 94661, Cleveland, Ohio 44101 -4661 Listed on the New York, Midwest and Pacific Stock Exchanges. New York Stock Exchange symbol-CX.

Annual Meeting The annualinecting of the share owners of the Company Registrar will be held April 26,1988. Owners of common stock AmeriTrust Company National Association as of February 26,1988, the record date for the meeting, ,

900 Euclid Avenue, beveland, Ohio 44114 will be eligible to vote on matters brought up for share owners' consideration.

Notice: The annual report and the f aancial statements Transfer Agent herein are for the generalinformation of the share Centerior Energy Corporation owners of the Company and are not intended to be used Share Owner Services in connecti n with any sale or purchase of securities.

P.O. Box 9 4661, Clevelar.d, Ohio 4 4101 -4661 Stock transfers may be presented at Wells Fargo The Company is an equal opportunity employer.

Securities Clearance Corporation,45 Broad Street, New York, NY 10004.

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