ML20195C644
| ML20195C644 | |
| Person / Time | |
|---|---|
| Site: | Beaver Valley |
| Issue date: | 12/31/1987 |
| From: | Von Schack W DUQUESNE LIGHT CO. |
| To: | |
| Shared Package | |
| ML20195C529 | List: |
| References | |
| NUDOCS 8806220247 | |
| Download: ML20195C644 (46) | |
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- y. . J sale ofcLa trte energy The Company senes
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an area of approrimately 800 square mdes L" ' Jil.
- in Alleghenyand Beasercounties This a rea. w hich indudes the City of Pittsbu rgh.
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h Y a s p Mission Statement Our first responsibihty is to our resi-
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, ' ') - tJ / ,^ , dential, commercial, and industnal cus-k- -- - _- _ __ ~~ d ef __w/d C. tomers in meetingtheir needs,we must
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P/MTh 4 [H /c' tmd sible to our stockholdert We must be innovative in our approach, entrepre.
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'N Mm . - return for the Company's owners for the N k ~ !3,/ t. use of their capital we are responsible M 2h/
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wurk We must be good corporate citi: ens, offering assistance and doing our part to
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I D U Q U E S N E L,I G H T C 0 M P A N Y
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i To OUR Today's Pittsbuq;h region is growmg-.. regaining measurable strength as SilAREllOLDERS it continues a transformanon and diversification from an economy based primanly on heavy industry to an increasmgly knowledge 1
oriented economy.
This year's annual report cover illusuation shows just some of the exciting new developments throtghout the 800 square l
mile temtory we serve -the mstallation of ene of the largest supercom- i puters in the nation, pionect work in medical transplant piecedures.
robotics, biotechnology, and computer sof tware Each ty pifies a region )
l forging a new future.
Likewise.1987 terail demand for our product increased with the improvinglocal economy Our annual sys em j peak load w cs seven percent higher than the previous year's, and sa!cs to retail customers increased 4.4 percent. to almost 11 billion kilowatt-hours.
Consis:ent growth in demand from our commercia!
segment reflects the changmg nature of our region's econom> la 1981, i
commercial sales represented 30 percent of our retail sales total,in 1
1987, that share was 45 percent. Meanwhile, sales to other unhties ;
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reached a new high of 2 5 b:lhon kilowatt hours. a 16 percent in- j crease os er the prenous year, resultingin overall sales of 13 5 billion 1
kilowatt hours O ur riUQUESS E Pi AN business strategy, ininated 4
in 1086 to help revitali:e our Company and the communities we sen e, provided the foundation foi our achievements in 1987 liignlights of g
the year include:
= the complenon and start up ef Beaver Valley Unit 2 and Perry Umt 1; i
1
D U 0 U E $ N E L 1 0 H V C 0 M P A N' 'Y
= the innovative sale and leaseback arrangement for our 13 74 percent interest in Beaver Valley Unit 2, which will help us strengthen our financial position by eniblirg us to buy back a ponion of our com-mon stock and to repurchase cenain high coupon aebt securities;
- Beaver Valley Unit l'c new continuous operation record-185 days. Its high availabihty and employee einphasis ou safety and excellence make it one of the better piants in the nation; a the quahty service we provided all year, pamcularly last summer when we set our highest annual reall peak in six years; a the continued strong perfonnance in off system sales, which set a new all time high and registered a 1,100 percent increase since 1981;
= the creative sale of 400,000 tons of Oy ash from our coal-fired power plants for use in the largest ofits kind road embankment in the United States.. resultingin savings of up to 51 milhon in disirsal costs; a three consumer advisory panels created to give us the benefit of additionalcustomer feedback; j = our new markenng emphasis to meet the challenge of increasmg compention;
= our expanded use oi economic development rates; e furtherdownsizing of our work force-approximately 13 percent fewer employees smcc 1984; and
= conunuanon of cost cutung measures, begun in 1985, which so far have reab: d more than $100 milhon in savings The cover of last year's annual tcpon summari:cd l Duquesne Light's besmess strategy: to become more efhcient, mon- )
l competinve, more muket dnven, more customer oriented, and more l profitable I am pleased to report we are making exc ellent progress m positioningourselves to meet our objective.
1988 marks the first year in more than two decades Duquesne L:ght 03mpany will not be mvolved in power plant con-simction With this construction pregram complete. capital expendi- )
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0 V 0 U E S N E L I G H T C 0 M P A N Y I i
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tures and the need for outside fmancings have been greatly reduced.
In addinen, the Pubhc l'nhty Comnussion has formally recognt:cd our"de facta"abandonment of the Perry Umt 2 f rojeu by allowing us to rCcover otir investmerit over a 10 y ear period We have no inti'ntion i
o[\ eting to resume cellstruction of that platit.
Stillieft unresolved as ! write this letter is w hether w e wdl recei\ e fair treatment on our mvesunent in Beaver Valley Umt 2 and Penv Umt 1 My letter to you List year discussed the eIfetts of:he uneenam po!nical and regulatory envuonment in Pennsylvania on our Company I noted the mherent unfairness of one particular product of that environment, the so-called "exess capat ity" legi3! anon S!nte that I!me.%e have been working closely w uh #
7 stare leoslators and res;ulators scekmga mote balanced pubbe enercy pohCy and recul<tlOry mc enti\ cs % hich would cru eurage the com-pan) !!) C!fettlVe y u'e lt$ re?Ourt e5 and gl\ e Investors an opportun!!y IO cain a f alt retuni en their tapnal.
C ),t redutnen and orgamanonal and hnanol reinu, mnne .edl cononue to be out top pnonnes as u e meet the ohje tla es o[ p ro\ hhng L ompet:1, Vel) pil,ed energy and 4tlengthchmg Ji ,,,g, ec % .-e~ ,
, . ,j + 7.- ; ,.e e tlle financla$ bCa!N1 of our( Almparly [ ouking ahead there will be inar- !. , N#FM ?
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ket and rc\ enue oppanumacs both w ithm and cutwJe our servue l hecutveoffcer 1 ternwy whhh u e intend to pursue agcre-ively On behalf of the Board of Ducuord wnh to thank our sh.mhouets for their 'uppan. and my f eHa. ump!ayces for thea j hard a ork anJ < onnn.uncomnunnent We conhdemly look forward l to the cppanun:t:c' th n he aheaJ i
/C M 4 uam n ms 3
D U 0 0 E S N E L 1'G HT C 0 M P A N-Y i
1 FINANCIAL FINANCIAt. Percent 1987 1986 Change ,
AND ,
Reve nes hom Customers (000) $835,986 $850,744
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- OPERATING Revenues trom other unht:es t000)
$52718 II5.510
+A3 Total openung Revenues (000) $888,004 $806.263 - 09
, HIGliLiGliTS Net !ncome (000) $151,316 $151.426 -0I
$131,528 $ 130,879 +05 !
Earmngs Avatbble for Common Stoci:
larn .tgs itr Share of Common Stock $ 1.81 $ 1.79 + 1.1 ;
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\ Tidends Decbred PerShare ni Common Stock $ 1.20 $ 1.415 -152
, Book Value itr Share of Common stock at Year End $ 17.61 $ 16.75 + 51 Shares of Common Stock Otustandmg at Year End (000) 70,096 73.119 - 4.1 I
Abowance for Funds Used Dunng -
Gmstrucuon as a Percent of Eammgs for Common Stock 79% 85% - 7.1 OPERATING Liectne rbnt l000) $4,007,551 $4.312.047 - 7.1 ,
MWii Sales to Cu> tome rs 10,980,028 10,514.121 + 4.4 MWil Sales to Other Unhnes 2,485,711 2,135.834 + 16 4 3
Total MWil 5 ales 13,465,739 12.049.955 +64 Ivak 1.oad Mepwatts 2,280 2.132 ; +69 j Cmt of fuelltr Milhen BTU 151.0c 165 M - 8.7 Awrage fi1U ltr KWit Output 10,449 10.624 - 16 Annual System Generanon MWil 14,033,342 13.275,877 + 5.7 i
j CONTENTS 1
lYrspeente on 1987 5 Board of D: rect.s 15 i Company Othe ers and Ur. Managers Io Fmancta! Review 17
) shareholder Reference Guide irmde Back Coer 9
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D U 0 U E S N E L i G H T C 0 M P A N Y I
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l PERSPECTIVE M AJOR EVENTS OF Tile YEAR ON 1987 Earnings, Sales, Revenues Earnings per share v.ere $181. a two cent increase from the previous l
l year.1987 carnings reflect three nonrec urringevents.
= The mnovatise sale and leaseback of our mtet est in Beaver Valley Unit 2 improved the Company's cash flow and enabled us to reduce our current rate increase request However. the sa!c resuhed in a one nmc. 33 cents per share loss due to the difference between Unit 2's l
cost at complenon and as appratsed value.
= In a separate matter, camings were reduced 20 tents per share {M_FE -s,_ _.__
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e because the Pennsylvama Supreme Court reversed earlier mhngs y.2 ,
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w!uch had allowed us to recover costs associated with four plants (p ~. ',
cancelled m 1980 i' iI
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= In addmen. a $16 mdhon rate reduction ordered by the Pubhc Unhty 's Commission low cred earnings by seven cents per share 2 . . . . ,l Sales to ret.ul cusromers m 1987 inacased 4 4 rer'em comp ucd to the prenous year, to almost 11 bilhon k:lowatt-hours Industnal sales were up o 7 percent as USN Corporation stect mith rebounded from an extended 1086 stnke Both iesidennal and com- I, l '*: "
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merc tal sales posted gains of ahnost four percent Off syttem sales iio - u hus:: .a.~ *": z! --_
o were strong mcicasmg 16 4 percent over 1986's record level, to :. cm l 2 5 bdhon kdowan-hours Our tctal 1987 sale.s increa<ed 6 4 percent, [ ==e to 13 5 bdhon kilowatt hours Grow th in the commeraal segment has been par-l ticubtly encourapng Tradinonal grow th in this expanding market
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sewr-ofhce des elopments. resta urant sshoppmpomp!cxes-l i
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D U 0 U E S N E L i G H T C 0 M P A N Y i
4 has been bolstered by the emergence of a wide range of advanted tet knology busmesses and industnes Memberslupin the Putsburgh I hgh Technolegv Countil has gur,vn to about 000 hrms sinc e Im repre(enting both individual cittrepreneurs and Fortune 500 tom-
- unies I he dlustration on the < over of this report mdudes two of the l latest development 3 m thn rap;dly gtou mg field--the Softw are l
Enginectinginstitute and the Patsburgh Supertompuung Center ln the future, we see c onunued grow th in both i
the advanced technology and the traJinonal commeraal areas g >n - -
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The lo!!aw mg examp!c3 are unluded m our cover d!ustranen
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a w or k n progreamgon the Pittsburgh ict hnhgv Center. ; M MGap an athanccJ tchnology mdustrul park on the former s:te of
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a steel rml!. nc.u the dow n:own husmess dwna I'
--hasbeenbolsteredbyI
= Gmund re.endv was broken for the new midheM ternunal of the theemergenceofa wide
( or.4ter htabun;h Intemanon.d Auport. a pro;cct signincant in ibril.
range ofadvancedtech-n,a w hit n aM wdl enmurm the comm 'rcul residennal and I
nologybusinessesand mdu'nul deselopment of hunJreds of surroundmgaacs
. industries."
i a bround will be b:oken in the < pang for the new 5 3n nulhon Buhl Suen,e t enter. ta be located near 1 hree Rn ers 9aJmm e lhe proposcJ 10 h!o, k. W) r,n! hen Rn er-ide festn al market emena;nment tempicx <ould pronJe a ugrnhtant boost to the De.lthy IIL hi [ lJw refh e benVCntion Center. w hich aka is unJcr (onsSIrra; ion tor cApan4 D3n Rn enues trom icoti t u+ men were down u pei-( t ent to i8 6 nulhen. priman!c due to the Pt'C ordaed rate reaasuon Our n ul operanne,resenues fo :he year were dow n one pcucm t <'mp. ired to l@h to 3 SS$ nuIlh'n l
0 U 0 U E S N E L i G H T C 0 M P A N Y Power Plant Construction Program Completed Both Be.v.er Val!q Umt 2 and Peny Unit I began commercui operanon in November We con 3tmcted and now openue Beaver Valley Umt 2 The Clescland Electne lHummanng Company constmeted and operates Perry Unit 1 Duquesne Ught has a 13 74 percent mterest in each umt.
l We are paniculady proud of the Beaver VaHey pnw l
l ject T he attentton to detad, commament to excellence, and focus on safety by Duque<ne Ught employees and local craftworkers make
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Umt 2 one of the best buih nudcar plants in the connuy Bacxed by 's h.he9._stem c .-[d_g,,,
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Our 30 years of nuelcar expenence, we are confident this Mate of the art 7 = '. . . '
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1 ano s una will match or exc eed the unptcoive operating record achieved by ', =
, m%.w Be.r,er Vallev Urut I m ret ent years Una 1 rec (ntly set a new continu- 's ^
eus operation record, producmg power for 1M days before it was shut S * *
- 5' "**
w dew n in December for a schedu!cd iefuchng Innovative Sale and Leaseback Arrangement !
4 In October. Duquerne Ught comp!cted an mnovante and cre.mvc sa!c !
1 and leatcheck arrangement for our 13 74 percent mterest m Beaver Va!!cy Umt 2 In ef!cct. the Company sold us share of the unit to several muaunanal mvestors u ha h, in tum. immcJiately leased their mie:est back to Duque<ne 1:ght for a penod of 2% years We ec.ntinue to opel.ite lnd maintain l' tut 2. hold its oper:tanglu eine.and receive I
! l 3 N percent of the elettricuy it produces 1 his innosative transac non I
also wdl bencitt c u(tomers throu;h rate 4 low er than they w ould be o:Le rv.ne 7
0 U 0 UE S' N E Lt'G H T C 0 M P A N Y I
Major Rate Case Filed -
The Pubhe Utihry Commission did not consider the mnovative phase-in ..
approach we proposed m our 1986 rve request and instead ordered
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a $16 million rate reduction, pnmanly due to application of the lower :
)
corporate tax rste created by the Tax Reform Act of 1986 inJune 1987, l
we bled d tradinonal case, usmg the "all at once" approach, in the amount of $379 million. The mapr reason thi; rate increaseis needed I is to recover our investment m lleover Valley Umt 2 and Perry Umt 1. l The sale and h;ueback transa: tion later enaMed us to voluntari!y lower the overall amouti et our request by 561 million, to $318 mdhon kg g Hawev ,,at the time of theJune 1987 hhng, we r~jg"es~p""~g~fp"g expressed ou dissatistaction with this rme making method and wdbenefitcustome/s worked, ra no avad. to achieve a reasonable settlement In November, throughrateslowerthan -
, ' . thywouldbe otherwise.
vie subimtred to the PUL an ennrely new proposal to phase-in the l
propo<.cd rate increase over suc to eignt years ,
la early February 1988 a PUC adnunn trah ve law judge recommended a 5234 milhor. rate increase for the Company.
to be phased m over six years, wuh rate increases of about 7 8 percery each year A final plt decsion is expected by the end of Marc h , ,
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GETTING CLOSER TO OUR CUSNMLRS t ,4 y; -.f Competition is increasing, and we are takinghe necessa:Atery t. h ' S l l } I' posiuon Duquesne Light to successfully mee, this challery,c. Our. ri-
. A mary focus is on expanding a commitment we fiin diad
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initiated cur DUQUESNE PLAN business strategy in I?SL j ,? d 3\ 2
'3' 4 i To develop a clsser relaticnship with our customra through expanded <
l .' 1 markeongand economic development effons. Specifically e fre work- -;
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ing to better understand what our customers want and need, and to l
l deliver those energy services ta them in a mnelyand effective manner We conducted in-depth ma3et research, segmented ;
m our markets, and reahgned our markering force, assigning account {$$fMyy managers to specific customer segments instead of geographic areas. C.seMg.
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tothyninaly in This enables our people to develop creanvc add customized sclutions hy/elyandaffective, s
e ne d , '
to the specific needs of our customers 1987 marked our first year of acate markenng m l
more than a decade, with two major campaigns: one featuring tesiden- / ,
nal heat pumps and the second, commercial heating ~.'hrough these j campaigns, we have formed new partnerships with key trad ~ allies, ', )
1 such as builders. developers, equipment supplicts and national chin ,
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accounts . alliances we believe v. ill result in additional marketing <
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opportunities for our Company. c ;
Economic development is a highly competitive a
business. Every state, county and town in the Umted States w. nts new f l l
l l jobs Our proactive economic development program includes net-
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l workingwith key regional and state partners, including major univer- I sities Together, we are selling tbc advantages oflocating or expanding l l I '
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e r(aJdress this competitive challenge, we more than i
tripk.( our econu 1.!c develapment stallin 1987 New acovitics include the follewme '
i
= The expm . <n rg aat computerized listing of available business sacs fmm 250 f acih;is to appioximately 800.
.Fyranded videotapmgof a number of key properties available for busir:ss expansion or relocation ~1 hcse videos are made available ta a Sneppf potential bapu
= The (rean ce channehngof a ponton of a PUC mandated refund into 'i][4q,ly;.
a centrah:cd program whic h infused 53 nulhon into local economic g(~g){i,,i f .s.' ..
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~ - l'i d development ef forts sjef
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' Ihe exp.inded ase ol .spt ual eednomic develop:nent rates . another uq' e
, imponant < ontribunon to the area s mondnued revitalization efforts N; A i
Employee mvolvement is playmg an increasmgly
[?arGarWi= man __ , _
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Unhers,Mes;foget,h,er m.~ m ..x .
w iaiportant ro!c as our markering an.d economic development ellotts - ' -""
" a're"se~!!!ng"the a'dMtages I:
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connnue to muhiply A variety of prograins were introduced last year o/ locating crexpanding y . .
anwn.'ne employt e.s to beconc ' ambassadors l' promotingthe businessesin thegreater benefits of quahty electric hving and looking for economic Rusburgh area."
des elopment opponunines 1
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D U 0 U E S N E L I G H T C 0 M P A N Y COMMITMENT TO EXCELLENCE Our DUQUESNE PLAN business saategy provides flexibility to adapt l
to changing conditions .yet a remains constant in its commitment to i excellence-emphasizingefficiency and innc cation in all areas of the Company.
Doing Bettet With Less We have cut costs recently by more thaa S100 million through a vancty of measur-s, including downsizing our operations, and reduc-ing our work force by appan:im.uely 13 percent in 19P7. the union and management negor.iated a three year contract that recognizes the Company's financial situanon by includinga first yeat wage freeze. ;{ Fossd fueled units supplied 77 percent of our total Q{@lQlan ~wn m ~., ~ . gly energy production in 1987, nuclear units supplied 23 percent. Our p;operadons,andreducing
;jg $
two wholly owned coal fired plants performed wellin 1987, maintain. oury.Mcehappr05 l
. imately 13 percent."
ing an availabdity of 79 percent Beaver Valley Unit 1 achieved an availabdity of 84 percent for the year. Our 1,200 nuclear employees amassed more than one million work hours without a lost time accident during 1987 We at: commttted to increasingour trainingand development efforts because we believe properly trained and motivated employees are the key to excellence in operations. In 1987, we increased l the number of training programs by more than half and doubled the numNr of employees trained, compared to the previous year. We con-ducted a vancty of hands on skills training programs. such a' pole top safety for hne crews and an elderly awareness program for customer contact employees in 1988, we expect our nuclear training center to be fully acctedited by the National Academy for Nuclear Iraining 11
D U Q U E S N E L l G HT C 0 M P A N Y . Improving Value Through lunovation As pan of our DUQUESNE PLAN buciness strategy, we will contmue to pursue new and non-traditional ways to improve efficiency and to enhance shareholder value Earlier, we described two such examples-the sa!c and leaseback and specialized economic development rates. There ate other notable examples throughout our Company. For instance. in 1987 we sold 400,000 tons of11y ash and stabdized scrubber sludge from two of our coal 6md power stations .. .. to the state for une as embankment 611 on a 1.200 foot section of a new ; 3; . ; . hh. 3 . " 'i _ local expressway. In addition to savingour Company up to $1 million { y A g /' yyy;;idM;iy=W&%X in waste disposal costs, this project is notable because it should help g.. = Waminon.#mefonaf ' " ' y ' y; L [ y;;;;;;ni pave the way for other high volume uses of fly ash. ^ L waystoimproveefficiency
-l Another enmple is AUegheny Development Corpora. andto enhance share.
I hoMervalue? tion. a w holly owned subsidiary of Duquesne Light, which competitively bid on an energy services facility to supply electricity, steam and chilled water to the new midheld tenmnal at Greater Pntsburgh Intemational ; i Airport. I his project represents a potennal 17 megawatts ofload and demonstrates our mtennon to provide competinvely pnced elecnicity Emplo> ce suggestions conunned to save the Com. l pany doll 1rs and to improve efhciency and safety in 1987. Nearly 100 specihc employee ideas were approved through the Company's suggestion System last year. l l l l I 12
D U 0 U E S N E L I G H T C 0 M P A N Y Building Partnerships Stronger community and govemment coahuons will help the Putsburgh region complete the economic transformanon illustrated on the cover of this report As a hometown company committed to the revnalianon of Allegheny and Beaver counties. Duquesne Ught greatly increased its visibility m 1987 on a number of fronts-especially economic devel-opment. community relanons, and the polincal arena Professmnals m our economie development organi- , h0 ! , g.g "..,a ..
'g.3..
ration serve m leadership and executive positions on the boards or [p;g@;. n41y executive committees of numerouslocal, state. national and interna-f1w hw u ? nonal econonne development organianons On a corporate level, l'lQ y }'
- ven:;;w,12;:c]n%
w e also are highly mvolved m a variety of pannerships, meluding the *Duquesneuptpos$"" w:-:y:W%;;;wny: newly fonned Pennsylvama Industnal Resource Center--an effon to MUCf8ased/fs visitetyin y
..m m ,, cm, y
;1987on3numberof tonsohdate pubhe. private, and acadenuc economic development fronts--especiallyeco-effons throughout the state.
nomicdevelopment, We took some special steps in 1987 to make sure our communityrelations, community outreach programs are effecavely helping fmancially trou~ andthepoliticalatena." bled customers Because of the size and diversity of our semce tern-tory, we created three consumer advisory panels-one cach for the City of P:ttsburgh, Allegheny County, and Beaver County Panel mem-bers provide invaluable insight mto the specific problems and needs of the population they represent Their unique perspecoves are valuable resources as we evaluate our existing programs and consider new com- 3 munity Inillatives 13
0 0 0 U E S N F L 1 G H T C 0 M P A N Y l l 19s7 continued a long tradition of einployee com. 4 1 mitment to their home commurutics in addition to the half nuthon I dollars pledged by our employees to the United Way. tnany Company sponsored and employee y;rassroots campaigns were conducted for a wide range of caur.es. including. amongothers, the $ahation Army j Food Fund, Childten's Hospital. Toys for Tots. and the Rehabilitation l Insuture of Pittsburgh. ( l l Becausclegistanve/regulaton deasions sigmucantly ,ypypewy on : L . ; .v - o influence out operations, we also have become more active in this area .warkmg to develop doser relationships and to create a more "M Mg' open thalogue with ges ernment ofhciah T hrough our Stockholders hpm::4nww?7::t]: glsscescr$Wfo{ ' Voice program, groups of sharehohlers, umon and management [m x - ge ~-Q .M. a i .Duquesne
'8 #8 employees and renrees made personal visits and wrote letters to legis- ' 0 '89' f"8'"
I contacttheirelected0111 ! lators to discuss the 1987 rate case and other pubhc pohty issues in cialstosupportbalanced the future, Stockholders \bice wdl conunue to provide information on legislativeandregulatory pubhc pohcy issues enocal to Duquesne Light and encourage members ed" I to contact their elected of ficials to suppon balanced legislante and 1 regulat0ry tirattnell! l t l l l 14
D U 0 U E S N E L i G H T C 0 M F A N Y I l BOARD OF : DIRECTORS ) ' k ) [y g f (, W S 4 f % M % E % ! M & A W M A @ il1 {'p, p .
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f,n j e , 7 ;p && nw = .pr .y e>.. - lU~~ D ~WO ?$T Y~^* andJohnM: Arthur
- Wesley W von Schack 45* William 11. Knoell *
- Chair r;cn of rhe P~ urd, f tenfent Chainnan an) Ch.cf fhcaanc Oficcr,
..mf Ch:cfEirn.tnc Oficcr Cyc lys f ra!a>trie s Inc.
Henry G AllynJr *l G Christian I;ntach t# Rctuca Prcs!cnt a nJ Chuf RctucJ % e Cha:rma n clMellcn ISct utnc Oyacr cf The l'urs!m,ch Bank. and rct:rcJ Mct Cl.Jurun a"J and LAe Er:c Radroad Cornppn Ticasurer olMcHen Ba nk Ccrp' rat:cn John M. Arthur 3,. Eric W. Spunger ti Retved C h.vrman c)t he Bmrd VI'Tne' Hetty Srrmicr and Dyc(nc Lyht Cor ;wn \f atic'n. f'C-Daniel Berg *
- Atumns-at-Lia l rut tutc Vr&wr. e vew j r:r cm~-s Penstc Jcr D I)(G hu Instli1f( t V+vvfWCfM M W ci N f'
% t W wctf y r'e rd Darcen E. Ib> t e t* c e, % ws cow, Dirca:r. I he B;shl fvund.wn 9 Wi" 5 %'rw&mm e ve w s u n er.n c> w n John 11 Demmler **
- m u 4v,mn,3 cv-r IUrincr. 4cJ sm:th %w & WCln ?*
1 2:t 1**m'M"' W4 C*'.'*T A:::rw a! la,r Sigo Ialk ti Prcsa!ctr and chicf faccarne ofu ct, Cran!vrig bnctgency anj O:J(mMfic Ccnfer 15
D-U=0 V ES N E- L i G H T C 0 M-P A N Y l l 1 l
. COMPANY We51ey W ton 5(hack Gary L Schwass Cininnan cf the Board, President Vue President and Tucasurer l OFFICERS ""d O*"""# Ulh"' l John n Sieber John) Carey Vwe Presdent
' Evcutive VwePicsdent Nuclear \
Operatwns Diane S. Eismont Roger D. !Wk 5 cretary Vwe President Afarketmg and Customer . J ames O. Ellenberger l Senics Conticl!ct -
}
Gary R. Brandenbery,er - Laura Lane Amelio Vwe President Assistant Secretary 1%er Supply 9 Lawrence P.Gahe . ' Christine A tiansen Assistant Trcasurcr Vwe Picsdent Joan S. Senchyshyn l/ gal and Corprute Communications Asststant Secretary D.nid D Marshall Vice Presdcnt A William Stein Assistant Trcasorer Corivra:e Dcvc:opment Donald O. Messner Vu e l'rcsdent AJministratne Senices UNIT George E. Bentz 11. Donald Morine Ge neral Scmas Marketing and Economic MANAGERS Richard s Christner General Canscl Frank M. Nadolny Thomas 11. Cook Managment WilliamJ Neidlinger informatien Senu es Corporatc Irrjennancc Analysis James O Crockett T homas E Nist Corpraw Nuclear Customer Semccs Senues East.n m Dn tsen WilliamJ. Delco Steve L Pernic k Jr. Planrung, Budgeting, and Environmental Affatrs Business Doc 10pm?nt Robert C. Schcpper Donald 11. DeVos- Marciials Management System Doclopment Paul L Schroeder C. Eugene Ewing $) stem Operatwns and Nuc?rar Quahty Assuran;e Teluomr.nuneatwns T homas lluater Donald A_ ShirerJr. Cu stomer Sema> Fessil Fuels Westem Dwisen Emest M. Varhola Thomas D Jones 11 GevemmentalRelatens - Fossil Gcneratwn Joseph E Zagorski Wdham S. Lacey Human Resources - Nm! car Operattsns Armand G. Zitelli John Elaudenslager Customer and General Sent es Corprate Communu ations L 16' L . .. .
l ma,xsim epwase;xum,.m nn wemumnsammes,3 r l l 1
0 U 0 V E S N E t. I G H T C 0 M P A N Y COMPANY REPORT ON FiNANCI AL STATEMENTS The Company is responsible for the fmancial infonnanon ally accepted audmng standards and mcluded a review 3 and representations contained in the financial statements of the system ofintemal accounting control and tests of
~
and other secnonsof this Annual Report "te Company transactions to the extent they considered necessary to believes that the fmancial statements have been prepared provide reasonable assurance that the fmancial statements in conformity wah generally accepted accounting princi- are not misleadmgand do not contain matenal error s , ples appropnate in the circumstances to reflect, in all T he Board of Directors has an Audit Comnunce com-matenal respects, the substance of events and transac- posed of four non-employee directors which met four nons that shoukl be included m the statements and that times in 1987. The Auda Comnunce has the follow ing the other information m he Annual Report is consistent duties and responsibihties: (1) recommending the inde-with those statements. In prepanng the financial state- pendent pubhc accountants;(2) review ing the planned mems. the Company makes infonned judgments and scope and results of the auda md other services to be estimates based on currently avadable information about perforr.ed by the independent pubhc accountants; the effects of cenain events and transactions. ( 3) ruewing the financial statements and the related T he Company maintams a system ofintemal account- rerort of the independent pubhc accountants;(4) review-ing control designed to provide reasonable assurante that hg with the officers,intemal auditors and the indepen-the Company's assets are safeguarded and that aans- dent pubhc accountants the adequacy of the Company's actions are executed and recorded in accordance wah system of intemal accounnng control. including their estabbshed procedures There are hmits inherent in any recommendanons with respect thereto; and (5) reviewing system of mtemal control based on the recogninon that the planned scope and results of the intemal audit func-the cost of such a system should not exceed the benefas tion. The independent cenified public accountants and to be denved The system ofinternal accounting centrol intemal audnors have full and free access to the Audit is supported by wnuen pohcies and guidehnes and is Commutec and meet wah it. wah and wahout manage-supplemented by a staff of mternalauditors l he Com- ment being present, to discuss inte mal accounung con- ) pany beheves that the mternal accounnngcontrol system trol, audmng and financial reporting matters. j provides reasonable assurance that as assets are safe-guarded and the fmanaal mfonnanon is rehable The accompanying fmancial statements have been h kl 4 heL [ audacd by Delo:tte Haskms & Sells. independent ccr- Wesley W von Schack Gary L Schwass ofied pubhc accountants. whose appomtment was Chainnan of the Board. Vice President approved at the 1987 Annual Meenng of Stockholders President and Chief and Treasurer T heir examinanon was made m accordance wah gener- Execunve Officer OPINION OF INDEPENDENT CERTlHED PUBlIC ACCOUNTANTS DELOITTE HASKINS & SELIS Certified Pubhc Accountants 2400 One PPG Plate Pittsburgh, Pennsylvama 15222 10 THE DIRECTORS AND STOCKHOLDERS OF DUQUESNE LIGH T COMPANY: We have examined the balan(e sFeets of Duquesne Light in our opimen. subject to the effects on the financial Company as of December 31,1987 and 1980 and the statements of such adjustments. if any, as might have related statements of mcome, rt tamed camings. capital been required had the outcome of the uncenainties re-suq31us and changes in fmanaA posaion for each of the ferred to in the preceding paragraph been known, such three years m the penod ended December 31,1987 Our fmancial statements present fairly the financial posmon examinations were made m act ordance wnh generally of Duquesne Light Company at December 31,1987 and accepted audmng standards and, accordmgly, mcluded 1986 and the results of as operanons and the changes in such tests of the accountmg records and such other its financial posinon for each of the three years in the audamg protedures as we considered necessary m the period ended December 31,1987, m confonmty wah circumstanccs generally accepted accounung pnnciples apphed on a As discussed m NoteJ-Rate Mauers, there are several consistent basis issues affectmg the ulomate recoverabihty of the Com-pany's m.estment m the Perry Umt No 1 generating stanon which was completed m 1087 The Company is fg unable to predic t w hat cf fcct, if any. the Sunset i egislation Febmary 12,1688 or any alleged imprudence m the construcnon of the Umt wdl have on the Company's financial posinon or resuhs of operanons 18
D Uc0 U E. S N E 'L I G-H'T C 0 M P A N. Y STATEhlENT OF INCOhtE Year Ended December 31, (Thousands of Dollars, Except Per Share Amounts) 1987 1986 1985~ OPERATING REVENUES: Customers $835,986 $850,744 $872.411 Otheruulities 52,018 45,519 46,049 Total Operating Revenues 888,004 896,263 918,460 OPERATING EXPENSES: Fuel 238,039 233.673 249,212 Purchased power __ 5,594 3,765 4,094_ Otheroperation ._ 189,783 169,555 159,188_ hiaintenance_ 66,380 74.719 60,462 Depreciation and amortization , _ _ 82,172 74,325 , 81,066 Taxes other than income taxes 67,442 ' 70,987 72.614 Income taxes (Note G) ' 52,859 79,724 100,992 TotalOperating Expenses 702,269 706,748 727,628 OPERATING INCOh1E 185,735 189,515- 190.832 OTilER INCOh1E AND DEDUCTIONS: Allowance for equity funds used during construction 71,234 81,943 72,782 Loss on cancelledjenerating units (Note D) (34,263) - - loss on sale of Beaver Valley Unit No 2 (Note E) , __ (23,828) - - Rate refunds (includinginterest expense of
$1.854 in 1987 and $12,953 in 1986)(Note C) (1,854) (57,278) -
Income taxes-credit (Note G) 68,638 62,188 28,552 Other-net 21,654 2.692 10.801 Total Other Income and Deductions 101,581 89,545 112,135 INCOh1E BEFOREINTEREST CilARGES 287,316 279.060 302.967 IN TEREST CilARGES: Interest onlong term debt 163,777 147,483 146,884 Other interest 4,566 8,792 6,357 Allowance for borrowed funds used during construction, net ofincome taxes (32,343) (28.641) (26.231) Totallnterest Charges 136,000 127,634 127.010 _ NET INCOh1E 151,316 151,426_ 175,957 DIVIDENDS ON PREFERRED AND PREFERENCE STOCK 19,788 20,547 21,250 EARNINGS FOR COhlh10N STOCK $131,528 $ 130,879 $ 154,707 AVERAGE NUhlBER OF COhthf ON SIIARES OlJTSTANDING (000) 72,845 72,930 68,543 EARNINGS PER SilARE OF COhlh10N STOCK $ 1.81 $ 1.79 $2.26 DIVIDENDS DECIARED PER SilARE OF COhlhtON STOCK $1.20 $1.415 $ 2.06 See Notes to Financial Statements. 19
D U O U E S N E L I G H T C 0 M P A N Y l l { BALANCE SliEET As of December 31, (Thousands of Dollars) 1987 1986 ASSETS PROPERTY, PIANT AND EQUIPMENT-Electric plant in service $3,429,422 $ 2,607,433 Construction work in progress _ __ _ _ _ 74,094 __ _l,324.848. _ _ 1 Property held under capital leases (Note 1) _ _ _ _ 290,907 _ __272,721 Propeny held for future use(NoteJ) 213,128 107.045 Total 4,007,551 4,312.047 less accumulated depreciation and amortization 908,654 821.448 Property, Plant and Equipment-Net 3,098.897 3.490.599 OTilER PROPERTY AND INVESTMENTS 20,477 18.424 l CURRENT ASSE15 j Cash and temporary cash investments (at cost which approximates market) _74,699__ _ _ _ 2.821__ Cash held by trustec (Note E) 34_5,439._ _ _ _4,413 Accounts receivable: Customers (less allowance for uncollecuble accounts of $ 5,417 and $ 5.181, respecovely) ._ _ 90,592 _ 85,751 Other (mcluding ; tax claims of $14,199 and $ 20.025. respectively) _ _ 56,538__ 41,749 f Materials and supplies (generally at average cost): Coal 40,642 33.687 Other operatingand construction _ _ _44,l'02 [ }2.45I C cher current assets 34,336 29,354 . Total Current Assets 686,348 240.227 l
\
l l DEFERRED DEBITS: Extraordmary propenylosses (Notes B and D) _ _ 152,573 _ _ 181.661_ Unamonized loss on reacquired debt (Note M) 39,862_ _ __. . _ 40.614 Deferred coal costs (Notej) 16,200 16.375 l Income taxes on sale of Beaver Valley Unit No 2 (Note E) _ _ 85,086 __- _ Other deferred debits 91,875 51,227 j Total Deferred Debits 385.596 289.877 Total Assets _
$4,191,318 $4.039.127 See Notes to Financial Statemems 20
_ _ _ _ _ _ _ _ _ _ _ _ _ _ . _ _ _ l
D U 0 U E S N E Ll G H T C 0 M P A N Y 1987 1986 CAPITALIZATION AND LIABILITIES CAPITALIZATION (Note hi): Comynon stock (aupon:ed _ , _ _ 1 9p_p00g shy . d-73119,446, shares) _ _ _ ___$_73,119 _ _ $_ _73,119_ Capital surplus 926,131 926,131 Retained eamings 269,965 225,733 Less treasury stock (at cost)(3,023.800 shares) (34,748) - l Total Common Stockholders' Equity 1,234,467 1,224,983 N ngedeemable preferred and preference stock 156,137 156,137 Redeemable preferred and preference stock 104,768 110,653 Firs (mpngage_b,onds 1,401,669 1.326,135 Otherlong-term debt _____ __ _ _ _ _ _ 297,599 296,137 Unamorti:cd debt discount and premium-net (8,668) (8,485) Total Capitalization 3,185,972 3,105,560 OBLIGATIONS UNDER CAPITAL LEASES (Note 1) 140,535 154,887 CURRENT LIABILITIES: Notes payable- _ bank (Note F)
- 15,000 Long; term debt and lease obligations due within one year (Notes I and M) __
, _ _ __ __ 53,529 ., _ 33,071 ACC _unts payable 107,040 97,517 l Accrued income taxes 9,968 i,805 l
Deferred _ income taxes and other accrued taxes _ _,_ _ _ _ _ _ . , _ _ _ _ _19,068 _ _ 10,548__ _ Accrued interest 43,597 38,792 Dividends declared 26,404 27,017 Deferred energy costs 18,064 3,313 Sinking fund andpurchase requirements (Note M) 18,645 18,170 Rate refunds due within one year (Note C) 3,500 3,500 Total Current Liabilities 299,815 254,733 OTilER NONCURRENT L! ABILITIES: Investment tax credits unamortized 165,452 198,258 Accumulated deferred income taxes 369,633 270,565 Rate refunds (Note C) 4,134 51,770 Other deferred credits 25,777 3,354 Total Other Noncurrent Liabilities 564,996 523,947 COMMITMENTS AND CONTINGENCIES (Notes B through N) Total Capitalization and Liabilities 54,191,318 54,039,127 21 \ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _ -.
0 0 0 U E S N E L i G H T C 0 M P A N Y STATEMENT OF CilANGES IN FINANCIAL POSITION Year Ended December 31, (Thousands of Dollars) 1987 1986 1935 CASil PROVIDED FRO 51: Operations: Net income $151,316 5151,426 5175,957
. Dypreciation and amortipation_ __ _ _ ._ _ _ _ _ _ _ _ _ ,14 l 002 _9U65_ _109,755_
Allowance for cqu,ity and borro,yed funds used_dunng construction _ _ _ _ ,._ 10 ( 3.57 7) (110J84)_ 9.013) (9 Changes in working capital (see below) 5,932 (44,957) (2,933) _ inyeumentjagred,its (managngeL._ _ _ _ ,_ _, __ __,_,__ ~_ _ _ , { 3,2y06[ _ J 2,988 _ 19,468. _ l Income taxes deferred-net (noncurrent portton) 64,077 17,176 30,756 34,991 ( {nggme tgesfelatedjq canpelled generating units - - _ togs on cancelled generatingunits_ _ _ _ _ _ _ _ , ,_34,26_3_ _ - _ _ _ _ _ _ loss on sale of Beaver Valley _Umt Na 2_ _ _ _ . _ - . . _ , _ _ l
-Rale, refunds (inpluding accmed intere,st,L __ _____ ___,__ _ _______
______ _ _23 51y0,,_ _ ,7_ 8 2,8, l Carrying charges on assets not in rate base (l1,093) - - ' Total Cash Provided From Operations 280,933 175,084 233.990 Financing Sale of Beaver Valley Unit No 2 537,921 - - Sale of bonds 100,000 100.000 289,000 1ssuance of common stock - 27,313 102,910 j _Nuclea r fuel obligations (induding icase arrangement s) 20,851 20,178 34,494 l lssuance ofpollution control obligations - - 44,250 Increase (decrease)in notes payable (15,000) 15.000 - Total Cash Provided From Financing 643,772 162,491 470,654 Total Cash Provided 924,705 337,575 704.644 CASil USED FOR: Construction ex enditures(net of allowance forequity and b rrqwed fqn;s used_duringconstruction) 154,959 178,765 244,859 Dividendsyn capital stock 107,084 123,645 162,318 Income taxes on sale of Beaver Valley Unu No. 2 _ , _ _ , _ _ 85,08_6_ _ _ _ _ _ - - __ Reductions of bng-term obligations (iricludmg cunent matuntics and rate refunds) _ 84_,229. _ 59,360 _ _ 198.935 Repurchase ofcommon stogk _ ___ _ __ _, _34,858 Nuclear fuel expend Lrures _ 20,851 70,178 __ , 34,494, Premium on reacquired debt _ 177 2.745 35.415 Other-net 24,557 27,040 13.194 Total Cash Used 511,801 411,733 689.215 Increase (Decrease) in Cash, Temporary Cash Investments, and Cash licid by Trustec $412,904 5(74.158) $ 15.429 CASil PROVIDED FROM (USED FOR) Cil ANGES IN WORKING CAPITAL: Accounts receiyable _ _ $ (19,6_30)_ _$_(10,498) _ 5(14.441) Maa nals and supphes (8,605) 4,089 _13.008 Other current assets _ (4,982)_. _( 15,466) ,__ (1,597) Accounts payable _ 9,523 _( 10,477) (6.268) Aarued income taxes 2,163 541 4,125 De ferred income taxes and other accrued taxes __ _. 8,520 ' _ (4,098) , _ _'(2,717)
~
Accrued interest . 4,805 2,200 _ _l,461 Dividends declared . . _ . - (613)-. (15.0_96) -- - 3,305 Deferred energy costs 14,751 191 _ _ 348 Rate refunds - 3.500 - Cash Provided From (Used f or) Changes in Working Capital 5 5,932 $ (44,957) $ (2.933) See Notes to Financial Statements 22
0 U 0 0 E $ N E L 1'G H T 'C 0 M P A N ' Y' I STATEMENT OF RETAINED EARNINGS Year Ended December 31, (Thousands of Dollars) 1987 1986 1985 BALANCE AT BEGINNING OF YEAR $225,733 $197,952 5184,313 NETINCOhlE FOR Tile YEAR 151,316 151 426 175.957 Total 377,049 349.378 360,270 Cash dividends declared: Preferred stock 9,131 9,284' 9,437 Preference stock 10,657 11.263 11,813 Common stock (per share: 1987-51.20,1986 - 51.415;1985-52.06)- 87,296 103.098 141,068 Total Cash Dividends Declared 107,084 123.645 162,318 BALANCE AT END OF YEAR 5269,965 5225,733 5197,952 STATEMENT OF CAPITAL SURPLUS Year Ended December 31, (Thousands of Dollars) 1987 1986 1985 BALANCE AT BEGINNING OF YEAR 5926,131 $900.391 5804,377 P_re,mium on conymon stoc_k +ssued_ _ _, _ _ _ _ _ _ _ - -_ _ _ 25,682 _ 96,197 _ Other - 58 (183) BAIANCE AT END OF YEAR $926,131 5926,131 5900,391 See Notes to Fin ncial Statements NOTES TO FINANCIAL STATEMENTS A.
SUMMARY
OF ACCOUNTING POLICIES Depreciation Property, Plant and Equipment Depreciation of electric plant, exclusive of coal propenies Properues are camed at original cost and generally are is calculated on a straight-line basis detennined in accor-subject to a first mangage lien Cost includes direct labor, dance with methods applied by the Pennsyhania Pubhc materials. indirect costs and an allowance for funds used Utility Commission (PUC) Depreciation, amonization d uring constmcrion ( AFC) of properties AFC is included and depletion of other propeny are calculated on various in constmction work in progress (CWIP)and credited to bases, such as amount of nuclear fuel bumed and tons of otherincome for AFC attnbutable to equ.ty funds and to coal mined. interest expense for AFC attnbutable to borrowed funds. The Company provides for decommissioning costs for net ofincome taxes AFC is a non-cash credit computed Beaver Valley Unit No. I as ordered by the PUC. The Com-usinga composite rate, which is applied to the balance of pany is allowed to recover through current rates annual CW!P and assumes that funds used for construction are decommissioning annuity payments to provide for its provided by borrowings and by preferred, preference and share of the Umt's decommissioning costs, estimated to common stock equity The average annual rate was 9%, be 570 million in current dollars. At December 31,1987 9 4% and 95% in 1987,1986 and 1985, respectively the Company had deposited $38 million in segregated Maintenance, repairs and replacements of minor umts accounts, which were established to pay for these costs of propeny are expensed and replacements of retirement in its 1987 rate case the Company requested similar rate units of mopeny and betterments are capitali:cd The treatment ofits share of decommissioning costs for Perry costs of propeny units retired, plus removal costs,less Unit No. I and Beaver Valley Unit No. 2 Such costs are sahage, are charged to accumulated depreciation. currently estimated to be $38 million and $20 million, Rnenues respectNely Customer meters are read monthly or bimonthly and bills are rendered monthly Revenues are recorded w hen billed. 23
D U 0 U E S N E L I G H T C 0 M P A N Y I NOTES (continued) Income Taxes B. EXTRAORDINARY PROPERTY LOSS j Deferred income taxes are provided principally for differ- In 1967 the Company and four other electric unhoes l ences between depreciation for income tax purposes and fonned the Central Area Ibwer Coordination (CAPCO) depreciation for accounting purposes, to the extent per- group. The CAPCO companies have placed in service mitted by the PUC for ratemakmg purposes Deferred three nuclear and five coal-fired geacrating units. I taxes are also provided for expenses, such as fuel, extraor- In March 1984 the CAPCO companies agreed to mini-dinary propeny losses and losses on early retirement of mi:e construction work and cash expenditures on Perry debt, which are deferred for accounting purposes but Unit No 2 pending consideration of several ahematives, deducted currently for income tax purposes. Deferred includmg resumption of constmc: ion or cancellanon of tax credits are recorded for certain rate refunds which are the Unit. The Company believes that any dectsion to recognized currently for accountmg pmposes but deducted resume construction of the Unit must be approved by all over the refund period forincome tax purposes in com- of the CAPCO companies. Based on present conditions, pliance with regulatory accounting, income taxes are the Company will not approve resumingconstruction. allocated between operating expenses and other income. The Company does not know what the positions of the j pnncipally with respect to interest charges related to other CAPCO companies will be with respect to the CWIP Investment tax credits related to regulated assets future of the Unit. generally are deferred and amoni cd over the lives of the in 1987 the Company received approval from the PUC related facihnes to amom:c and recover its $155 million investment in the At December 31,1987 the cumulative net amount of Unit over a ten-year period which beganJuly 1,1987 on timing differences for which deferred income taxes have the basis that the Company had abandoned its interest in i not been provided was approximately $269 mdhon. the Unit in 1986. The unrecovered cost of the Unit at These timing differences relate primarily to accelerated December 31,1987 was $147.6 million The Company is depreciation, certain taxes, the debt portion of AFC, pen- not caming a retum on such unrecovered cost. See Note L sions and cenam other employee benefits Deferred Fuel Costs C. RATE REIUNDS The difference between actual fuel costs and fuel costs Beaver Valley Replacement Power j included in base rates is deferred unal such costs are A settlement m 1986 relative to a PUC investig.uion of bdled to customers through the energy cost rate. The certain outages at Beaver Valley Unit No I provided for energy cost rate is based on projected costs with provi- refunds to the Company's customers of $15 3 milhon, e sions for subsequent adjustments to actual costs Any includinginterest, over a four-year period which began overcollections of revenues are refunded to customers July 1,1986 Accordingly,in 1986 the Company recorded with interest. the 511.5 mdlion principal amount of the refunds and / Nuclear Fuel Costs $2.7 million ofinterest expense. Additionalinterest The Company finances its acquisnion of nuclear fuel expense on the unpaid balance of the refunds ,s being
'hrough capitallease and other arrangements The Com. rewrded over the refund pcnod. The unpaid balance pany's share of nuclear fuel costs under the lease agree. of the efunds was $69 mdhon at December 31,1987.
ments is charged to fuel expense based on the quantity of 1981 Option Order electnc energy generated The Company was permitted in 1981 to increase its Under the Nuclear Waste ibhcy Act of 1982 (the \ct), annual rates by $64 2 million in accordance with an the United States Depanment of Energy is responsi J e option order of the PUC. In 1984 the linnsylvania for the ulumate storage and disposal of spent nuclea- Supreme Court ruled that the opuon order was nvalid fuel removed from reactors Under the Act the Company and remanded the case to tbe PUC. :n 1986 the PUC is required to pay a quanerly fee, which it recovers ordered refunds to the Company's customers of through rates $32 8 million of revenues collected under the option Other order The Company appealed the PUC's refund order Other propeny and mvestments are stated pnncipally at to the Ivnnsylvania Commonwealth Court. As part of a cost,less accumulated depreciation where apphcable. settlement relating to the 1986 rate case (see Notej), the Debt discount or premium and related expenses are Company agreed to implement a refund program over an amorti:cd over the hves of the apphcable issues 18-month period which beganJuly 30,1987, pending Reclassifications disposition of the appeal with the Commonweahh Court 1he 1986 and 1985 financial statements have been reclas- The Company recorded the $32 8 tmlhon principal sified to conform wnh atcounung presentauons adopted am unt of the refunds and $10 3 mdlion ofinterest m dunng 1987. 24
D U 0 U E S.N E ' t. I G H T C 0 M P A N Y 1986. Interest on the unpaid balance of the refunds is 1988. The Company remains responsible under the tenns ( being recorded over the refund period and amounted of the leases for all operation, maintenance and decom-to $16 million in 1987. missioningcosts of the Unit. On December 30,1987 the Company deposited Due to the difference between the Unit's cost at comple-
$30.8 million in an escrow account established for repay- tion and its appraised value, the Company recorded a ment of substantially all of the unpaid principal amount book loss of $238 million, or $33 per share, in September of refunds and interest accrued through December 31, 1987. Because AFC was not included in the tax basis of 1987. This transaction has been accounted for as an the Unit, the sale resulted in a taxable gain. The Company extinguishment of debt. Accordmgly, the hability for the received pennission from the PUC to recover the related rcfunds is not included in the Company's balance sheet taxes through rates over the term of the leases. The Com-as of December 31,1987. pany also received the benefit of cenain lessors' invest-ment tax credits resulting from the sale of the Unit.
D. LOSS ON CANCELLED GENERATING UNITS See Note G. In 1980 the CAPCO companies cancelled the construc- Proceeds from the sale were deposited with the trustee tion of four nucleargeneratingunits The Company under the Company's first mortgage bond indenture and received approval from the Federal Energy Regulatory are being withdrawn in accordance with the terms of the Commission and the PUC to amorti:e and recover from indenture. At December 31,1987 5345 3 million remained its customers its share of the accumulated costs of the on deposit with the trustee. cancelled units ($343 mdlion) over a ten-year penod The letter of credit referred to above secures the lessors' which began in 1983 The PUC's order approving the $116 3 million equity interest in the Unit. In addition, the recovery of these costs. which was appealed by the Company was involved in the issuance of $421.6 million [ Consumer Advocate to the Pennsylvania Commonweahh of collaterali:cd lease bonds by an unafhhated corporation Court, was afiirmed by that Court in 1985. for the purpose of financing the lessors' purchases of the l On October 15,1987 the Pennsyhania Supreme Court Unit. Upon the occurrence of certain specified events, the , issued an opinion as the result of a further appeal by the leases could terminate and the letter of credit and/or the i Consumer Advocate and otherintervenors The Court bonds would become direct obhganons of the Company. found that the Pennsylvania Public Unhty Code pro-hibited the recovery of the cancelled generatinguni ts' E SIIORTTERM BORROWING AND REVOLVING costs because such units never provided service to the CREDIT ARRANGEMENTS Company's custemers The Court remanded the matter T he Company has tw o revolving credit agreements with to the PUC for proteedings consistent wnh its opinion. two groups of banks totaling $ 225 milhon, available to
'njanuary 1988 the Company appealed the Pennsyl- May 15,1988 and December 15,1988 in the amounts of vania Supreme Coun's decision to the United States $125 milliou and $100 million, respectively At December Supreme Court. Pending further proceedings in this 31,1987 no loans were outstanding under these agree-matter, the Company recorded a loss in September ments. Under certain conditions, borrowings outstanding 1987 equal to the onginal inves tment in the units of under the two agreements may be convened to term 534 3 tmlhon. The effect of recording this loss was to notes. Interest rates fluctuate dunng the revolving and reduce camings, net ofincome taxes of $15 5 nullion, tenn periods, dependingon the period of borrowings, by $188 milhon, or 5 26 per share,in 1987. at the prime rate and at percentages in excess of prime, Euro-rate and certificate of deposit rates. There is a com-l E. BEAVER VALLEY UNIT NO. 2 SALE AND mitment fee of %% perannum on the average dady unbor-LEASEBACK rowed amount of each commitment. The commitment fee On October 2,1987 the Company sold its 13 74% mterest on the $125 million agreement increases to %% per annum in Beaver Valley Unit No. 2, exclusive of transmission and on the average daily unborrowed amount upon the first
- common facihnes The total sale price was $537.9 million, borcowing against this commitment.
! which was the appraised value of the Company's mterest During 1987,1986 and 1985,the maximum short term in the property Simultaneous with the sale, the Company bank and commercial paper borrowings outstanding was leased back us interest in the Unit for a temi of 29 % years. $46.5 million, $120 million and 523 mdlion, the average The leases provide forsemiannual payments and are daily short-term borrowings outstanding was $15.4 mil-accounted foras operatingleasu The semiannuallease lion,559.4 million and $36 million,and the weighted payments for 1988 will be $ 26.4 million. Additionally, the average daily interest rate apphcable to such borrowings Company wdl be required to pay fees for a letter of credit was 7% 66% and 8.2% respectively related to the sale and leaseback. Such fees will vary dur-ing the lease term and are estimated to be $1.7 million for 25 i
D U 0 V 'E S.N E L I G H T C 0 M P A N V NOTES (continued) I. G. INCOMETAXES 1987 1986 1985 ) included in operatingexpenses: (Thousands of Dollars) l Currently payable:
. Federal __ , _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ , , _ , . _ _ _ _ _ _ . . $ (23,929[,_$ 15,913 _ , $_37,765 State (1,053) 7,939 13.230 Deferred-net:
_ Me ra( _ _ _ _ _ _ _ _ _ _ _ _ ._ _ __ _ _ _ _ _ _, _ _ _ -. _ _ _ 06 911_ _ _ _ 40,871 _ 29,0,34_ l
. _ . State _ __ 1,434 (34) 743 15,496 20,220 f
Investment tax credits deferred-net 15.035 i Total included in operating expense s 52,859 79,724 100,992 included in otherincome: l Currently payable: ! reperal _ _. _ _,23.015)
. _ _ _ , _ _ _ _ _(25,61R _ _ (28,073) ( ) .__.5 Jag _ __ __ _ __ _ , _ _ , _ _ _ _ _ _
_ _ _ _ _ _(5,966)_ _( _6,406)_ _ 5,2 ( 52) Deferred: _ Rderal __ _ , _ _ _ ____ _ _ _ _ _ , _(12,765_)_ _ _ ( 22,324)___ 5 tate _ __ _ __ _ __ _ _ __, , __, ,, _ __ ,(3,0_8 4[ _ , _ _ _(1p_94L, _ _ _ _ _ - Investment tax credits (21,168) (291) (285) Totalincluded in otherincome (68,638) (62,188) (28,552) Totalincome tax expense (credit) $ (15,779) $ 17,536 $ 72,440 \ Total income taxes were less than the amount computed by applying the statutory federal income tax rate to income before income taxes. The reasons for this difference in each year were as follows: Computed federal income tax at statutory rate $ 54,147 $ 77,722 $114.262 Increase (decrease)in taxes resuking from: Allowance for funds used_ during construction _ _ _
, __ (41,379) _ 50,869)__ ( (45,546)
Exce:s of book over tax depreciation _ _ (3,986) (594) 6,215 State income taxes, net of federal income tax benefit (5,206) (1,941) 4,709 Amortization of deferred investment tax credits _ _ _ _ _ _ _ _ _ _( 24,651)_ (6,120_)___(4,818) Other-net 5,296 (662) (2,382) Totalincome tax expense (credit) $ (15,779) $ 17,536 5 72.440 Sources ofincome taxes deferred and the related tax effects w;re: Excess of accelerated over straight-hne depreciation , _ _ __ _ _ $ 36,4 27 5 34 769 _ _ $_20,388_ _ Expensed on tax retum and deferred on books: Loss on early retirenient of bonds (395) 1,403 19,362
, Rate refunds (includinginterest) 23,196 (27,418) -
pny Un!t_No. I test period costs 8,319 - - Expensed on books but not deducted for tax purposes: Fuelcosts (7,810) (1,630) (6,572) Loss on canccHed generatmg units _ _ , (17,016)_ _ _ _ _ _ -- Amorti:ation of extraordmary property losses ___ (3,152) (1,738) (1,703) Other-net 6,927 8.033 (1,698) Totalincome raxes deferred-net 5 46,496 $ 13,419 $ 29.777 The Company's income tax retums are settled through 1981 and the returns for 1982 through 1985 have been I examined The Company's management believes that the settlement of federal and state taxes will not have a material adverse effect on the Company's financial position or results of operations. Investment tax credits included in other income relate principally to the sale and leaseback of Beaver Valley Unit No. 2. See hote E. 26
f D U 0 V E SN E L 1 G H T C 0 M P A N Y 11 Eh1PLOYEE BENEFITS consist primarily of common stocks, United States obliga. l The Company has tmsteed retirement plans to provide tions and corporate debt secunties. Net pension cost for pensions for all full-time employees, except coal mine 1987 was computed as follows: employees who are covered under a plan administered
- (Thousands of Dollars) by the United hiine Workers of America (Uh1W1 Upon - - - - - - - - - - - - - - - - ~
Servic,e cost--benefas camed during 1987 .__5 8,449 retirement, employees receive a monthly pension based on length of service and compensation. Pension costs, Interest o_n projected benefn obhgations 18,645 l excluding the Uhtw plan, are funded in accordance with Rerum on plan assets ~ ~~ ~ (22,458)
~ ' -
federal regulations and include amortization of most prior NAamo~n~izatio~n oIdeferrals 7,662 seivice costs over 30 years and prior service costs related y-------- pg9g to the Company's 1984 one time early reurement pro-gram over 15 years. Pension costs charged to expense or construction for 1987,1986 and 1985 were $12.3 million, The actuarial present value of accumulated plan bene-
$13.5 million and $13.4 million, respectively. Costs fits as ofJanuary 1,1986 was $ 174 million.of which
$165 million was vested, and net assets available for i elated to the UhtW plan were $3.1 milhon, $2.9 million l and $2.7 million for 1987,1986 and 1985, respectively benefits were $189 million.The assumed rate of rerum l The Company adopted the provisions of Statement used in determining the actuanal present value of of Financial AccountingStandards No. 87,"Employers- accumulated plan benefits was 84 Accounting foribnsions," as ofJanuary 1,1987. Adopting this Statement did not have a material effect on the Com- 1. LEASES l
pany's pension expense for 1987. ~
- December 31, ~
~ ~~ ~
The following sets forth the funded status of the plans 3937 1986 and amounts recognized on the Balance Sheet at Decem-ber 31,1987. Since the UhtW plan is a multi-employer 5261,4I4 Nuclear fuel $24 230 plan, information conceming such plan is not determin~ Electric plant (pnneipally buddings abic by the Company and is not included in the informa- and data processmgequipt ent) - 29,463 - 29,491 tion below. ~~- -- -- - -- ~ Total 290,907 27A721 (Thousands of Dollars) Le saccumulatedamortizanqn _ 112,643 __85,563 Actuanal present value of benefit obligauons: Property held under capital Vested benefas $ 191,665 leases-net $ 178,264 5187,158 Nonvested benefas 14.212 Accumulated benefn obbganons 5205,877 leased nuclear fuelis amortized as the fuelis bumed The amortization ofleased electric plant is based on the Plan assets-at fair value $ 244.060 rental payments made. Amoru:ation ofleased property Actuanal present value of projected beneSt amounted to $27.6 milhon, $19.5 milhon and $24.9 million obhganons _ __ _ _ , _ _ _ _ _ 2 g 389 for 1987,1986 and 1985, respectively. Projected benefit obhgation in excess of Lease payments in 1987,1986 and 1985 amounted to plan assets 5(22,329) $59.9 million, $386 million and $436 milhon, respec-tively of which $54.1 million, $35.5 million and $41.2 Unrecogni:cd net gain __ _ 5 24,417
" U "'
'" "d' " # "" ** ** P'Y * * " O Unrecognized p- rior service cost - - - - (l5,159) respectively, were charged to operating expenses.
Unrecognized n.et transaion liability , _ _ _ (30,160) The nuclear fuelleases may be terminated by the lessees l Net pension hability per balance sheet (1,427) or lessors with notice as defined in the agreements or by l Total 5(22,329) casualty or certain other contmgencies, including default l by the lessees in certain situations involvinga tennination. The projected benefn obliganon was determined using the lessees may be required to purchase the leased fuel at assumed discount rates of 7.5% and 8% as ofJanuary 1 the higher of fair market value or unamonized cost. At and December 31,1987, respectively The assumed December 31,1987 the Company's share of the lessors' unamorti:cd cost of the leased fuel was $152 million, and change in compensation used was 5.7% and the long_ term rate of retum on plan assets was 7.5% Plan assets the Company expects to fmance an additional $43 million of such costs under current leasing anangements Approxi-mately $70 million of the credit agreements sepporung these leasing arrangements are scheduled to expire in i 1988. The Company expects to enter into replacement agreements. 27
D U 0 V E S N'E L i G H T C 0 M P A N Y l NOTES (continued) The Company has cenain properties or portions thereof 1986 Rate Case l under lease, includug its corporate headqua ners, subject OnJuly 16,1987 the PUC approved a settlement of various I to renewal options and m cenain cases purchase options. issues relating to the Company's 1986 rate case. Under Future minimum lease payments for capitalleases are the temis of the settlement, the effective date of the $158 l related principally to buildingleases and the esumated milhon rate reduction ordered by the PUC in the rate case usage of nuclear fuel, including a trust arrangement. Mini- was delayed from March 10,1987 (the original date of the mum payments foroperatingleases are related pnncipally ordered reduction) toJuly 1,1987. The Company will I to Beaver Valley Unit No 2 (see Note E)and corporate recover $ 5.2 million plus interest as a result of extending l headquaners. Future minimum lease payments at the old rates throughJune 30,1987. This amount, which i December 31,1987 were as follows: was recorded as revenue in 1987, will be collected over an ( 18-month period which beganJanuary 1.1988. The settle. Dece ni er 1, a es e s ment c ncluded all htigation relating to the 1986 rate case. I 1987 Rate Case (Thousands of Dollars) 1988 $ 40,669 $ 66.493 OnJune 26,1987 the Company filed with the PUC a rate "S" #" #"# ##" '" "
~
19"9 36,752 65,684 ' i approved, would increase annual revenues by approxi-1990 12.341 63,938 mately $379 million in its filing the Company requested 1991 24,659 62 802 rate base treatment ofits $716 million investment in Perry 1992 22.972 62.219 Unit No. I as well as its $665 milhon mvestment in Beaver I 1993 and thereafter 92,204 1,542.700 Valley Unit No 2. Both Units attamed commercial oper-ation, as detennined by PUC guidelines, in November 1987. Total mmimum icase payments 249.597 51.863.836 On October 2,1987 the company completed a sale and Less amount represennnginterest 58,638 leascback ofits 13.74% interest in Beaver Valley Unit No. 2. Present value of net mmimum See Note E in its orders approving the sale and leaseback, capitallease payments s190,959 the PUC imposed a number of conditions, including the requirements that an excess capacity adjustment (consist-J. RATE MATTERS ing f a denialof a retum on its equityin estment in the
. Umt) will be applicable to the Unit untdJanuary 1,1991 Sunset Legislation and that the Company's electric rates will be established The PUC Sunset Legislation, enacted in 1986, estabhshes as though the Company still had a 13.74% ownership a rebuttable presumpoon that a newly constructed base interest in the Unit dunngthis penod The PUC also load generaung umt is excess capacity. A unit's operating required that the Company's rates in efTect prior to and construction costs can be recovered from ratepayers Janony 1.1992 may not reflect a common equity com-only if(l) the unit is found to be necessary to meet cus~
ponent greater than 42% Finally, the Company wdl be tomer demand, including a reasonable reserve margin, unable to recover any portion of the lease expense related and (2) the unit produces an annual economic benefit to the Unit unnl the Company's new rates are effecove, which exceeds the total annual cost of the plant. which is expected to be in March 1988 The Company has agreed that an excess capacity On October 28,1987 the Company reduced the amount adjustment shall be applicable to Beaver Valley Unit No. 2 ofits rate request to $318 million in order to reflect the unni at leastJanuary 1,1991. This adjustment wdl have effects of the sale and leaseback as well as other factors _ an adverse effect on the Company's cash flow and resuhs On February 1.1988 an administrative lawjudge (ALJ) of operanons unal such time as the Unit is no longer con-ssued a decision recommending an increase in annual sidered to be excess capacity. The new law also could affect revenues of $234.5 million, to be phased in over a six-the Company s rate proceedmgs requesting rate treatment year period in equal annual percentage increases not to of Perry Unit No.1 (see "1987 Rate Case"). exceed 7.8% Interest would accumulate on the deferred Because it is uncertain how the PUC and the courts will amounts at the rate of 6% The ALJ concluded that an further interpret and apriv the statute relative to current excess capacity adjustment for Perry Umt No I was un-and future rate proceedmgs, the Company is unable t ' warranted. However, he gave effect to the PUCs orders predict the total effect the Sunset Legislation wdl have approving the sale and leaseback of Beaver Valley Unit on its rates, fmancial position or results of operanons. No. 2 by imposingan excess capacity adjustment for that Unit T he adjustment. which was equivalent to a denial of the equity retum on the investment in the Unit, reduced the annual revenue requirement by about $48 mdlion The ALJ found that no prudence adjustment was neces-sary for Peny Unit No.1. However, an overall prudence disallowance for Beaver Valley Unit No 2 of approximately 28
0 U 0 U E S N E L I G H 'T C 0 M P A N Y l I
$372 milhon was deemed to be accessary, the Company's Deferred Coal Costs ( Alansfield) share of which would be $51 million. While the ALJ indi- The PUC directed the Company to hmit its recovery of cated that the disallowance should be offset by $24 million, the cost of coal dehvered to the Bruce hiansfield Plant the Company believes that a $33 milhon adjustment was (htansfield coal) to the market pnce of similar coal, rather previously recogni:cd in connection with the sale and than the actual cost of hiansfield coal The Company is leaseback of the Unit. See Note E. required todefertheexcessof theactualcostof hiansfield The AlJs recommended decision is not bindingon the coal over the cost allowed to be recovered through its PUC, which is scheduled to issue its final order in the rate energy cost rate.
case in late hlarch 1988. The Company believes that the total amount of defened This excess capacity adjustment makes it unhkely that coal costs may vary dunng the term of the hiansfield coal the Company's rates will be sufficient to recover all of the sales agreement which expires in 1999. See Note K Fluc-Unit's lease and other operating expensts until the adjust- tuations may resuh dependingon actual hiansfield coal ment is eliminated or substantially reduced. The adjust- costs, market price of coal and other factors. The unrecov- i ment will have an adverse effect on results of operations ered cost of hiansfield coal paid by the Company was i I and cash flow until the Unit is no longer considered to be 59.9 million and $11.7 milhon (as adjusted)at December excess capacity 31,1987 and 1986, respecnvely The Company believes Further, a fmding by the PUC that all or part of Perry that the deferred costs will uhimately be recovered. Unit No. I constitutes excess capacity or a disallowance Other Deferred Coal Costs for alleged impmdence in the construcnon of the Unit for in accordance with a 1981 PUC order, the cost of coal the period after the date that fuel was loaded (htarch 21, from the Company's wholly-owned Warwick hiine in 1986) could have a material adverse effect on the Com- excess of the average market price of similar quality coal pany's results of operations and financial position purchased by Pennsyhania unlities may not be recovered Beaver Valley Unit No. 2 through the energy cost rate, but must be deferred and Construction hianagement Audit recovered to the extent the cost of the coal falls below such The PUC directed that an outside consultant perform a market price. In April 1987 the PUC expanded this limit constmcnon management audit of Beaver Valley Unit No on the recovery of fuel costs to mclude all coal delivered to 2 to determine, among other things, whether project costs the Company's wholly andjointly owned power stations ! were reasonable and proper. The Company has a 13 74% (except the hiansfield Plant). Such deferred costs amounted I leasehold interest in the Umt and is the CAPCO company to $63 million and $78 million at December 31,1987 and responsib!c for its construction and operation. 1986, respecovely The Company beheves that the deferred On September 17,1987 the PUC released the audit costs will uhim tely be recovered Addinonally, the PUC report which concluded that the Company "did perform ehminated the Warwick hiine from the Company's rate most of its overall duties in a reasonable manner", with base in 1981. The exclusion from rate base was $49.1 the exception of"certain specific technical issues". The million at December 31,1987. consultant esumated that the technicalissues unneces- Property lleld For Future Use sarily increased the Umt's cost by $219 to $271 milhon. The PUC approved the Company's requests to place most which is five to six percent of the $4 4 bilhon total cost of the Brunot Island and Philhps Power Stanons in "cold of the Umt reserve". The Company's net investment in the cold-In addition, the consultant concluded that the CAPCO resen ed units was $1d6 million at December 31,1987 companies extended the Umt's construction schedule and is included in the Balance Sheet as "Property held due to financial, regulatory, capacity, load and technical for future use". 536 million of this investment had been consideranons The report quantified the cost of these removed from rate base at December 31,1987. The PUC's extensions as beingbetween $312 and $488 milhon orders provide that the approvals are not to be considered The report did not characterire these extensions and precedent for excess capacity issues m the 1987 rate case costs as avoidable or unreasonable. (see"1987 Rate Case" on page 28)orin subsequen rate t The Company does not agree with the consultant s con- proceedings. The Company beheves that its investment clusions conceming avoidable costs and has challenged in the cold-reserved units eventually will be recovered. those concludons in its pending rate case See "1987 Rate Case" on page 28. The Company is unable to predict what K COhthilTh1ENTS AND CONTINGENCIES action the PUC will take as a result of the audit. If the PUC Construction concludes that any of the Unit's costs were imprudently The Company esumates that it will spend $ 545 milhon incurred it could further disallow recovery of the lease n c nstmai n,enlusiw of nuclear fuel and AFC, expense reiated to the Umt dunng the penod 1988 through 1992. l 29 ,
0 0 0 V E S N E L 1 G H T C 0 M P A N Y NOTES (continued) Quarto Mining Company The cases have been consolidated for all further pro-The CAPCO companics originally entered into a long- ccedings. While discovery has commenced, no class term coal supply arrangement with Quarto MinmgCom- has yet been cenified in any of the claims Although the pany(Quarto),an unaffiliated company As part of this Company is unable to predict the uhimate outcome of arrangement We individual CAPCO compames severally, these matters it is continuing to contest the three com-notjointly, guaranteed their proportionate shares of plamts, and believes that the complamts are without Quarto's debt and lease obligations incurred in connec- merit and that resolution of this matter will not have a tion with the development aad equippingof Quano's material adverse effect on its fmancial position or results coal properties. At December 31,1987 the Company had of operations. guaranteed 546 million of Quarto debt as well as lease Nuclear Insurance obligations relating to $13.3 million of capital equipment. The CAPCO companies maintain a nuclearinsurance i in general. the purchase prices paid for the coal received program to the maximum extent available. This program I under the foregoing arrangements included amounts currently provides $750 million of primary and excess sufficient to service the guaranteed obligations. l property insurance and $775 million of decontamination i The Company's estimated future mimmum payments liabihty and excess property insurance coverage for the l under the coal supply contract tre:
$5.6 bilhon interest m Beaver Valley Units Nos. I and 2. I Year Endmg December 31, (Thousands of Dollars) The companies also have similar property insurance for 1988 $ 8.672 the $58 bdlion interest in Perry Unit No.1. The com-1989 pan s us rempeche premWm 8.337 adjustments in the event of accidents at these units or at 1990 8.002 -
certain other utilities' nuclear phnts. Based on its current 1991 _ 7.668 interest in three operaung nuclear reactors, the Company's 1992 7,455 share of any such assessment would be approximately
~
After 1992 43.246 $4 *dII " PCT FCdf-Total $83,380 The Price-Anderson Amendn ents to the Atomic Energy Act hmit liabdity to third panics to 5720 million for each o nuclear incident. Coverage for such liabdity is provided ursuant to an assignment from the CAPCO companies by $160 million ofinsurance and $560 million of retro-on March 11,1987, Conschdation Coal Company (Consol) acuve assessments against all operating nuclear reactors acquired all the common stock of Quarto On Apnl 10-in the United States. Based on its present interest in three 1987 the existmgcontract for the dehvery of coal from operating reactors, the Company's maximum potential Quarto was substantially amended, restated in it s entirety and incorporated into a contract with Conset Under this assessment under the Amendments would be 57.5 mil-lion per year. The current Amendments expired on l contract, Consolis obligated to deliver up to 5 million August 1,1987; however. licensees continue to be covered 1 tons of coal annually through December 31,1999 The under the Act's expired provisions. Congress has tenta- I restated contract also includes a stated unit pnce (subject dvely agreed to increase the habihty to third panies to to escalanon) for the coal rather than a cost plus arrange-approximately $7 bdhon for each nuclear incident. ment. The several guarantees of the CAPCO companies desenbed above u ere not affected by these changes It is LTV Steel Company expected that these new arrangements wdl make the sup- The Company has been mvolved in various regulatory ply of coal more secure and cconomical over the penod nd coun proceedings with LTV Steel Company, Inc. 1 of the contract Total payments under these contracts (LTV), which fded for reorganization under Chapter 11 of were $258 mdhon, $289 mdlion and $29 4 million in the federal bankruptcylaws in 1986. On August 13.1987 1987,1986 and 1985 respectively. the federal bankmptcy coun approved a Compromise and Setdement Agreement between LTV and the Company Shareholder Suits Under the tenns of the Agreement, the amount of the Subsequent to the reduction of the quanerly dividend on Company's claim in bankruptcy for $9 7 million for past th. company's common stock in 1986, hve complamts sen. ice and $358 million under a long tenn electric serv-we re fded against the Company and/or its directors. Tw ce contract was set at a totalof $30 mdhon. The Agree-of the complaints have been dismissed without prejudice ment also permitted the Company to offset LTV's share of While the remaining three complaints are not identical-refunds related to the 1981 opnon order (see Note C-they collecnvely seek compensatory and punitive damages "RAT E REFUNDS-1981 Option Order")against the in an undetermined amount for alleged violanons of secu-amount of the claim. Recovery of all or part of this nties laws, as well as common law fraud and negligent
$ 30 million unsecured claim will depend upon the marepresentanon.
amount of funds ulumately available to pay all of LT\"s unsecured t reditors 30
0 U 0 V E S N E L i G H T C 0 M P A N Y l l Fuel Purchase Commitments M. CAPITALIZATION The Company is obligated to purchase minimum quan- Common Stock tities of coal and nuclear fuel under vanous fuel supply The Company has paid a regular quarterly common stock arrangements. Prior years' purchases from an unaffiliated dividend each year beginning in 1953. The dividends for coal supplier were less than the minimum quantities the first two quaners of 1986 were 51 % cents per share. l specified in the contract and resulted in a total shortfall of Dividends for the last two quarters in 1986 and for each 417,000 tons at December 31,1987. The Company is cur- quarter in 1987 were 30 cents per share. rently making up this shortfall at the rate of approximately Dividends may be paid on the common stock to the 50,000 tons per month. extent permitted by law and as declared by the Board of Other Directors, subject to the provisions of the Company's The Company is involved in various other legal proceed- Restated Articles which restrict the payment of cash ings. The Company believes such proceedings will not dividends or other distributions on, or the purchase of, have a material adverse effect on its financial position its capital stock rank.ingjunior to its preferred stock. or resuhs of operations See Notej for a description of Pennsyh ania law provides that dividends on common ' various other contingencies related to rate matters. stock may only be paid out of positive retained eamings No dividends or distributions may be made on the L NEW ACCOUNTING STANDARDS common stock if dividends or sinkingot purchase fund in 1986 the Financial Accounting Standards Board (FASB) obligations on the preferred or preference stock are issued Statement No. 90. "Regulated Enterprises- accumulated and unpaid. Further, the aggregate amount Accounting for Abandonments and Disallowances of ofjunior stock payments is generally limited to certain Plant Costs". The Statement prescribes how the Company percentages of net income and by the ratio of common must account for abandoned plants and disallowances of stockholders' equity to total capitalization. No portion of costs associated with newly-completed plants. The Com- retained earnings at December 31,1987 was so restricted. pany will adopt Statement No. 90 in the first quarter of During the fourth quarter of 1987, the Company repur-1988 and restate previously-issued financial statements. chased 3,032,600 shares of common stock at a total cost Adoption of the Statement will reduce the Company's of $34.8 million. The Company expects to purchase addi-investment in Perry Unit No. 2 at December 31,1987 by tional shares during 1988. 535 nul: ion. As restated, net income for 1986 will decrease in 1987 the Company's shareholders approved a long- j by $20 million and increase by $3 million in 1987 and by Term Incentive Plan through which the Company n ay decreasing amounts over the remainder of the recovery grant options to management employees to purchase up period. See Note B. to a total of 3 million shares ofits common stock during The FASB issued Statement No 92,"Regulated the period 1987-1997. The exercise price of each option Enterprises-Accounting for Phase-in Plans",in August may not be less than the market price of the stock on the 1987. This Statement specifies how utilities must account date of the grant. As of December 31,1987 active grants for rate orders that gradually increase electric rates when totaled 1,053,845 shares at an exercise price of $12.3125 a new plant is placed in service. Unlities whose plans do per share. Stock appreciation rights (SARs) have been , not meet the requirements of the Statement will be re- granted in connection with all options outstanding l quired to record expenses immediately, rather than defer. Nc.ne of these options or SARs may be exercised prior l ring such expenses to later years when they would be toJanuary 1,1989. recovered through rates The Statement also permits the capitalization of an equity return on plant investment High/ low stock prices for 1987 and 1986 were as follows: only during construction or in connection with phase-in 1987 1986 I plans that meet the requirements of the Statement. Although the Company currently does not have any Quaner liigh low High Low phase-in plans in effect,it has proposed such a plan as 1st ._ _ ____$14%__ $12%___S19% Slo j part ofits 1987 rate case. See Notej It is possible that a 2nd 13% 11 % '8%
. 13 I
l resolution of the rate case could result in the PUC's adop- 3rd 12% 11 % 15% 12% l tion of a phase-in plan which does not meet the criteria of 4th 12% 10 % 13% 12% l Statement No 92 and which would have an adverse effect l on the Company's results of operations until the entir. The principal trading market for the Company's rate increase has been reflected in rates Common Stock is the New York Stock Exchange. The in December 1987 the FASB issued Statement No 96' stock also is listed on the Philadelphia Stock Exchange. )
"Accounting for Income Taxes", which changes the -
i method of accounting forincome taxes The Company l must adopt the provisions of the Statement byJanuary 1, 1989 The Company is currendy determining what effect this Statement will have on it s financial statements . l l l
- n. . . _
i
0 U 0 U E S N E L 1 G H T C 0 M P A N Y i NOTES (continued) Preferred and Preference Stock at $100 per share up to 4% of the number of shares origi-The preferred stock is entitled to quarterly cumulative nally issued. The 59.125 preference stock is subject to a dividends if four quarterly dividends on any series of cumulative sinking fund which will retire 33,300 shares t preferred stock are in arrears, holders of the stock are onJanuary 1 in each year through 1997 at $100 per share. . entitled to elect a majority of the Board of hrectors untd The Company may on a non-cumulative basis retire an ( all dividends on such stock have been pa d. additional 33.300 shares in each such year, provided that The preference stock is entitl ed to quar erly cumulative the Company may not retire through the exercise of this dividends except that no dividends may oe paid if divi- option more than an aggregate of 150,000 shares. dends on any series of the preferred sto< k are accumu- The $8.64 preferred stock is subject to a non-cumulative lated and unpaid. If six quanerly divide ads on any series purchase fund under which the Company offers to pur-of preference stock are in default, the holders of the chase annually up to 6,000 shares at not more than $100 preference stock are entuled to elect two directors until per share. The 58.375 preferred stock is subject to a all dividends in arrears on such stock have been paid. cumulative sinking fund which will retire 12 000 shares The outstanding preferred and preference stock on April 1 in each year at $100 per share The Company generally are callable on not less than thirty days' notice may on a non-cumulative basis retire an additional at the prices stated in the table on page 33 plus accrued 12,000 shares in each such year. dividends Certain call prices decline in future years. As of December 31,1987 the maximum combined The $9125 preference series is not redeemable prior to aggregate sinking fund and mandatory purchase require-January 1,1989 through certain refundingoperations; ments for preferred and preference stock is $6,430,000 for however,it is otherwise redeemable at $100 plus a pre- each of the next five years. mium which decreases from $4 80 in 1988 to :ero in 1098. Gains on the redemption of capital stock are recorded The $750 preference stock is subject to a non-cumulative in capital surplus; losses, to the extent they exceed cumu-purchase fund under which the holders of the stock may lative gains, are charged to retained camings. tender, and the Company is required to purchase, annually The followmg summary indicates the changes in the number of shares of common, preferred and preference stock l outstandmgduring 1987,1986 and 1985: l Year Ended December 31. ! 1987 1986 1985 Common Stock: Shares cutstandmgat begnningof year _ _ 73,119,446 _ 71,488.270 _ 64,774,591
!ssuances:
_ Common stock sales __ 3.000.000 Dividend reinvestment plan _ l.631.176 _ 3.656.923 _ Employee stock ownership plans 56,756 Retssuances of treasury stock 8 80_0_ Repurchase of common stock (3,032.600) - - Shares outstanding at end of year 70.095.646 73.119.446 71,488.270 Preference Stock: Shares outstandmgat begmmngof ycar 3,109,9_60 3,264.460 __ 3.337,985 Purchases and redemptions-52 75 Senes (55,000) __ (110.000) _ (2_7,665)
--57 50 Senes (7,550) (11,200) (12.560)
-$9125 Series (33,300) (33.300) (33.300)
Shares outstanding at end of year 3.014,110 3.109.960 3.264.460 Preferred Stock: Shares outstandmgat begmnmgof year 2,072 841 2.090.841 2.108.841 Purchases-$8 375 Series (12,000) (12,000) _( 12,000)
-$8 64 Series (6,000) (6 000) (6 000)
Shares outstanding at end of yrar 2,054.841 2.072.841 2.090.841 32
D U 0 U E S N E L1 G W T C 0 M P A N Y ' December 31,1987 December 31,1986 Call Price Shares Shares PerShare Outstanding Amount Outstanding Amount Capital Surplus: Premium on common stock __ _ $933,325,825_ _ _ _ _ _ _ _ _5933,325,825 _ _ _ Capital stock expense __ (7,561,053) (7,612,032) Other 365,711 416,748 Total CapitalSurplus $926,130,483 $926,130,541 Non-redeemable Preferred and Preference Stock: Preferred stock-$ 50 par value (cumulative)(1): 4% Series (2) - $ 51.50 549,969 $ 27,498,450 549,969 5 27,498,450 3.75% Series (2) 51.00 150,000 7,500,000 150,000 7,500 000 4.15% 5eries (2) 51.73 140,000 7,000,000 140,000 7,000,000
. 4 20% Series (2) 51,71 100,000 . _ . _ 5,000,000 100,000 5,000,000
$210 Series (2) 51.84 160,000 8,000,000 160,000 8.000,000
$7.20 Series (3) 101.00 350,000 17,500,000 350,000 17,500,000 Preference stock-51 par value (cumulative)(1):
$ 2.315 Series (4) 25.90 1,200,000 1,200,000 1,200,000 1,200,000
$2.10 Series (4) 25.70 1,200,000 1,200,000 1.200,000 1,200,000
._ . l_.
Tota
. - - - . . . . . . . - - . - .._-_.._.-...-0 80,898,45 - . - . . . - . - .
80,898,450 Premium on non-redeemable preferred and preference stock 75,238,760 75.238,760 Total Non-redeemable Preferred and Preference Stock $ 156,137.210 $ 156,137,210 Involuntary Liquidation Value $ 155,998,450 $155,998,450 Redeema' ole Preferred and Preference Stock: Preferred stock-$ 50 par value (cumulative)(1):
$864 Series (3) $104.00 232,872 $ 11,643,600 238.872 $ 11,943,600
_ _ 58 375 Senes (3) 112.00 _ _ _252,000 _ 12,600,000 264,000 l3,200,000 Preference stock-51 par value (cumulative)(1): 57.50 Series (3) 103.00 214,010 214,010 221,560 221,560 __$2.75 Series (4)(5) . _ . _, __ n __ ___ _ _ - _ _ ~ __ MS00 _ _ _ , , _ 55.000 .
$9.125 Series (3) 105.28 400,100 400,100 433.400 433,400 Total 24,857,710 25,853,560
_ Premium o,n redeemable preferred and preference stock _ 85,040,490 _ 91,304.640 Purchase and sinking fund requirements (5,130,000) (6,505.000) Total Redeemable Prefened and Preference Stock $104,768,200 $ 110.653.200 Involuntary Liquidation Value $104,768,200 $ 110.653,200 (1) Authorized shares: preferred stock-4,000.00@ (3) $100 per share involuntary liquidation value. preference stock-8,000.000. (4) 525 per share involuntary hquidation value. (2) $50 per share involuntary liquidation value. (5) Final redemption August 1,1987. 33
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D U 0 0 E S.N E L I G H T- C 0 M P A N Y NOT ES (continued) l Principal Amount Outstanding Firpt h_fongage pondsi__ . . at December 31, l 1987 1986 ) Series due Apnl 1,1988 (3M%) 5 15,000,000 5 15,000,000 Series due hiarch 1,1989 (4%%) _ _ _ _ _ _ _ _ _ __ _10,000_,000 _ _ _ _ 10,000,000 . Series due hlarch 1,1991(l3%%) __ 49,500,000 50,000,000 Series due December 1,1992 (10%%) 75,000,000 75,000.000 Series dueJune 1,1995 (10K%) 50,000,000 50,000,000 Series due February 1,1996(5%%) . 22,800,000 22.800,000 _ Senies due February 1,1997 (5%%) 24,600,000 24,600,000 Series due February 1,1998 (6%%) 34,700,000 34,700,000 Series dueJanuary 1,1999(7%) 30,000,000 30,000,000 Series dueJuly 1,1999(7h%)_ _ _ _ _ _ __ . _. _2_8,94 7,000_ _, _ 28_._947,000 Series due hiarch 1,2000(8%%) 30,000,000 30,000,000 Series due hiarch 1,2001 (7%%) __ __ _ _ _ _ _ _ __ _ 35,000,0_00_ ___ _35,000,000 Series que Dec_ ember 1,200_1 (7 %%) 26,461,00_0 . _ _ 2,6,46_1,000 Series dueJune 1,2002 (7%%) 28,470,000 28,470,000 Series dqeJanuary 1,2003 (7%%) 32,670,000 32,670,000 _ Series dueJuly 1,2003(7h%) 35,000,000 35,000,000 Senes due Ap_nl_1,2004 (8%%) _ __ _ _. _ _ _ _ 44,100,000 _ 44,100,000 Series due hiarch 1_,2005 (9%%) _ _ _ _ _ _ ._ _ _ _ . _ _ _ 50.000,000 _ _ 5_0 000,,000 s Senes dueJunc 1,2006 (9%) 80,000,000 80,000,000 Series due April _l,2007 (8%%), __ __ _ _ _ _ __ 97,4_00,000 _ __ 97,400,000 Senes due February 1,2009 (10%%) 100,000,000 100,000.000 Senes ducJanuary 1,2010(12%%) _ 57,400,000 60,000,000 Series due hiay 1,2012 (16%%) ._ _ __ _ _ _ __ ___ _ _ _ 2,597,000 __ _ _3,277,000 . Senes due April 1, 2013 (1_2,%%)_ _ __ _ 57,914,000 _ , 60,000,000_ Series due December 1,2013 (l3%) 49,500,000 50,000.000 Series due February 1,2015 (1,1%%) _ __ _ . _ _ _ _ 39,000,000_ _, 39,000,000 Series due December 1,2015 (11%%). __ _ _ 123,750,000 _ _ 125,000.000 Series due December 1,2016(9%%) _ _ _ _1_00,000,000 _ , __100.000,000 Serics due February 1,2017 (9%) 100,000,000 - Total _ _ _ . _ _ _ _ _ _ _ _ _ _. Id29,809,000_ _ . 1,337,425,000 _ Less: Current maturities-Series due April 1,1988 (3%%) 15,000,000 - Current sinking fund requirements 13,140,000 11.290.000 Total First hlortgage Bonds $ 1,401,669,000 $1,326.135,000 During 1986 and 1987 the Company reacquired a total of $26.1 million of first mortgage bonds The difference between the purchase prices and the net carryingamounts of the bonds was $2.9 million and has been included in the Balance i Sheet as "Unamorti:ed loss on reacquired debt". T he Company amortizes and recovers these losses th rough rates. The trust indenture securing the first mortgage bonds provides that no additional bonds may be issued unless the l "camings applicable to bond interest", as defined by the indenture, are at least twice the annual interest requirements on the additional bonds and on all bonds outstanding At December 31,1987 this restriction precluded the Company from issuing additional bonds. Ilowever, a separate provision of the indenture permitted issuance of $198 millicn of addition ! bonds at December 31,1987 on the basis of previously-issued bonds which have been retired. I l 34
D U 0 V E S N E L i G H T C 0 M P A N Y Other long Term Debt: Pollution Control Obligations: Serial Matunty Average orMandatory Principal Amount Outstandmg - Date of Interest at December 31, Redemption Final Issuance Rate Beginning Maturity 1987 1986
. September 21,1972 5 49 % 1983 2002 5 21,400,000 $ 22.000,000 June 21,1973 5 685% 1984 2003 11,200,000 11,400.000.
October 25,1973 5.755% 1984 2003 14,625,000 15,000.000
. August [3J974 _ , , _ _ _ _ _ _ _ _ , _ _ _ _
7.97% 1989 2004 14,000,000 14.000,000 _ Apn) 2 J 975, _ _ _ _, __ _ __ . _ _ _ _ 7_.50% _ _199 3_ 2005___17,000M_ _17,000,000 _ October 29,1975 8 40% 1991 2005 18,000,000 18,000,000 September 29,1976. 6 90% 1994 2011 15,000,000- 15,000,000 h Mdff_24.1981__ 12 00% _ 2002_ __ _2011 _ _ _50,000,000 __ 50,000,000 November 1,1983 _ _ _ __ _ 10_10% _ . _ _ _ _ _ 2013 _20,500,000 . _ _20,500,000 Decernber 19,1984 11.625% _ -_ _ _ . 2014 _ 51,000 000_ _ _ 51,000,000 _ October 24,1985 7.75% - 2015 44,250,000 44,250.000
.. Total _ _ _ _
, _ _ _ 76,97_5,000. 2 _
_ _ 278,1,5_0.000 1.ess current maturities and sinking fund requirement 1,173,000 1,175,000 Total Ibllution Control Oblications 275,800,000 276,975.000 Nufcar,fuelobligations _ 12,695,050__ ,
.l0,058,070 5% smking fund debentures (authon=ed-520.000.000) due March 1,2010 9,104,000 9,104,000 Total Other long Term Debt _ $297,599,050 $296.137.070 The pollution control obhgations arise from the sale of Smking fund requhements ana matunnes for the nm bonds by governmental authonties in connection with fwe years oflong-tenn debt outstanding, exclusivt of the constructi on of pollunon control facilities at the nuclear fuel obligations, as of December 31,1987 were as Company's plants The Company is obligated to pay to follows:
the authonties amounts equal to the principal of and Year Endmg Sinking Fund interest on such bonds-December 31 Requirements Matunties There is an annual commitment fee of %% for an ine-3ggg -- 3 j $g g,1,000-- -- S i 5,800.000 vocable letter of credit w hich expires on October 15,1990 -- - and w hich is available for the payment ofinterest on or . l_984 .__ 16.140.000 , _ 10,900,000 redempnon of a portion of the bonds under certain 1990 _ 16,l_40,000 900p)0 ; circumstances, Under certain circumstances the holders 1991 15,595p00 51,050.000 may tender the bonds for mandatory purchase g99i - ~ ~ - ~ ~1 ~,[2id,000
' 76.500,000 The nuclear fuel obligations result from a trust arrange- -
ment for the procurement of a portion of the Company's The > inking fund requirementuelate pnmarily to the l nuclear fuel Interest is caphah:cd and mcluded in CWIP first mortgage bonds and may be satisfied by the certth-at rates rangmg from 1%% to 1 %% over the trustee's com-canon of property additions cqual tu 165%% of the bonds mercial pa per rate. Trust obhganons wul be paid by the recuired to be redeemed Company as the related fuelis withdrawn from the trust. Totalintere>r costs iricurred during 1987,1986 and 1985 were $195 4 million, $182 i niilCen and $169 mil-lion, respectivdy. of which $128.7 million, $124.4 million and $115.6 milhon were capita %ed or deferred. includmg AFC. Dunng 1987 and 1986, approximately 52 rmilion and $D million, respectively, of these costs were related to rate refunds. !cc Noe C l 1, 35
[f, , ,,,, D U dIU L,E S N E .L'l G H T C OIM P A N Y ,,g/l! , g p, ', f
' NOTES (continue'd) g_ .ti>
I N.JOINTW-OWNED GENERATING UNITS ; ; The Company, together with other electric utilities, sprimarily'the an ownership or le.tsehold CAPCO com g-' X interest in certain jointly-owned units. Under the tenns of the arrangements with th' other owners of thesejointly-owned units, the Company is required to provide its share of financinphe cos}s dl iut h units. The Company's share of the direct expenks (fuel, maintenance and other operation expenses) of the jointly-owned units 6 included in the corresponding operating expenses.in the statement ofincome. lnfonnation regarding the (' Company's share of such jointly-owned units as of December 31,1987 is as follows (thousands of dollars):l g Compan/sl Interest ,
', Percentage Accumulated Construction Unit Interest hiegtw.m< ' in' Service l'tihty Pllnt iDepreciation Work in Progress Fort htartin Na 1 50 0 276 $ 51.302 $fa.986' 5 6.030 . ,
CAPCO Units: .; /, '
-( ,
_E. astlake Na 5_ _ _ _ ,31 1 _ 202_ _ g 53,952i 10,930 11,901 sammis No. 7 _ _ _ _ _ . _
- 31. 2_ . __ _ 187. _ _ , 7 3.44P , __ _ _17. ,94 5_ _ _ 2.186 _ _
Bnace hiansfield No 1 29.3 228 74.102 23.681 123-Bru.ce Nta_nsfgld No 2 _ _ _,00 _ 62 20.5,88 _ _5.8 74_ _ __ _103 Bruce hiansfield No 3 _ _ _ 13;74 _ _ _ 110 '. 72207 16,102 (59) Bruce blansfield Common , ~ and Shared the6.rs 04W8 21.210 429 Beaver Vtiley No 1 . _ 473 _ _ 385__ , _ M2,251j _ 93,955 6,203 Beaver nlley Na 2 ! 't74 114 5.093 0' 0 Ikaver Wlley Common Facilities ,____ , __193,5,5,7_ _ _12M4 _ ._l,244 _ Perry Na 1 13.74 165 742.dh [ 0 0 , Total a 1.729 51.733.830 r $228,147 $ 28.160
=
- 0. QUARTERI.Y FINANC6L INFORM ATION (Unauditt d'f ,
The follow mgi: a smnmary of selected quarterly Imancial data (thousands of doi) rs, except per share amoijnts): g d - Operating Openting i Net ; Eamings Per i Revenues income income Shire Qwnicr Ended hiarch 31,1986 3232.006 5_4 7,2_15 _ _ - $42,8_75 __. _ _$.5 2_ _. Junc 3d 1986 _ _214.379 4 5,461_ j, , , _ _ _ 37,54 3 _ _ . , _ .44 _
/
Septemberp0,1986 227,34_5_ _. 46.315 _ _ _ _ 45,993 _ _ g ,.56_ December 31. Noo 222J333 48'i23 25.015(1) ' .27(1) u_ Niatt h 31,1987 5215,928 $47,599 $45,210 5.55 June 30,1987 , 212,199 _ _._ _ 46,90F ,_ _ 47,8_06 _ _ , .59, , 9ptembq 30. i987 _ .__
, 240,955 _ . 59,4/ ( _ _ l_3 &95 _ _. _.1 2 _
December 31,1987 -- 21H,912 29.'14 44,305(2) .55(2) ____, a _ (l) In the fourth quarter of 1986. the Company nicorded refunds to cunonicebted to a 1991 Orition Order,which > ! 3 reduced foud. paner cammgs by $21 1 nullior., er approximate y S30 k '.are. See Note C. V (D in the founh quarter of 1987, the Co'opany recorded approximately $21 million ofinvestment tax credits related
, io the sale and leaseback of Beaver Valley Unt: No 2 (see Note D which iriqcased fourth quarter camiry by ? '
s a per share / , i j . i i
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3 -- 0 U 0 0 E S N E L i G H T C 0 M P A N Y a ! j i ')
/ L M ANAGEMENT'S DISCUSSION I AND ANALY315 OF FINANCIAL CONDITION AND RESULT 3 OF 01.) GIONS
' 'i
\1 CAPITAL RESOURCES AND LIQUIDITY In order to maintain earnings adequate to f5ance con- N Construction sauction expenditures and funding requirements, the Construction expenditures dunng 1987, exclus.ve of AFC Company requires rate increases sufficien.d offset and nuclear fuel, were $155 million and were pnmanly increased costs and provide a fair rate of return to its , ,
st ckholders. i ,[ for the construction of Wrr/ Unit No. I and Beaver Vallev' Unit No. 2, both of which went mto commercial operation on October 2.1997 the Conipany completed the sale in November 1987. Expenditures were also made to im. and !caschack ofits iterest in Beaver Wfey Unit No. 2. prove and expand production. transmission and distribu. See Note E. The compay irNads to use ti. / proceeds to tion systems and for pollution control equipment. In 1987 refund, refinance or repurchase its outstand mg securities the Company completed an extensive construenon prr,. and for general corpor.nte p ,xposes. gram largely related te the constmction of new generating During the perio (fruQ October 2.1987 to February 29, facilities. 1988. the Company re) chased nearly 4 million shares The Company cunendy estimates that its construction ofits common stock . y approximately $47 million and expenditures, exclusive of AFC and nuclear fuel, will bc spent approximatch g million to retire certain first
$115. 5100, $105, $110. and $115 million for each of the mortgage bonds. t years 1988 through 1992. respectively. These estimates Thtse trosactions recluce / interest expens ed other assume. among other things, that there will be no new costs associated with the Unit and mcreased the Com-environmental regulation, such as "acid rain"legislation, pany's fiNncial flexibility. p which would require large capital expenditures. Rate Mattes i Financing As discussed in NoteJ, the outcorre of prudence and The Company antic ipates that funds for construction excess capacity issues related to the constn etion oflYrry ,
expenditures in the next several years will be provided Unit No I have created uncertamties as to whether the from cash becoming available from operations and. Company will recover and cam a rett..a on its entire in-to a mmimal extent, the issuance of additional securities. vestment in that Unit, and that an excess capacity penalty The percentage ofintemally generated funds for 1988 willapply to Beaver Valley Unit No 2 unnl at least 1991. will be a direct result of the outcome of the Company s Additionally, t! e PUC's fmal decisirr. jn the 1987 rate case , pending rate case and w hether a phase-m plan is ordered and in future rate cases will determins whether tbe Com- , by the PUC. See NoteJ pany fully recovers its investments and or cranng costs On Febmary ll,1987 the Company issued $100 millmn related to the'se units An adverse outcome of these and of 9% first mortgage bonds, series due February 1, '.017. other rate matters could have a material adverse ef ect on Ponions of the net proceeds from this transacuon were the Company's financial posinon and resuhs of operat%ns used to pay short-term indebtedness incurred pnneipally Effects ofInfiation for construction purposes The balance was used for Because the Company s rates are regulated, any increases general corporate purposes There wcre no issuances in its cost of service will not be included in rates charged of the Company's equity securines in 1987 to customers untilit can implement new rates through a , The Company fmances its nuclear f tel requirements by proceeding filed with the PUC. leasmg and other arrangements whereby it may fmance The Company, by holdmg assets such as receivables, ; up to $208 mdlion of nuclear fuel. As of December 31, prepayments and mventory, suffers a loss of purchasmg i 1987 5165 milhon of nuclear fuel,includinginterest stor- power dunng periods of inflation because the amoun' of , 3 age and other costs. was financed under these arrangements. cash received in the future for these items wdl purcL4e ! ! in 1987 $12.5 milhon was required for mat irities of less Conversely, by incurrmg moneta ry @hties, primar- ',, long-term debt and sinkmg fund and stock purchase dy long-term debt, the Company b nfits necatise repay-
)l requirements It is anticipated that 522 9 mdlion will ments in the future w ill be maJe with hollars havingless - ., l be required m 1988 for similar purposes purchasm,; power. /
l , i Interim financing has been and wdl continue to be The regaidory process hmits the amount lepreption provided through bank borrowmgs and sales of commer- expense recovered through rates and limits ..tihty q int m ' . l cial paper See Note F rate base to original cost Such amounts pro .'pce M The Restated Anicles of the Company require that as Dows which are inadequwo replace suon pc perty jr. l a condition for the issuance of preferred stock, camings preserve the purchasing power of equjy cQtal preva,ady , (after income taxesuvailable for mterest chaiges be at invested Whde this effec
- 9 partiany tr'rigated by thd least 1.5 nmes the sum ofinterest charges on all mdebt- benefit densed from incurringlong tetr geht, the Com-l edness plus preferred stock dividend recuirt ments. This pany has a net purchasing powerless wl.n h is bome by restrienon currently precludes the Company frorr issum ; the common stockholders and can enly be overcome by j i preferred stock Thereis no simdar restnction upon the adequate rate rehef '
l 7.ssuance of the Cc mpany's pref (ren<.e er common stock Also see Note M . i I 37 .y 3 ,
. .. - . .. - - .- . - - . - - .-,J _n_~ . - - .
, D U Q U E .S N E t, i G H T C 0 M P A N Y V s MANAb NT'S DISCU SlON AND ANjAtyslS I FINATAA1. CONDillON AND RLSULTS OF OPERATIONS (contmued)
Outlook .
/ . V, i
s, g~' $108 mill' ion, respectively The fluctuations in electrical Because tl dempany is no longer recording AFC on consumption resulted from changes in kilowatt-hour Perry Umt th I and ne lr Valley Unit No. 2, the Com- sales to industrial customers The fluctuations in energy pany gects that it wiP p perience dechnes in net in. cost rate revenues were due to changes in kilowatt hour cmne .np e3mings per sr. Are of common stock in 1988. sales and in the energy cost nue. The decrease in state tax ndever, su be AFC is a noncash item, the Company's adjustment revenues in 1987 was due to a reduction in cash flow and thus its hquidity is not expected to be the state corporate net income tax rate effectiveJanuary 1, mat AAly affected. The loss of AFC will be panially offset 1987. Favorable capacit) Quations and the requirements by tl weewdmgof carrying charges applier.ble to these , of ne;ghboring uihties rm Ited in incrcased sales to other Units through March 1988. utihties during tie three. year penod. The extent to which f eds from operations will con- ' Operation and Maintenance Expenses 4 ,tinue to be availablgay divid pds and finance the Total operation expenses (fuel, purchased power and Company's capital needs depends upon its financial con- other operation)increamd in 1987 due to increases in
, Sion eamings, business prospect < - deferred energy costs and general and administrative
) and other relevant factors. anyThe Cor)he regulatory is concerned expenses and chmate rent expense associated with the Beaver about further unfavorable decisi#p mte-rela'ed pro- Valley Unit No 21 ease. See Nc,te E. Totaloperation ceedings. recent changes in accou ung p rinciples, and expenses decreased slightlyin 1986 compared to 1985 other problems whtch it and thei dric utihty industry is due to dec eases in deferred energy costs, which were experiencingin bringing new genc#. gcapacity on hn' substantially offset by increases in general and adminis-d, particularly con- trative expenses and transmission expenses.
and fully into rate base. The Compan)d Legislation'; dis-cemed about the lYnnsylvania "Suns Maintenance expense was significantly higher in 1986 cussed in NoteJ, and the mcreased uhcertaimy associated dbn in 1987 and 1985 because of scheduled outages of winnhe regulation of electric rates These uncertainties ~ the Cheswick Station and Beaver Valley Unit No.1 in 1986 could have a material ads erse effect on the Compar v's Depreciathmand Taxes revenues, net mcome and cash flow and its abihty t Depreciatiori and amom: anon increased in 1987 due to y obtain financingand pay dividends. the amortt:ation ofItny Unit No 2 begmninginJuly 1987.
# #E # " ## '
- E
RESULTS OF OPERATIONS j
- 1985 due to a sayice hfe study w$# the hich increased Operating Revenue $ expected service lives of certain of the Company's assets.
Operating revenues increased (decreased)in the years The decreases in income taxes were pnmanly due to
, 1985 through 19S7 over the respective preceding gars, decreases in taxable income in 1987 and 1986 and to for the followmg reasons: lower federal and state income tax rates and the amor-I 1987 1986 1985 tiration of defetred investment tax credits in 1987 T he J effective inc me t x rates for 1987,1986 and lo85 were (Milhons of U hr~s) l12%),10% and 29%, respecuvely Generalrate mcreases(decreases) $ (7.6) $ li h ti 27.3 '
\ # Other income and Deductions and Interest Charges Ek vicalconsumpoon 10.8 (233)((194)
Energy cost rate revenues (10.9) me gm a@ Beaver Mey Umt No 2 was sold in Atober 1987 and Perry Umt No. I was state tax adiustment and other (.* 3)_ _ (9.9) k + .6 6 $18),g plac d in commcrval operation in November 1987. This j Revenues fronMber utthries 6.5 ( 5) 14 6 decrease was largJy offset by $11.1 milhon of canying Total $ (8.3) $(22 2) $ 213 charges applicable to these Units included in other f=="7- " 1- etncc,me The increase in AFC in 1986 compared to 1985 was due to increased construction costs-Ope ating revenues are based on rates authon:cd tiy the
' Interest income increased because of greater amounts of j PI R pmd are designed to recover operaung expen ses, plus
.) i iof return on the investment in utihty rate base cash available for investments and $7.2 million ofinterest Me general rate decrease in 1987 resuhed from the fmal accrued on the proceeds of the sale of Beaver Valley Unit i N 2.
ordrin the 1986 rate case See Note J There was no rate
< increasN.1 1986 In 1985 the Company was permitted The adverse effects on 1987 net income and earnmgs l Jt per share of the loss on cancelled generaung units and the
[ r'n ed .e to ircreases in January and November ir{ crease annual revenues by $ 314 m/.han and which were I ss esti-n sale and leaseback of Beaver Valley Unit No 2 are ( ! discussed in Notes D and E. The adverse effects of two cote refunds recorded in 1986 are discussed in Note C. } \ / I e w amm
0 0 0 U E S N E L i G H T C 0 M P A N Y SELECTED FINANCIAL DATA AND STATISTICAL
SUMMARY
(Thousands of Dollars, Except Der Share Amounts) 1987 1986 1985 1984 1983 1982
SUMMARY
RESULTS OF OPERATIONS: Residential revenues $ 299,562 $297,520 $286,260 $ 280,647 $267,110 $238,496 Commercial revenues 345,585 347,364 335;012 314,129 290,370 263.374 Industnal revenues 165,550 178,425 225,692 244.970 221,107 225,292 Other revenues 25,289 27,435 25,447 25,955 25,663 22,418 Total revenues fror , customers 835,986 850,744 872.411 865,701 804,250 749,580 Revenues from other utihties 52,018 45,519 46,049 31,439 10.471 28,686 _Totaloperaung revenues 888,004 896.263 918,460 897,140 814,721 778,266 Operation and maintenanc_e_ expenses __ _499_,796 _ 48_1,71{ 472.956 466,329 400,762 431,331 Depreciation and amortt:auon 82,172 74,325 81,066 77,532 73.682 62,939 Taxes other than income taxes 67,442 70,987 72,614 70,279 60,651 57,476 income taxes (15,i79) 17,536 72,440 74.600 76,194 53,307 Interest charges, net of allowance for borrowed funds used dunng construction 236,000 127,634 127.010 116,333 .)9.161 100,344 Other income, principally allowance for equity funds used during construction 92,888 84,035 83.583 64,727 50,955 44,328 less on cancelled generati_ng units. _ _ 34,263, _ _ Less_on sale andJease_baek 2 3,8_2_8 _ _ _ _ _ _ _ _ _ Rate refupds Oncluding interest expensc) _ 1,854_. 5 7,2 78 _ _ __ _ _- -- income from connnuing operanons before extraordinary gain _. _ _ _ _ . 151_,31_6_ 151,426 ,_175,957 _ _156,794 _ _ 145,226 _ 117,19_7 _ loss from discontmued steam heatmgoperations - - - - - 9.924(1) Income before extraordinarygain_ _ _ _ 151,316 _ 151,426 _ _ 175,95_7 _ 156,7_94 _ 145,226 _ l_07,273_ _ _ Extraordmary gain - - - - - 9.609(2) Net income __ ._ _ 151,316 _151,4p _ _175,957_ _156,794__ _1_45,220___ _116,882 __ Dividends on preferred and preference stock 19,788 20,547 21,250 21,955 22,411 22.701 Eamings for common stock $ 131,528 $130.874 $154,707 $ 134,839 $ 122.815 $ 94,181 Average number of common shares outstanding (000) __ 72,845 72.930 68,543 61,054. _ 55,88_3 _ 48,236 _ Eamings per share of common stock: Income from continuingoperations_
$ 1.81 _
$ 1.79 $ 2.26 _ _ $ 2 21_ _ $2.20 $ 1.96_ _
Eamings for common stock 1 81 _ __ l.79 2.26 _ _ _ 2.21_,___ 2.20 _ _ _ 195 _ Dn;idends dedyred on commpn stock _ 1. 2_0_ 1,415__ _. 2.06 _. 2 06 2_00 _ __ 1,90 Property. plant and equipment
$4,007,551 $4,312.047 $4,168.993_ $3,799,499 $ 3.293,481 $ 3,02_4.5 5_4_ .
Accumulated deprectanon and amorti:ation 008.634 821,448 718,860 659.745 555,641 504.680 Property, plant and I equipment-net $ 3.098,897 $3,490.599 $ 3.420,133 $3.139,754 $ 2.737,840 $ 2,519,874 Totalassets $4.191,318 $4,039.127 $ 3.854,468 $ 3,330,310 $ 3,145,811 $2.883.424 Book value per share $ 17.61 $16 75 $16 36 $ 16.26 $16 41 $16.29 (1) Irss from Company's steam heating subsidiary which discontinued steam sereice effective May 31,1983. l (2) Extraordinary gain of 59.609.000, or $ 20 per common share, resuhing from the exchange of 1,406,898 shares of l common stock for approximately $29.852,000 pnncipal amount of first mortgage bonds. j 39
D U 0 U E S N E L i G H T C 0 M P A N Y l l I SELECTED FINANCIAL DATA AND STATISTICAL SUhthlARY (continued) (Thousands of Dollars. Except 0tr Share Amounts) 1987 1986 1985 1984 1983 1982 CAPITALIZATION: 7),119_ _$ ,73.,119_5 71,488 $ 64,775_ $ _ 58.420 _$_ 53.277 Common stock _ _ __ _$ . . Capitalsuypltp _ _ _ 926,131 __926,131__ _ 900,391 _ _ 804.377 _ 724.,l_4_7 _ 649,376 _ _ Retained e_arni_ngs __ _ 269,965 _ 225,73_3_ _ _197,95_2 _ _184,3131 175,938 _1,6,$_,340 _ Tre_asury stock (34,748) ~ - - - - ! Non-redcemable preferred l and preference sto<.,k , _ _ 156,137 , 156,137 _. 156,137 _ _156,137 15_6.137 _ _1_5_6.137_ l Redeemable preferred and pr_eference stock _ _ 104,768 110.653 119,653 _ 127,414 , l34.979 _ 140,829 _ l _ First mongage bonds 1,401,669 1,326,135 1.244,691 1,149,248 1,099,848 1,006.338 Otherlong-term debt _ _ 297,599 296,137 313,986 278.384 234.019 _199g34 Unamonized debt discount and premium-net (8,668) (8,485) (9.209) (10.896) (10,967) (9,488) Total Capitali:ation $ 3,185,972 $ 3,4 05,560 $ 2,995,089 $ 2.753.752 $2,572,521 $2,361,743 AVERAGE REVENUE PER KILOWAIT-IlOUR-ALL CUSTOhlERS 7.517c 8 032( 7.8 T2C 7.389C 7.215C 6.708( SALES OF ELECTRICITY: Average annual residential kilowatt houruse _ 6.019 _ _5.821 _ 5,621 5,768 __ 5,752 _ 5 668 Electnc energy sales billed (milhonsof kikiwatt hours) Residential 3.065 _2.957 _ _ 2,848 2.918 2.905 2 853 { Ccmmercial _ 4,899 _ 4,724 4,537 4,393 _ _ _4.2 57 4,163 Industital _ _ 2,918 _ 2.734 3.522 _ _ _ 4,148 _ __ 3 .717 _ _ _3.902_ Other _ 98 _ 99 _ 101 __ 104._ _ 111 , 120_ Total sales to customers _ 10,980 10,514 11.008 _ __.Il_,563 10.990 11.038 Sales tc other unhties 2,486 2.136 1.981 1.019 327 917 Total Sales 13,466 12.650 12.989 12,582 11.317 11.955 _ ENERGY SUPPLY AND PRODUCTION DATA: Energy supply (milhons of ktlowatt-hours). Net generation-system _ plants 14,025 13.264 13,590 12,983 11.900 12,352 Purchased and net inadvertent power 258 194 184 216 _, 163 228 Total energy supply 14,283 13.458 13,774 13.199 _ 12 063 12.580 Losses and Company use (817) (808) (785) (6171 (746) (625) _ Net energy supply 13,466 12,650 _ 12.989 11,31? 11.955 __ 12.582 _ _ _ Generating capabihty (thousands of kilowatts) 2.852 2,707 _ 3,148 3,148 3,144 _ 3.148_ _ Peak load (thousands of kilowatts) 2,280 2.132 2.127 2,172 2.184 2.153 Cost of fuci per milhon B1U l 50.991 c 165.340( 168 450C _165 838( 167 140( 16? 865( _ B1U per kilowatt hour generated 10,449 10.624 10,633 10.642 10.635 10.853 Average production cost per kilowatt hour 1.328( _ 2 545C 2.462( 2 559( _291( 2 575C NU5111ER OF CUSTON1ERS-END OF YEAR: Residential 510,823 _ 509 054 _ 507.824 506.883 505.781 503 987 Commercial 50,904 50.346 49,927_ _ 49.857 40.493 _49,320 Industnal 1,978 1.970 1.981 1.990 1.964 1.999 Other 1,8 31 1.826 !.817 1.588 1.633 1,647 _
'lotal Customers 565,536 563.196 501.549 560.298 558 891 556.9' _3 4
40
D U 0 V E S N F L I G H T C 0 M P A N Y - SilAREllOLDER REFERENCE GUIDE ShareholderInquiries Shareholderinquiries relating to changes of address.
. United Start, General Election-November 8,1988 missing stock certificates, dividend reinvestment, divi-dends, and other account information should be directed The choice of our next President and the agenda he brings to office v,ill be determined by you, the voter.
to our Sharenolder Relations Department at One Oxford It is important that: Centre (17-5),301 Grant Street, Pittsburgh, PA 15279 e yoti are registered to vote; You may call toll-free from anywhere in the continental a you do vote-United States between 7.30 a.m and 4:30 r.m , Eastern , gg, g,,3;e qualifications of the candidates; and time. The numbers are as follows: a you know wbere they stand on issuesimportant to Pittsburgh area . .393-6167
).ou and your Company (Duquesne Light).
[ Pennsylvania (except Pittsbu.gh) . .1 800-367-6400 For information on the candidates, please call one of Outside Pennsylvania .1-800-247-0400 the shareholder inquir telephone numbers listed Questions relating to stock transfer can be handled by "I P#E*' our $bareholder Rebtions Depanment but should be = addressed to our unsfer agent: The FirstJersey National Bank, Attention: Ray Zanowski. Stock Transfer Depart- Federal Income Tax Status of Common Stock Dividends ment, One Exchange Place, Jersey City, NJ 07302 You Duct uesr>e Light expects all dividends paid on Company may contact them by usmg one of the followmg numbers: stock dunng 1987 wdl be fully taxable. Toll-Fcee Number 1-800-631-0749, Ext. 7420 Corporate Offices Other Numbers .201-547-7424 The corporate offices of Duquesne Lif.t are located at: 2014 47-7420 One Oxford Centre Fmancial Community Inquiries 301 Grant Street Analysts or brokers shoeld direct their inquines to Pittsburgh, PA 15279 the Company's Corporate Fmance Deruttmeia at Service Arca Map (412) 393-6420. Writtea inquines should be sent to: ( Assistant Treasurer-Corporate Fm : ace Duquesne Light Comp my One Oxford Centre (28 3) 301 Grant Street ^ Ptttsburgh. PA 15279 ~,' (Q
- Annual Meeting of Stockholders Mt The .innual Meetmg of Stockholders scd! he 1.cld a 10 a m Tuesday May 24.1988,in the Dad L. Lav.rence hk7 b h
Ccnve. mon Center. Pittsburgh. Eh f< C = c pl - The approxirnate number of record holders of common
;tock as of the March 16.1988. record date for the 1988 R}m_
1,4 3. . Annual Meeting is 117.000.
}
Form 10-K Offer Nu hold or are a beneficial owner of any class of the O53 'w ,p ( cmpany's stock as et t .e record date for the 1988 Annual i ", "' Meetmg the Company v ill send you, fru upon request a 6 r ' copy of the. Company's Annual Report on Form 10-K iiied F with the Securitie< rnd Exchange Commission for 1937. All requests muu be made in v ntmg to: r Cc cporate Secretary Duquesne Light Compa..y One Oxford Centre (17-6) 301 Grant Street F Pittsbu*gh. PA ' 5279 r
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e 3 ighlights of 1987
- Davis.Besse Nuclear Power Station
- The Public Utilities Commission was available 84 percent of the of Ohio granted four rate increases time, the best operating per- totaling $104 million per year to
- Beaver Wiley Unit 2 achieved formance in the plant's 10. year our operating subsidiaries.
commercial operation on history. November 17. A day later, Perry
- Completion of Beaver Wiley Unit 2 Unit I went commercial.
- Customers set a new record for and Perry Unit I enabled us to electricity demand onJuly 22. stop issuing new common stock.
- Centerior Energy completed a The peak demand of 5,173 l $1.7 billion sale and leaseback of' megawatts was three percent generating units on September 30'; higher than the previous record, it reas the largest transaction of ;
this type in electric utility history
- A Sylvania. Ohio family became 1 and helped us retire 1860 million of our one millionth customer in May.
high<ost debt and preferred and l
^
preference stock. l
\
1 ancial Summary % 1987 1986 Change Earnings Per Share of Common Stock . .. $ 2.82 1 3.04 (7.2) Dividends Declared Per Share of Common Stock . . 8 2.56 3 2.49 2.8 Book Value Per Share of Common Stock at Year End . . .. $ 22.10 $ . 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 Operating Revenues (000) .. ... 81,945,541 81,917,730 1.5 Operating Expenses (300) .. 51,561,931 $ 1,557,925 0.3 - Net income (000) . . . . .. . . $ 390,353 3 391,893 (0.4) Return on Average Common Equity . 12.8 % 13.7 % (6.6) Kilowatt.hout Sales (Milhons of Kilowatt hours) Residential . . ... 6,659 6,527 2.0 Commercial . 6,350 6,239 1.8 Industrial 11,985 11,409 5.0 Other . . 1,348 1,151 17.1 ; Total . . 26,342 25,326 4.0 l Employees at Year End . 8,891 9,306 (4.5) Quarterly Range of Centerior Energy's Common Stock Prices
'86 1st '
2nd 22% - 'mM 25% 3rd 22% mM 27% 4th 22% 125%
'87 Ist 21%m 24%
2nd 15MNM22% 3rd 15 N t8% 4th 15 %M 18% Qir. l 15 20 25 30
*Centenor Energis Common Sud traded for the first tinuton Aptd 30.19H6 1
, I l
l r Share Owner: and staff. We are vigorously contesting this ruling and l 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 customers. In early 1988, phase in proposals were filed other challenges remain. with the PUCO. Ur, der 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 i,mproving 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 2.id 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
- Completed a large nuclear construction program, ComPeth se, M tM N's hre acdons b 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
- Executed the largest sale and leaseback of generating every possible benefit out of the Cleveland Electric-units in electric utility history and Tbledo Edison affiliation. For example, centraliz.ing
- Revitalized efforts to improve service to customers. additional functions at Cergerior 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 workforce).
[ in today's highly competitive energy business. We are 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 ofinformation, to the. They give definition to the care and concern for research and advice. In particular, we will continue to which Centerior Energy stands, help industrial customers operate more efficiently and compete more effecthely in the global marketplace. 3, Completion of the construction program was a vital y step toward achieving the long term success of your Company. As a result, we expect cash flow and the Robert M. Ginn quality of eamings to improve signi.lcantly over the Chairman next few years. The downside is that 1988 earnings are expected to be lower than the 32.82 per share earned Richad A. Mu in 1987, although any decline is anticipated to be President primarily in noncash accounting credits. February 22,1988 Future e2mings also may be affected by several other factors, including The Public Utilities Commission of Ohio's attempt to disallow about 3800 million of the construction costs of Perrv Unit 1. Our share is about 3410 million. The disallowance was considerably higher than recommendations of the PUCO's consultants 2 i _
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a- _ i l Year of Progress problems that can result from nereasing Sales reliance on one fuel source Nuclear power provides a hedge against the , in 1987, your Company completed costly emission control expenditures increased sales will spread our fixed 1 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 1987, nuclear power provided 25 increase an average of 1.6 percent operations of Cleveland Electric and Percent of our generstion and coal- per year over the next 20 years. 1 Toledo Edison. Events over which fired units 75 percent. As we rely Innovative rate designs, knowledge I 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 providingsuperior service are the j out as well. of generation provided by nuclear ways we intend to increase sales. l power will rise. However, coal will i remain our primary fuel source. I Nuclear Program Progress % Innovative Rate Designs l On consecutive days in November, A Delicate Balance Our rate structure can be modified Beaver Valley Unit 2 and Perry Unit I so customers can use the particular 1 were brought into commercial With completion of the new units operating characteristics of their I comes a new challenge: earning a facilities to lower their electric operation. Our third nuclear unit, Davis Besse, recorded the best year fair return on our investment by energy costs. Following are three achieving a delicate balance between examples of how we have retained in its 10 year operating history. the need of customers for reasonably existing business and added These three nuclear units assure priced electricity and the need of new business. Northern Ohio of a reliable electricity share owners for improved financial l supply that not only will serve the performance by the Company. We A Cleveland area titanium pro'd ucer , growing needs of our current have developed a three pronged decided not to close a large sodium customers, but also will help attract strategy to do this: plant after Cleveland Electric new businesses to our service area.
- An innovative sales improvement created a rate design that lowers the ,
The availability of a reliable supply program, customer's rates in any month when of electricity will become increas- the plant surpasses predetermined
- An aggressive cost containment i ingly important in the 1990s when energy usage levels. Sodium is used program and various regions of the country are as a catalytic agent in making titanium. ,
expected to experience shortages.
- A creative rate moderation gg g. ;,3 )
program. The balanced mix of generating the producer probably would have If bought sodium elsewhere and closed capacity will enable us to avoid the These programs are discussed in the
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following sections. the 28 megawatt facility. A special contract for additional toad enabled a metals manufacturer
} to restart an are furnace to make ferro silicon. Tlie unusual operating
{ characteristics of the furnace enabled 1 1 l 1 5
9 by mid 1988, will add eight meg 2- In 1988, we will switch from postal us to offer energy prices that were watts to our load. card billing to erwelope billing. This extremely competithc with rates
- available to the customer's plants in will enable us to insert a retum We helped improve productivity at emtiope for the convenience of other regions and in other countries.
the plant of a mak e of specialty customers to pay their bills. We also The restarted are furnace added molds and precision patterns. After will be able to insert a new newsletter
$660,000 a month to our revenues getting advice from Tbledo Eoison with monthly electric bills. This is a and 50 new jobs to the Ashtabula and the Center for Materials Fabri- cost effecthe way to infonn County economy. cation in Columbus, the manu facturer customers how to get th.: greatest installed a full scale computer aided value out of the electricity they use, ;. Another special rate desigr} helped design and manufacturing system.
y attract a steel company to Tbledo. We have added customer service j That company plans to start building We have long been active in offices in severalcommunities to
!! a $150 million steel rolling millin promoting economic development make it easier for customers to pay Y 1988. This will eventually add 33 in Northern Ohio. Now, more than bills and arrange for electric service, megawatts to Toledo Edison's load.
g ever, we are helping industrial These offices also enable us to customers increase their pro
- distribute helpful tips on such topics ductivity by getting the utmost out as the most effective use of electric Knowledge of Customers.
of the dollars they spend on electric appliances. In 1988, we will take Businesses energy. Such efforts will help fulfill # Our marketing representatives work our pledge that businesses will not tocustomersbyhavingacustomized hard to understand the operations because of van'tnake regularly scheduled and needs of customers. They e t appearances at shopping centers. combine this knowleJge with their expertise in electricity applications e cav rs. AH em@ees are aware uc i t hn es r duce of their responsibilities to the The third strategy for increasing their costs, enhance their competitht customers who depend on us, and sales is to provide the kind of service stance and add to our sales. the daily actions of employees reflec' that makes customers eager to do that care and concern. The net b We are assisting with installation of business with us. resuh of providing superior service l the world's first commercial plasma In the residential sector, our sales is an increase in kilowatt hour sales j' torch technology at the General eff rts stress the comenience, that improves the Company's Motors foundry near Deflance. comfort 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 j degrees Fahrenheit while the limit lighting. We also will continue infor- l in fossil fuelcombustion is about mall n21 Programs to help people 2,800 degrees F. This will facilitate use appliances m te efriciently. the melting of iron and the processing of other materials. The plasma torch, whichis expected to be in operation 6
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g s 1 W h 1 r 9 Z* . ; ', d.+ l 1 We raised $1.7 billionfrorn the sale and leaseback of the Bruce .61an sfield coal fired pla nt, foreground, and Bes n'er %sliry Unit 2, the nuc'rar untiin the back-grou. 'd. Because ofent trean-rnen ta; '*en t rul eq uipure n t, the s tacks and censling ton +rs arc ernilling unty ba rmless n'aler tuspor. 8
Containing Costs The affiliation enabled the operating Edison scid 92 percent of its interest companies to increase coordination in Beaver Wiley Unit 2 for 3715 of electricity dispatching. This, million. Toledo Edison 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 out and minimizing rate increases. the nye units at Cleveland Electric's ability to bolster Toledo Edison's l Significant cost reductions achieved Avon Lake Power Plant. An en- credit rating with Cleveland Electric's in 1987 underscored the success of gineering study concluded it was stronger rating. The resulting lower the Toledo Edison Clewland Electri,c more economical to decommission interest cost was another example affiliation. Most of these savings the 192 megawatt unit than to cf Toledo Edison customers reaping would not have been possible for spend money to keep it operating. the benefits of'he af0liation. either company if they still operated independently. The transaction will result in the Financial Restructuring removalof our Bruce Mansfield
- More long range decision making investment from rate base (the Our standing in the Gnancial was centralized at Centerior Enegy s property value upon which regulators c mmunity was strengthened by a headquarters. This centralization allow us to earn a return). The Snancial restructuring. We redeemed and other steps to eliminate redun- Portion of Beaver Wiley Unit 2 that or refunded 3860 million of highet dancy allowed the implementation we sold will not be placed in rate of a voluntary early retirement base. Instead, we will pay rent to stock in 1987. This reduced our program. Nearly six percent of the annualinterest and preferred and .
workforce retired, resulting in an i initial annual savings of $ 28 million preference dividend requirements by $123 million. See the chart on Embedded costs of'Long Term Detx in payroll and benefit costs. s
,] this page for the impact on out and Preferred and Preference Stock embedded costs of capital. Our Ohr End Annuahzed)
C Generation dispatching, coordination stronger balance sheet showed 3165 of power plant operations and *' million less in long term debt, '87 u engineering and technical support were consolidated at Centerior Preferred and preference stock at m," Energy, as was planning for sub-the end of 1987 than at year end '86 1986. We expect to redeem 2:least , stations and transmission lines. The operating subsidiaries continue to another $150 million of debt and '85 J be responsible for day to day Preferred stock in 1988. w9 34 ) operation of power plants and for A considerable portion of this debt customer related activities. This arrangement helps Cleveland Electric and equity retirement program was 83 d"
** # E * #**'# '#* #'
and Toledo Edison retain the
*# 8*"*#* "8 " **' '
YV%0 customer good will they have 2 4 6 8 to 12 virtually our entire interest in the developed over the past century. We Bm hn&@ NW N*aa w fired plant for 31 billion. Toledo Embedded costs of tong term debt and preferred and preference saxk bate been i mfucedfrom their 1985 gwk les els l lbrough miemptions and refundurgs. l i l l 1 9 6 - - _
m the investors for the right to continue Over the next fin years,constmetion to use the generating capacity, expenditures should be about $1.9 billion (see the chart on this page). An u oderating Rates Removing these investments from i rate base willpermit the placement important part of the construction I of the capitalcosts of Perry Unit 1 program willinvolve the renovation of existing generating units to in February 1988, the Company l and Beaver Wiley Unit 2 in rate base l extend their usefut lives and to proposed a rate moderation plan to without the substantial rate increases ! Increase their operating availability phase the construction costs of that otherwise would be required. This is a lower cost option than the Perry and Beaver Wiley units In effect, the sale and leaseback building new generating units. into rate base. Our ownership share transaction gives customers a long- ( b $4 billion. The rest is owned term budget plan to pay for vt do not expect to issue 2ny new andleased by our utility partners , these units. i common stock in the foreseeable in CAPCO(the Central Area Power ' future. The dilution of per share Coordination Group) and other The Mansfield sale enabled us to realize a significant capital g2t'n and earnings from new common stock investors. sales that had been necessary l to use investment tax credds that Under the rate moderation approach, otherwise could not be used at this has ended. Cleveland Electric revenues would time, minimizing the tax on the increase 9.5 percent and Toledo Despite this progress, financial capital gain. problems remain. Dividends paid Edison revenues would rise 7.2 on common stock were $2.56 per percent in the first year. These Our financial situation will improve share in 1987, substantially higher increas'es would cover other costs as a result of completing construction of the nuclear units. For the five year than cash flow per common share of doing business as well as a (see the chart on page 13). Further- portion of die nuclear construction period 1983 87, construction more, earnings in 1988 are expected investment. Under normal pro-expenditures were $4.5 billion. to be lower than the 82.82 per share cedures, any rate increase would earned in 1987. Future dividend not go into effect before Decernber action willbe determined on a 1988. We are, however, seeking to Actual and Forecast Construction quarterdo quarter basis in light of negotiate an agreement earlier. EWtures % Aweoiso the then recent financial results and l evaluation of the corporation's future To put Perry tnd Beaver Wiley into l l earning ability and cash flow. That, rate base in one step would result in 72 in turn, depends to a significant a rate increase of about 30 percent
'91 y' degree upon the success of efforts for our customers. We realize that 9o g ,.
to obtain regulatory action to assure price increases of that magnitude 89 MD to the maximum extent possible the could putindustrialand commercial inclusion of the irwestment 2nd customers at a competitive dis-advantage, as well as be burdensome
'87 M M "* operating costs of Perry 2nd Beaver 86 mmmm u.~ Wiley in rates over the next several l l years (see the chart on page 14).
y l l 0 200 400 600 800 1,000 1.200 m-m-- Ibrecast construa60n costs are less than half of the letwt emertenced on 1987 and about one.tbird of the peak letet in 1986 10
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b^ / irefriarest scos ts ster- thtet nietet is The holettenfeep plesort is the e.ncessir'c testsjoerostre res tous c tly 's teo rgest erroptrot er A sr est erheetsllistes erront tr aerts ft e r ror e r s i es rly nietes Iresor segreerrecret belos vers the meeor ( brysier rosterscogeroseret enrost helps pr es cart onslosges leep to eor ker s to all keep the fotot ott oof rer eslo ong ool icoa s t Itu r n o oo g h l')*).* I'
to residential customers. W filed increase granted in mid 1986. In Perry Disallowance notices in February 1988 for rate December, the PUCO granted an inJanuary 1988, tne PUCO ruled increases of that magnitude ho protect additionalincrease of $28.8 million that $628 million of the costs of our legal rights. liowever, our intent per year. For the first 18 months, building Perry Unit I were "im-is to work with The Public Utilities however, the increase will be only prudently or unreasonably incurred" Cocimission of Ohio and other inter- $17 million on an annual basis since This disallowance applied to costs ested parties to reach agreement on it will be offset by the "payback" of incurred through the fuelloading I our rate moderation plan. revenues previously collected date of March 21,1986. The PUCO under Ohio's construction work- also required an upward adjustment We are not relying solely upon rate in progresslaw. to this amount relating to allowance increases to produce the added earnings we need. The aggressive in May, the PUCO granted Toledo Edison a $43 million emergency rate (AFUDC). AFUDC is a noncash marketing and cost cutting programs credit to income that compensates I described previously are important increase. In December, that increase f r m ney imested in facilities elements of our strategy. Future rate and a $22.7 million emergency rate which are not yet in rate base. We increase requests, as has always % increase granted in February 1985 estimate that this additional AFUDC-been the case, will depend upon were made permanent by the related am.ount could bring the total the success of these efforts. We will PUCO. The December order also disallowance to $800 million, with need a PUCO approved plan to deal approved an additional $4 million about $ 410 million being our share. with the balance of our nuclear per year. investment. We believe we can keep the average rate increase near the Over the past five years, the average expected rate of inflatian over the price paid for electricity by Cleveland next decade. Electric customers has increased Charges Cash Flow and Dividends less than one percent per year. The Paid Per Common Share average price paid by Toledo Edison's ,,, Regulatory Arena customers has increased 3.2 percent a year over that period. The annual
'87 gg ,
The PUCO granted disappointing
- rate ofinflation from 19831987 was E -,,. '"
rate increases to Cleveland Electric .- and Toledo Edison in 1987. a wn In March, Cleveland Electric received past several years coupled with the
'8 5
- E uneau
$39 8 million annu.C increase as high cost of completing the nuclear ..
second part of a two step w w '84
- m tributed to the decline in the amount !
and quality of Centerior Energy's .", "* earnings. Utilities with inadequate E -
's rates are poor financial risks. Their l borrowing costs go up because their ys o a 2 4 credit ratings are lowered. Like all other expenses, these costs ultimately m u e,, % gas m ,,,
are teflected in customers' electric and on a coneed o smernent of bills. So customers save money in the figures of Clestland Electic and [ the long run when utilities are allowed to charge reasonable rates. f# , conm,,d of,,onc,33,no-prfu a, used durtng construct on (AFUDC) and carrysng chargea Cashflow did not coter dot tJen.ts in 1995.1986 and 1987 Houem; cashflow emproued nearly aj perrent en 1987 and is e.tpected M contsnue n emprous signifwanity I 13 i
The PUCO ruling was in sharp The PUCO also is imtstigating the The perseterance we demonstrated conflict with an earlier order by the reasonableness of $1.2 billion of incompletingour huge construction Pennsylvania Public Utillt'/ Com- costs incurred from the March 21, program willsee us through the ' missionin a Duquesne Light 1986 fuelloading to the start of challenge of securing a retum on Company rate case. The P2PUC commercialoperation on November this imestment.
" determined that allof the costs of 18,1987. In another Duquesne Light The actsdom of providing a reliable Perry through fuelloading were rate matter, a Pennsyhunia admini.
strative law judge ruled inJanuary supply of electricity for Northern prudent.The PUCO's disallowance 1988 that there was no imprudent Ohio will be evident in the 1990s also was much higher thanthe when economic growth in some l recommendations ofits own con- spending at Perry during that period, regions is short circuited by sultants and staff, The PUCO also is studying the shortages of electricity. I l We will appeal the PUCO's decision prudency of Beaver Wiley Unit 2 con. structior.. The Pennsyinnla admini. Theflexibility to changein a i to the Ohio Supreme Court. Among changing business world ns Ii other things, we will cite incon- strathe law judge found inJanuary 1988 that $ 372 million (eight pet. exemplified by the affiliatlan. With
) sistencies and errors in the ruling.
the benefit of operating ex )erience, For ex2mple, the PUCO determined cent) of the cost of bul' ding the we have increased centrali ation that Cleveland Electric "was not Unit was imprudently spent. The PUCO will review the Pennsyhania and efficiency. Greater eml>loyee k imprudent in its management" of mobility among the subsidu. ries ! I issues related to General Electric investigations as part of that process.
' creates a "cross pollination" that l Company, designer of the Unit's assu}es the highest qttality operation ;
reactor. The PUCO also conceded througho,ut the organization. its $264 million disallonnce in " connection with GE issues was not The commitment to provide based on a determination of the outstanding service for residential, I adequacy of GE's performance, u oving Forward With commercial and industrial customers Nevertheless, the PUCO fnund that Confidence is reflected in all corporate activities.
! Cleveland Electric was responsible for In the highly competitive energy the allegedcostsofGE relateddelap. business, an electric utility's greatest The 1980s will go down in the pages of our corporate history as an asset is a satisfied customer. We will extremely difficult decade. Never. continue to merit that asset.
Investment Not in R2re Bue and theless, the completion and Investment in Rate Bue ts na* licensing of our nuclear units gives
,)
g _l " us cause for optimism about our future. The next several years will r ; " 1 M u provide a bridge to a future that will f '85 84 n n
" be rewarding not only for Centerior Energy, but for all of our con-g stituencies. There are many reasons
'83 " for this confidence:
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ditors' Report To the Share Owners and Board of Directors of Centerior Energy Corporation: we have examined the consolidated balance sheet (PUCO) and if necessary an appeal to the Ohio l and consolidated statement of cumulative preferred Supreme Court regarding Perry Unit I cost disal. and preference stock of Centerior Energy Corporation Iowances ordered by the PUCO. (an Ohio corporation) and subsidipies as of Decem.
- 2. The outcome of further PUCO investigations re-ber 31,1987 and 1986, and the related consolidated garding the prudency of construction costs at Perry statements of results of operations, retained earnings Unit I and Beaver Valley Unit 2.
and source of funds invested in plant, facilities and special deposits for each of the three years in the 3. The outcome of future PUCO regulatory proceed-period ended December 31,1987. Our examinations ings to establish a rate phase in plan to recover were made in accordance with generally accepted the investments, lease obligations and deferred I auditing standards and, accordirfgly, included such costs relating to Perry Unit 1 and Beaver Valley tests of the accounting records and such other audit' Unit 2. ing procedures as we considered necessary in the circumstances. We did not examine the consolidated 4. The resolution of potential excess capacity issues. financial statements of The Cleveland Electric 5, whether Perry Unit 2 will be completed and Illuminating Company, a company acquired by whether the investment will ulhmately be recover-k Centerior in 1986 in a transaction accounted for as a able in rates charged to customers. l pooling of interests, for the year ended December 31,1985. Such statements reflect total operating rev. As a result of the uncertainties referred to above, i enues constituting approximately 70% of Centerior's management can give no assurance that the full in-J consolidated operating revenues for the year ended vestment in these units and a return thereon, applica-December 31, 1985. These statements were ex' ble lease rental obligations and deferred costs will amined by other auditors whose report thereon has ultimately be recovered in rates charged to l been furnished to us, and our opinion expressed customers.
< herein, insofar as it relates to the amounts included for The Cleveland Electric Illuminating Company for in our opinion, based upon our examinations and the i that period is based solely upon the report of other report of other auditors referred to above, and subject j 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 have been required had
. spect to Perry Unit 1, Perry Unit 2 and Beaver Valley the outcome of the uncertainties discussed above Unit 2 insofar as they apply to The Cleveland Electric been known, the financial statements referred to illuminating Company. above present fairly the consolidated financial posi-
" # ' "# # E' "* *
- As discussed further in Notes 3 and 7, significant as of December 31,1987 and 1986, and the consolt-uncertainties exist with respect to the recovery of dated results of their operations and source of funds
. investments, lease obligations and deferred costs re- .
invested in plant, facilit es and special deposits for lating to Perry Units 1 and 2 and Beaver Valley Unit 2, each of the three years in the period ended Decem-i including: ber 31,1987, all in conformity with generally ac-
- 1. The outcome of a request for rehearing pending cepted accounting principles applied on a consistent before The Public Utilities Commission of Ohio basis.
b d Arthur Andersen & Co. 9 Cleveland, Ohio
; February 17,1988 17
m 11 ummary of Significant Accounting Policies , i General added to the base rates for electric service. This I, factor is designed to recover fuel costs from custom. Centerior Energy was organized in 1985 and acquired ers. It is changed semiannually after a hearing before The Cleveland Electric illuminating Company and the PUCO. , subsidiaries (Cleveland Electric) and The Toledo i Edison Company (Toledo Edison) on April 29,1986. This business combination was accounted for as a pooling of interests. The historical 6nancial state- The Centerior Utilities defer the differences between ments of Cleveland Electric and Toledo Edison actual fuel costs and estimated fuel costs currently (Centerior Utilities) have been combined and re- being recovered from customers. This matches fuel stated. The consolidated 6nancial statements also in- expenses with fuel related revenues. clude the accounts of Centerior Energy's wholly-owned subsidiary, Centerior Service Company (Ser. The cost of fossil fuel is charged to fuel expense vice Company), which wasincorporated in 1986. The based on inventory usage. The cost of nuclear fuel, 1 Service Company provides, at cost, management,6 including interest, is charged to fuel expense based nancial, administrative, engineering, legal and other on the rate of consumption. Estimated future nuclear {- services to Centerior Energy, Cleveland Electric and fuel disposal costs are being recovered through the Toledo Edison. The Centerior Utilities operate as base rates. separate companies, each serving the customers in its service area. The f rst mortgage bonds, other debt Carrying Charges and Deferred Operating l l Expenses
. obligations and preferred and preference stock of the ,
1 ! Centerior Utilities continue to be outstanding securi-The PUCO has authorized the Centerior Utilities to i ties of the Centerior Utilities. All signi6 cant in- ' defer imerest car @g cosa, cunem opera @g er i tercompany items have been eliminated in
. penses (including rental payments) and de'preciation consolidation.
{l for Deaver Valley Unit 2 from its commercial in-Centerior Energy and the Centerior Utilities follow service date through December 31,1988 or until that the Uniform System of Accounts prescribed by the Unit's costs are included in rates, whichever occurs Federal Energy Regulatory Commission and adopted 6rst. The PUCO also has authorized the Centerior q by The Public Utilities Commission of Ohio Utilities to defer current operating expenses and de-h (PUCO). The Service Company follows the Uniform preciation for Perry Unit I from June 1,1987 through December 22,1987, the date when these costs be-
) System of Accounts for Mutual Service Companies as prescribed by the Securities and Exchange Commis- gan to be recovered in rates, and has authorized the sion under the Public Utility Holding Company Act of deferral of interest and equity carrying costs, exclu-f 1935. sive of those associated with operating expenses and epec n, f r this Unit from June 1,1987 through The Centerio Utuities are members of the Central
# #" ' #" "I###' #'
- N Area Power Coordination Group (CAPCO). Other l
e sts from January 1,1988 through December 31, I members include Duquesne Ught Company (Du-
"" #'#' #' "N '" # #
quesne), Ohio Edison Company (Ohio Edison) and in rates, whichever occurs nrst. The PUCO deter-Pennsyhania Power Company (Pennsylvania mined that Perry Unit I was considered "used and Power). The members have constructed and operate 1 USC n 2Y . 9 M feRulatMY PWPoses. Em j generation and transmission faci!' :es for the use of fmanc al rep rting purposes, the amounts deferred ' the CAPCO companies. for Perry Unit I pursuant to the PUCO accounting , rders have been included in property, plant and - Revenues equipment through the November 18,1987 commer-Customers are billed on a monthly cycle basis for cial in service date. Subsequent to that date, amounts ; their energy consumption, based on rate schedules deferred have been recorded as deferred charges. authorized by the PUCO. These revenues are re. The PUCO did not authorize deferral of any equity corded in the accounting period during which meters carrying costs after November 17,1987 for Beaver are read, except for the portion of revenues which are Valley Unit 2 or after December 31,1987 for Perry deferred under the mirror construction work in. Unit 1. See Note 7 for a discussion of regulatory progress (CWIP) law discussed below. A fuel factor is matters relating to our investments in these Units. 18
e , 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 ate reflected the nuclear generating units, is depreciated over as reductions to tax expense over the life of the their estimated useful lives on a straight.line basis, rel,,ted 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 utility 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 units is based on the units of production method. Imerest n 1 og term debt reponed on the stateraent This includes provisions for future decoramissioning f Results of Operations does not include interest on costs. These provisions are estimated at scle r fuel obligations. Interest on nuclear fuel
$122,000,000 in 1986 dollars for the Davis-Besse bligations for fuel under construction is capitalized.
Nuclear Power Station (Davis Besse) and $72,000,000 b## "## $' ior Perry Unit I and $63,000,00p for Beaver Valley Unit 2 in 1987 dollars. There are no restrictions on Pr perty. Plant and Equipment , the use of the amounts currently being recovered from customers through rates for decommissioning of Property, plant and equipment are stated at original Davis Besse and Perry Unit 1. The sale and leaseback cost. Included in the cost of construction are items h agreement for Beaver Valley Unit 2 requires the such as related payroll taxes, pensions, fringe bene-
; external funding of the leasehold interests' share of fits, management and general overheads and an 21 the Unit's decommissioning costs starting by Septem- lowance for funds used durin'g construction '
ber 1992. See Note 2. (AFUDC). AFUDC represems the estimated compos-ite debt and equity cost of funds used to finance Costs associated with four CAPCO nuclear generating construction. This noncash allowance is credited to 4 I i units canalled in 1980 are being amortized and income, except for AFUDC for Perry Unit 2. Since July recovered in rates through 1991 in accordance with 1985, Perry Unit 2 AFUDC had been credited to a PUCO rate orders. The PUCO does not allow the deferred income account. Effective January 1,1983, ! Centerior Utilities to earn a return on the unamortized we discontinued the practice of accruing AFUDC on balance. A new accounting standard will require the Perry Unit 2. See Note 3. The AFUDC rates, net of discounting of this balance in 1988. This discount * ) the income tax effect, averaged 10.7% in 1987 and ing will not materially impact our financial 10.6% in 1986 and 1985. ; statements. [ Maintenance and repairs are charged to expense as , incurred. Certain maintenance and repair expenses Federal income Taxes for Perry Unit I and Beaver Valley Unit 2 have been defer.ed pursuant to the PUCO accounting orders. T:ledo Edison and Cleseland Electric have deferred discussed above. The cost of replacing plant and the federal income taxes for the differences between equipment is charged to the utility plant accounts. straight kne depreciation and tax depreciation for The cost of property retired plus removal costs, after 8 propert) additions since 1973 and 1976, respectively. deducting any salvage value,is charged to the acc+ In addition, the tax effects of cenain other timing mutated provision for depreciation. differenco nave been deferred. This treatment is consistent with the methods used for rate making blirror Con truction Work in Progress purposes Th: Centerior Utilities have also deferred the tax (ficct of the net gains and loss relating to the The Ohio mirror CTIP law requires that revenues sale and leaseback transactions. See Note 2. The authc,rized by the PUCO and collected as a result of l remaining timing differences are not deferred. They including CWIP in rate base be refunded in a subse-l are recognized for book purposes, and in rates, in the quent period after the project is included in rate base.
; year they affect taxes payable. At December 31,1987, such amounts are deferred and recorded as refund the cumulative income tax timing difference for obligations to customers. AFUDC continues to be " which deferred income taxes have not been provided capitalized during the construction petiod. The de.
amounted to $412,000,000. Based on PUCO and ferred revenues are then recogni/ed as operating rev-Ohio Supreme Court decisions, such taxes can be enues in the Results of Operations over the period of f the refund. recovered in future revenues. 19 3-
4 1 e 1 h .i ngement's Financial Anslysis i 1, Results of Opersikas creases in the average number of shares outsta:Wmg ho contributed to the dt/chnes in per Ahare resuhs. Operating revenues increased by 1.5% in 1985,
~
following increases of 3.8% in 198 mJ 47% in 1985. APUDC and deferred carrying charges have r(pre. l l The $27,000,000 incre;. ,e in elec. :c revenues in sented an increasing proporthm of earnings - 1987 from 1986 resulted from an $89,000,000 in. l' R4% in 1987,105.3% in b)H6 and 89.5% la 19tts. ' crease in base rates and other revenu.es sna a At the same time, cash flows hwe been inTutec: b[
$ 40,000,000 increase from kilowatt hour salea yc,wth the cost of additional debt and equity knavng &
offset hy a $56,000,000 decrease in fuel cost recoveay the cc,mpletion of the two nuclear units. Af UDC for revenues and a $46,000,000 decrease for mirror N Beawr Vattey Unit 2 im eument was discontinued CWIP refund provisioris wl en this Unit became oper..;ional in November 2 3987. AFUDC for the Perry Unit 1 invsstment was 5 Kilowatt hour sales increased by 4% in 1987 following ' ' discontinued on January 1,19M pursuant to a PUCO t an increase of 18% in 19M and a slight increase ia accounting order. Subsequent in these im dates, i 1985. Sales to industrial customers increased by 5% interest carrying charges on these innstments are l o in 1987 frc.m the level in 19E6 and 1935 Industrial teing credited to income +t a rate lower than the full I sales growth we broad based, partimilaily in the steel AFUDC ra:c, Consequently, earnings are expected to sector. Resider,tial and commercial sales increased be lower in 1988, although the quality of earnings 2% and 1.8%, respectively, in 1987 irom i98(, levels, and cash flow are expected to improve. Deferral ot largely because of a substantially warmer than nor, interest carrying chtrges wil} be discontinued as the l investments are recogoized in rate base, j mal surumer in 1987. l.ower fuel revenues in 1987 I
! resulted from increased use of our nuclear units.
i EtTect of Inflation i Operating expenses increased by 0.3% in 1987,7.6% , in 1986 and 5% in 1985. The increases in operatin8 Inflation continues <o affect our business, Over the i expenses in 1985 and 1986 were derived partly from three year period 1935 1987. out average electric the effects of an 18 month outage at Davis.Besse. rates have increased less than the Consumer Price This outage resulted in the use of more coal and Index. In this period, increases in the cost of Isor, [ purchased power at unit prices which exceeded the materials and services used in cperations were moder unit price of nuclear fuel generation. Other operation axd by a downward trend in the cost of coal. and maintenance expenses in 1985 and 1986 in-creased pincipally for the refurbishment of Davis- The effect of inn tiion on the cost of much of our new Besse. In 1937, fuel and purchased power expense facilities bas yet to be recograed in the rate making dropped as Davis Besse came back on line and Perry process. Gem; ally. we have to raise new capiul to l' tInit 1 and Beaver Valley Unit 2 went into service. meet growth needs at inflated costs of construction The reduction in fuel and purchased power expense, and to replace worn out items at higher replacement lower federal income taxes and savings from cost ( cts. !f rare adjustavnts fail to compensate for the reduction programs were acuut offset by sale and cost of new capsul 2n erosion of our return on equity leaseback rental expense and higher units.of produc- will occur. As a result,6ue will be a continuing need tion depreciation at Davis Besse. for rate increaes.
/
Earnings per share were $2.82 in 1987, down 7.2% Te continue to seek adequate and timely rate in. from $3.04 in 1986 and 14.3% lower than $3.29 in creases for the Centerior Utilities and a regulatory 1985. The salc of Cleveland Oectric's steam system environment which h respoc>ive to the effect of inda reduced 1987 earnings by 1.* cents per skre In- tion on our investment. l I l 20 . 1
m Results of Operations Cer,terior Energy Corporation and Subsidiatics > For the years ended December 3__1,, 1987 1986 1985 (thousands ci dollars, enerJ [vr share
.s ounts) ,
Operating Revenue; j 4 Electric . . . . . . . . $ 1,932,170 $1,904,777 $ 1,828,131
' (2y 3 Steam heating and gas . . .' . 13,371 18,866 1,94 5,5 4_f ' . 3,846,997 Operating Expenses <)
I:uel and purchased power . 470,/66 522 h81 510,844 J Other operation and maintenance . 642,594 So,874 450,376 ! Depreciation and amortizahion. 214,421 141,009 141,333 < Taxes, other than federal income taxes . . 208,480 195,967 182,046 ' 'j ' Perry Unit I and Beaver Valley Unit 2 deferred operating j gg expenses . . t)7,623) - - Federal income taxes . . I13,593 147,794 163,362 1,561,931 1,55'7,925 1,447,961 ,, f Operating /ncome. . . 383,610 ' '359,8'1y, , 399,036 Ih , - Nonoperating Incorne /[ l Allowance for equity funds used during construction . 297,239 >298381 260,632 N - -' Other income and deductions, net. (30,665) (8,108) 5,825 Loss on steam sys:em sale' . . (27,156) - - l l Perry Unit I and Beaver Valley Unit 2 carrving charges . 39,303 , t Federal income taxes - credit 121,122' ,_ J16,4 22 86,775 f .. 399,843 407,095 353,232 ( Income Before Interest Charges.
).
783,453 766,900 752,268 !> Interest Charges l M25,977 [l Long term debt. . 397,206 360,912 Short term debt 6,834 6,812 5.917 l Allowance for borrowed funds used during construction . (125,446) ;{.114,038) (98,777) _ ,506,965 _ gp 9,80 , 268,052 income After interest Charges . . . 176,488 484,216 L Preferred and preference dividend requirements of s@$idiaries . 86.135, , 476,q$17 85, >82,829, Net /ncome . . . . .. . ,. .. $ 390,353 $ :39),E93 $ 401.387 ) Average Number of Common Shares Outstanding (thousands}. . . 138,395 128,927 121,898 Earnings Per Common Share. .
. . $ 2.82 $ 3.04 $ 3.29 Ditidends Declared Per Common Share . . . $ 2.56 $ 2.49 $ 2.20
- The one time loss on the steam system sale reduced earnings per common share by 13 cents in 1987. See Note 11.
[
\
The accompanying notes and summary of significant accounting$ i olic32 are an intec;ial part of this statemey .l 21 5 -
o -- - q 1 ff i
- I h,
L l'
' g.m .ianagement's Financial Analysis p
Opital Resources arid Liquidity purchase $38,000,000 of preferred and preference We $rry en x continuous program of constructing stock during the same period. We expect to finance i externally about one half to two thirds of these re-
! ned tNeilMes and modifying existing facilities to meet quirements. See Note 12 for further information con-anticipated demand for electric service and to com-cerning the first m rigage bonds and the preferred i ply with governmeatal regulations. The capital re-and preference stock of Cleveland Electric and quirements for this construction program over the Toledo Edison. Our available short term borrowing I three year period 1985 1987 totaled approximately >
arrangements are explam.ed in Note 13. l $ 3,000.000,000, excluding nuclear fuel. This amount ' includes AFUD' / r.ie capital required to finance our Our ability to meet our financing needs depends upon construction program is obtained from funds gener the Centerior Utilities obtaining sufficient and timely ated internally as well as from external sources. rate increases and upon availability of capital. See ! Note 7 for discussion of rate increase requests. The l About 66% of the constru tion program capital re availability of capital to meet our external financing j quirements for 1985 and 986 was raised through needs depends upon such factors as financial market l bank borrowings and sales of s:curities. Our 1987 , l conditions, earnings, our ability to pay dividends, the j financing activity iuluded the' issuance of over s h 5,500.000 shares of Centerior Energy common stock ur consuugtion program and our credit ! ratings. In 1985, rating agencies lowered their ratings iluongh shee owner and employee stock plans, which rmed aboer. $ 103,000,000. See Note 12. M certain securities f the Centerior Utilities. This I Cleveland Electric is5ued $370,500,000 of first mort- ** * # I #*P I '* * '# #*P#"8I"#' I" ^P'I l ;985, Standard and Poor's Corp 9 ration further low. gage bonds and $75,000,000 of preferred stock. To-
! ledo Edison issued $250,000,000 of unsecured ne<es ered its ratings on the first mortgage bonds and pre-ferred stock of Cleveland Electric to BBB- and BB +,
i and debentores, 59,000,000 of preferred stock and
$41,000 6 )0 of 6rst mortgage bonds. In September re5Pectively. Standard and Poor's Corporation raised 1987, w e soid and leased back cernin interests in four Toledo Edison's first mortgage bonds and preferred i i 1 i generating uaits as discussed in Note 2. A substan- stock ratings to the same levels. Those ratings have i rict portican of the net perceds from these transac- n t changed through 1987. Standard and Poor's rates I tio'ns has been used to pay portions of short term debt Toledo Edison's unsecured notes BB + . Moody's In-incurred to finance the construction progam, to vest rs Service rates Cleveland Electric's bonds and redeem outstanding securities, o Pt" our construc- preferred stock Baa2 and Toledo Edison's bonds Baa3, unsecured notes Bal and preferrec: stock Ba2.
tion program costs and for generv corpoi nte pur. Q'. poses. The remainder of the funds fcem the sale and Our financing policy is to maintain, as near as practi-j, leaseback trans?.ctions will be used for our construc- cable, a capitalization structure of 40%42% common tion program, mandatory and optional cedernption stock equity, a maximum of 48% debt and 10%12% requirements and general corponte purposes. preferred and preference stock. At year end 1987, the In addition to our construct $n program funding re- Company's consolidated capitalization consisted of quirements (as discussed in Note 3), Cleveland Elec- 41% common stock equity,49% debt and 10% pre-ferred and preference stock. k tric and Toledo Edison will r; quire $447,'Yi0,000 and h $ 415,000,000, respectively, for the retirement of For discussion of the cash flow impact of the Tax i debt and orderred stock during the 19881992 pe- Reform Act of 1986, see Note 8. riod. Cleveland Electric also is required to offer to l s 22
6
?
l etained Earnings Canterior Energy Corporation and Subsidiaries q For the years ended D(cember 31, j 1987 1986 _ 1985 g Ohousands of doll. irs) { /talance ar /feginning of Year. $ 893,616 $ 820,756 $ 689,179 i Additions j Net income . 390,353 391,893 401,387 Deductions . s Common stock dividends declared. . . . ....... . (352,715) (319,023) (269,804) i Other, primarily preferred stock redemption expenses of subsidiaries (22,643) (10) (6) Earnings Reinvested During the Year . . 14,995 72,860 131,577 i /fa/ance at Fnd of Year. . . . . . . $ 908,611 $ 893,616 $_ 820,756 1 l Source of Funds invested in P'lant, Facilities and Special Deposits For the years ended December 31, 1987 1986 1985 i J Ohousands of dollars) 1 Provided from internal Sources . I Net income . . . . . . . . . .. . $ 390,353 $ 391,893 $ 401,387 Principal Non. Cash items: De reciation and amortization, net . 193,646 141,069 141,333 I De erred federal income taxes. . (272,133) 86,730 69,881
' investment tax credits, net . 132,699 (39,109) 18,483 Loss on steam system sale . ...... 27,156 -
Allowance for equity funds used during construction . (297,239) (298,781) (260,632) g Funds Provided from Operations 174,482 281,742 370,452 Common stock dividends . . . . . . . . . . . . . . (352,715) (319,023) (269,804) l Net prcceeds from sale and leaseback transactions 1,690,816 - - Net proceeds from steam system sale. . ......... ..... .. 7,000 - - l increase in reserve for Perry Unit 2 allowance for funds used during , construction ... ... ....... . 80,653 63,525 30,422 . Net change in working capital and other accounts . . (48,208) 34,802 (38,720) Allowance for equity funds used during construction . . 297,239 298,781 260.632 Funds Provided from Internal Sources. . 1,849,267 359,827 352.982 Provided frorn External Sources l Sale of Securities: - Common stock . . . . 102,724 208,383 175,287 Preferred stock . . . . . . . . . l
.. .. 123,313 103,968 79,000 First mortgage bonds . . . ... 411,500 325,000 385,970 Net change in other debt .. .. .. . ...... . . 166,542 84,306 114,188 Net change in pollution control construction funds . . . 26,964 56,449 (2,544)
Net (decrease) increase in short. term debt . . . (9,197) 16,807 (17,978) Net (increase) decrease in temporary cash investments. . (504,720) 102,917 12,344 Redemption of bonds, preferrM and preference stock . . (884,258) (127,325) (121,296) Net increase in other noncurient liabilities . . . 21,888 76.423 76,496 ? Funds Provided from EPrnal Sources . . (545,244) 846,428 701,467 ; Total Sources of funds. . . ..... . $ 1,304,023 $1,206,255 $ 1,054,449 i Invested in 'h, Construction Expenditures . . . ..... ...... ... . .. $ 933,744 $1,120,017 8 983,750 ..' Deposits in Trust. primarily sale and leaseback proceeds 374,085 - - (Decrease) Increase in Nuclear Fuel inventory . .. .. . (3,806) 86,238 70,699
;. Totalint'ested in Plant, Facilities and Special Deposits. . . . $ 1,304,023 $1,206,255 $ 1,054,4 49
~
*i,
[:.*
.t '
Cl,
- )f .
The accompanying notes and summary of s' aificant accounting policies are an integral part of these statements. 23 _d m _ _ _ _
alance Sheet Centerior Fnergy Corporation and Subsidiaries l December 31, 1987 1985 Assets Ohousands of dollars) Property. Plant and Equipment g Utility plant in service . . . ... .. $ 8,349,696 $ 4,639.542 ) Less: accumulated depreciation and amortization 1,324,446 1 367,662 7,025,250 3,271.880 . k Construction work in progress . . . 224,679 4,510.962 Perry Unit 2. . . . 783,028 702,579 8,032,957 8,485.421 Nuclear fuel, net of aniortization. . . . ... . . . 609,545 613,351 i Other property, less accumulated depreciation . . . . . . . 46,805 39,213 8,689,307 9,137,985 Special Deposits Pollution control construction funds, unex nded .... . 1,775 28,730 Deposits in trust, primarily sale and lease ck proceeds . . 374,085 ,_, Current Assets Cash and temporary cash investments . . 612,775 106.791 Amounts due from austomers and others, net . 208,214 192.731 Materials and supplies, at average cost . 65,910 44.536 Fossil fuel inventory, at average cost . . 73,665 62,422 , l 202,394 155,373 Taxes applicable to succeeding years. Other . 22,216 10.574
' ' E Deferred Charges } n Unamortized costs of terminated projects . .. . . 46.224 60,109 Accumulated deferred federal income taxes. 4 3,473 29,214 l .
1 4,475 o Unamortized loss, Bec er Valley Unit 2 sale - lj l Unamonized loss on reacquired debt . 59,748 1,736 Carrying charges and nuclear operating expenses 89,094 ij Other . . . 209,304 137.358 1,032,318 228.417 ll ! i Total Assets . italization and Liabilities
.. $ 11,282,059 $ 9,967,571 pitalization b Common shares, mthout par value (stated value of $191,172,000 and i $8 892,000 for 1987 and 1986, respectivel ); 180,000,000 author.
ize ; 140,706,000 and 135,197,000 outstan mg in 1987 and 1986, I respectively . . $ 2,200,449 $ 2.097,715 Retained earnings . . 908,611 893.615 il Common stock equity. . . 3,109,060 2,991,341 4 Preferred stock h' With mandatory redemption provisions. . .. 330,188 465.014 Without mandatory redemption provisions. 457,334 404.021 Preference stock, with mandatory redemption provisions. 13,797 22.800 q 3,718,249 3,792,402 Long term debt. . . Hl 7,628,628 7,675.578 1\ Other Noncurrent Liabiltties ], Refund obligations to customers . .... .... Other, primarily nuclear fuel lease and trust obligations .
. 33,000 598,084 609.196 J
SS I'004 009'I96 Currerrt liabilities Current ponion of long term debt and preferred stock. . . . 59,768 55,359 7 , Current ponion of lease obligations. 71,396 53,470 Notes payable to banks and others . ..... 36,732 45,929 Atcounts payable . .. . 185,070 180.888 Accrued taxes . . . . ... . 326,268 193,119 Accrued interest . . . . . . ... .. 93,351 92,158 Dividends declared . . .. . . 15,348 15,724 Accrued payroll and vacations ... .. . . . 27,308 31,074 Refund obligations to customers . . . 13,000 - Other .. . .. 28,561 27,042 856,802 694,763 Deferred Credits Unamonized investment tax credits . .. . .. .. 399,348 293,675 -l Accumulated deferred federal income taxes. . . . . . . . . . . . . . . ... . 672,817 526,981 ! Reserve for Perry Unit 2 allowance for funds used during construction. 174,600 93,947 j l i Unamonized gam, Bruce Mansfield Plant sale. . . . .. . 739,910 - ; j Other . .. .. . . 179,470 73,431 ' ! 2,166,145 988.034 Total Capitalization and Liabilities . . ... . .. $ 11,282,659 $ 9.967.571 The accompanying notes and summary of significant accounting policies are an integral part of this statement. ] 24 x j
o
, w L, tatement of Cumulative Preferred and Centerior Energy Corporation and Subsiditues Preference Stock 4 1987 Shares December 31, t,
Current Outstanding Call Price 1987 1986 Cleveland Electric Without par value, 4,000,000 preferred and 3,000,000 pref. erence shares authorized Subject to mandatory redemption (less current maturities): Preferred:
$ 7.35 Series C ., . . . 200,000 $ 103.00 $ 20,000 $ 21,000 !
88.00 Series E 36,000 1.045.91 36.000 39,000 75.00 Series F 16,666 1,000.00 16.666 33,333 80.00 Series ; 8,000 1,000.00 8,000 16,000 145.00 Serie: ri . 19,590 - 19,590 23,154
, 145.00 Series 1 . 23,624 -
23,624 27,562 i 113.50 Series J - - - 23,200 113.50 Series K 10,000 - 10,000 10,000 l Adjustable Series M . 500,000 106.76 49,000 49,000 9.125 Series N* . 750,000 109.13 73.968 73,968 256,848 316,217
, Preference:
77.50 Serns 1 , 13,797 1,000.00 13,797, 22,800 f Not subject to mandatory redemption: Preferred: 7.40 Series A 500,000 101.00 50,000 50,000 ' 7.56 Series B 450,000 102.26 45,071 45,071 ; Adjustable Series L 500,000 106.34 48,950- ' 48,950 l Remarketed Series P 750 101,500.00 73,313 -
' 1 i 217,334 144,021 Toledo Edison l
$100 par value preferred, 3,000,000 shares authorized; $25 par value preferred, 12,000,000 }l
, shares authorized; and $25 par value preference, 5,000,000 shares authorized - none t outstanding g
Subject to mandatory redemption (less current maturities): (
$100 par $ 11.00 . 50,000 103.50 5,000 5,499 9.375. 183,400 18,340 8 105.43 20,005 o l 13.25 - - -
11,268 12.65 - - - 18,225 [ 14.80 - - - 28,800 25 par 3.75 - - - 30,000 j 3.72 - - - 35,000 2.81 2,000,000 27.81 50,000 - 73,3_4_0, 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 10,0w 10,000 8.32 100,000 103.54 10,000 10,000 7.76 150,000 103.377 15,000 15,000 7.80 150,000 102.60 15,000 15,000 10.00 190,000 101.00 19,000 19,000 25 par 2.21 . .. . 1,000,000 25.90 25,000 25,000 2.3f,5 . 1,400,000 35,000 28.45 35,000 4.28 . - - - 20,000 3.47 ... .... 1,200,000 30.97 30,000 30,000 Series A Adjustable 1,200,000 - 30,000 '0,000 Series B Adjustable . 1,200,000 - 30,000 30,000 Centerior Energy 240,000 260,000 Without par value, 5,000,000 preferred shares authorized. . . . Total Preferred Stock with Mandatory Redemption Provisions . . ... . $ 330,188 $465,014 Total Preferred Stock without Mandatory Redemption Provisions . . . $457,334 $404,021 Total Preference Stock with Mandatory Redemption Provisions . . . $ 13,797 $ 22,800 The accompanying notes and summary of significant accounting policies are an integral pan of this statement. 25
6
. otes to the Financial Statements B
(1) Property Owned with Other Utilities and Investors , The Centerior Utilities own, as tenants in common with other utilities and those investor.s who are owner. participants in various sale and leaseback transactions (lessors), certain generating units as listed 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. Each 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 facilities owned by the Centeric Utilities as tenants in common with other utilities and lessors: In. Plant Construction Service Ownership Ownership Power in Work Share Megawatts Source Service in Progress Generating Unit Date _ (thousands of dollars) Ir, Service: 1970 80.00 % 305 liydro 5 58,297 $ 54 Seneca Pumped Storage . %. 446 Coal 119,594 30,878 Eastlake Unit 5 . 1972 68.80 Perry Unit 1 & Common 2,787,331 Facilities . . . 1987 51.02 615 Nuclear - Beaver Valley Unit 2 & 1,350,801 9,388 Common Facilities (Note 2) . . 1987 26.12 218 Nuclear Construction Suspended (Note 3): 783,028 Perry Unit 2. . Uncertain 51.02 615 Nuclear -
$4,316,023 $ 823,348 The accumulated depreciation for Seneca at December 31,1987 was $16,000,000. Depreciation on all other plant in service owned with others has been accumulated on an account basis with all other depreciable property rather than by specific units of depreciable property. The Centerior Utilities' share of the operating expense of these generating units is included in the Results of Operations.
Ohio Edison and Pennsyhania Power have agreed to purchase 80 megawatts of Cleveland Electric's 375 megawa'tt I ownership interest in Perry Unit I over an 18-month period. The purchase commenced with the commercial operation of the Unit in November 1987. (2) Utility Plant Sale and Leaseback Transactions Unit. The sale price was $715,000,000. On the same d y, the purchasers leased those interests in the two On September 30,1987, Cleveland Electric sold es- plants back to Toledo Edison (with Cleveland Elec-sentially all of its 470 megawatt undivided tenant in- tric as co lessee) for terms of about 29% years. commen interests in Units 1. 2 and 3 of the coal. The Centerior Utilities are amortizing the applicable 6ted Bruce Mans 6 eld Plant (Mans 6 eld Plant). Cleve-l deferred gains and loss associated with these sales of ! land Electric had owned 6.5%,26.8% and 24.47%, utility plant over the period of the lease terms. f respectively, of those three units. The sale price was i $625,500.000. On the same day, the purchasers leased Future minimum lease payments under these operat. ! those interests back to Cleveland Electric (with To. ing leases at December 31,1987 are summarized as ledo Edison as co lessee) for a term of about 29% follows: Year Amount years. (thousands of dollars) Also on September 30,1987, Toledo Edison sold 1988. .... $ 122,000 l 1989.. .. 182,000 essentially all of its 294. megawatt undivided tenant. . 182,000 1990... ... .. . in common interests in Units 2 and 3 of the Mansfield * * Plant. Toledo Edison had owned 17.3% and 19.91%, ,
*',** , ,, 0 respectively, of those two units. The sale price was 1.ater Years . . ... 5,020,000
$ 398,100,000. On the same day, Toledo Edison also Total Future Minimum sold about 18.26% of Beaver Valley Unit 2. Toledo Lease Payments . $ 5,875,000 Edison had owned a 19.91% (165 megawatts) undi.
vided tenant in. common interest in Beaver Valley The amount recorded as rental expense for the Mans-Unit 2 and has retained about a 1.65% interest in the field Plant leases was $32,100,000 in 1987. Rental 26
r
! costs for the Beaver Valley Unit 2 lease of AFUDC), plus any cancellation costs, less any equip.
$18,300,000 in 1987 were recorded in a deferred ment usable elsewhere and less any resulting tax charge account. saving, would have to be written off. We estimate that such a write off, based on our investment in this Unit The Centerior Utilities are responsible under the as of December 31,1987, would have been about i I leases for paying all taxes, insurance premiums, oper,
$4 38,000,000.
! ating and maintenance costs and all other similar costs for all interests in the Units sold and leased In April 1986, Duquesne announced that it no longer back. The Centerior Utilities may incur additional needs the capacity of Perry Unit 2. Duquesne is j costs in connection with capital improvements to the continuing to pay for its 13.74% ownership share of Units. The owners (lessors) may elect to make addi. maintaining Perry Unit 2 while construction is sus-i
' tional equity investments with respect to the cost of pended. Duquesne has advised the Pennsylvania Pub-any capital improvements on terms to be agreed lic Utilities Commission (PaPUC) that it will not upon. The Centerior Utilities have options to buy the agree (o resumption of construction of Perry Unit 2.
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 genew the leases for a between Duquesne and the other CAPCO compa.
- l. minimum of two years. Additional lease provisions nies if they want to complete Perry Unit 2 and ,
provide other purchase options along with conditions Duquesne does not change its position.
)
for mandatory termination of the leases (and possible l (4) Nuclear Operations and Contingencies l
; repurchase of the leasehold interests) for obsoles. ;
j cence and events of default. Davis Besse Nuclear Pou er Stat \on Y in 1987, the PUCO ordered a rehund of certain re-(3) Construction and Contingencies placement fuel and purchased power costs incurred 7) Construction Program and collected from customers during an outage at jl The estimated cost of our construction program for Davis Besse in 1985 and 1986, plus interest. The .,j the 19881992 period is $1,900,000,000, including refund requirement was based on the PUCO's c'6nc(u. }' AFUDC and excluding nuclear fuel. Should more sion that the outage was a result of imprudence in the *s j stringent environmental regulations be adopted, par. management and maintenance of Davis Besse by ; ticularly in the area of acid rain pollution control, Toledo Edison. The amounts of the refunds are ap- i' constructioa p~ogram costs for this period are not proximately $33,595,000 and $32,563,000 for Toledo expected to .ncrease substantially. However, such Edison and Cleveland Electric, respectively. The re-costs could increase substantially thereafter. No funds are to be made to customers over a period of 18 amount is included for Perry Unit 2 because its con. months beginning in February and March 1988, struction has been suspended. respectively, through operation of the fuel cost rate adjustment. We have appealed the order to the Ohio ' Perry Unit 2 Supreme Court. The refunds will reduce cash flow in q Perry Unit 2, exclusive of the facilities to be used in 1988 and 1989 up to the time of any reversal by the y common with Perry Unit 1,is about 44% complete. Court and could require financing in addition to that j including its share of the common facilities, 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 have been provided. 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- l vised estimated cost and completion date, mothball- tion of nuclear reactors designed by Babcock & ing or cancellation. None of these alternatives may be Wilcox (B&W) at several plants, including Davis. Implemented without the approval of each of the Besse. The NRC staff has concluded that the B&W-s CAPCO companies. designed reactors can continue to operate safely i If Perry Unit 2 is cancelled, the Centerior Utilities will while it< 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 ll
, respective investments in the Unit in rates. We have Predicted.
l no assurance that recovery would be allowed. In the in December 1986, the State of Ohio and an organiza. event of such a cancellation,if and when it were to tion each separately requested the United States appear probable that recovery would not be allowed, Court of Appeals for the Sixth Circuit to prevent the ! then our investment in Perry Unit 2 (including operation of Davis Besse until the NRC has reviewed l 27
e ., Ql 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 capl. 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 Perry Unit I the leases, rental payments are made as ther uel 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. tization payments based on projected burn are ,
$74,000,000 in 1988, $ 79,000,000 in 1989, l cial operation, petitions are pending before various judicial and regulatory bodies to halt the operation of $78,000,000 in 1990, $93,000,000 in 1991 and Peny 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. i l
succeed. See Note 7 for a discussion of regulatory newed and becomes available to 6 nance additional matteu relating to our investment in the Unit. nuclear fuel. Heaver Valley Unit 2
^' * * * '* *
- committed under the leases and the trust for nuclear Beaver Valley Unit 2 was placed in commercial opera material and costs of processing it into fuel for the tion on November 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 Besse, Perry Unit 1 and Beaver Valley Unit 2 in the Unit. reactors with remaining payrnents of $51,000,000,
$86,000,000 and $59,000,00h, respectively, as of De- t Other Nuclear Risks cember 31,1987. '
j Our interests in four nuclear units (Davis Besse, Perry
- Units 1 and 2 and Beaver Valley Unit 2) are also (6) Nuclear Insurance 9 i impacted by activities or events beyond our control. '
Operating nuclear generating units have experienced The Price Anderson Act (Act) limits the liabilih y i unplanned outages or extensions of scheduled out- the owners of a nuclear power plant. This limit is L 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 i; facility anywhere 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 li- United States has an incident with losses in excess of t 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 event of (5) Nuclear Fuel more than one incident) must be contributed for each The Centerior Utilities have lease and trust arrange. licensed nuclear unit in the country by the licensees ments to finance nuclear material and fuel. This nu- of each unit to cover liabilities arising out of the clear fuel inventory should provide an adequate incident. Based on our present ownership and lease. supply lasting into the mid.1990s. Substantial addl. hold interests in our three operating nuclear units, tional nuclear material must be obtained in the future ur maximum potential assessment under these provi-to supply fuel for the remaining useful lives of sions (assuming the other CAPCO companies were to Davis Besse, Perry Unit 1 and Beaver Valley Unit 2. contrit,ute their proportionate share of any assess. More nuclear material and fuel would be required if ment) veuld be 89,770,000 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, finance under one set of nuclear fuel leasing arrange- 1987. However, until new legislation is adopted, the ments is $495,000,000. It consists of two long term provisions of the Act relating to the industry assess-leases that allow the lenders to cancel their financing ment plan and the limitation 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 arran8e- modified to increase or eliminate the liability limit, ment is subject to cancellation by the lender after our potential assessment in the event of a nuclear one year's notice. incident could be significantly increased. . . _ _ _ _ _ _ _ .[
s1 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 Beaver 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
$1,525,000,000 for each site. Damage to our property an increase in electric rates of $4,000,000 annually.
could exceed the insurance coverage by a substantial in addition, the order made permanent the February I amount and thereby have a material adverse effect 1985 and May 1987 emergency rate increases. The . un our financial condition and results of operations in rate increase includes a signiGeant portion of the the periods following the loss. If the property dam- requested annualized operating costs for Perry Unit 1. age reserves of one of the insurers are inadequate t ' The rate increase also reflects inclusion of a portion 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 uo to
- l'
$ 14,467,000 for the current policy year. In c nnection with the February 1985 rate order, j Toledo Edison was ordered to record a portion of its Insurance coverage is also held for the cost of any AFUDC accruals to a reserve account (rather than to replacement power purchased after the occurrence of ncome) in an amount sufficient to offset the in.
I certain types of accidents at our nuclear units. The crease in after tax earnings resulting from the rate i amount of the coverage is limited to 90% of the increase. At December 31,1987, this AFUDC deferral estimated difference in replacement power costs per amounted to $38,000,000. It is expected that when week during the 52 week period starting 26 weeks Perry Unit 1 is considered for full ijclusion in Toledo after an accident and 45% of such estimate per week Edison's rate base, the PUCO will Nther reduce rate for the next 52 weeks. The cost and duration of base 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, j insurance coverage. Also, if the insurer's reserves are future revenues would be reduced by the interim 1 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 \ jl such insurance, we are obligated to pay retrospective n effect. premiums up to $3,042,000 for the current policy year. The Office of Consumers' Counsel (OCC) requested a rehearing objecting to inclusion of Perry Unit 1 (7) Regulatory Matters operating costs in each of the rate decisions. The OCC also filed a second request for rehearing in each rate case on other matters. The Centerior Utilities and During the three years ended December 31,1987, the other interested parties also have requested rehear-PUCO granted increases in electric rates to the ings. The PUCO denied the requests for rehearings j Centerior Utilities as follows: with respect to the inclusion of Perry Unit 1 operat- - l d Date Company m ing c sts. The PUCO also acted on the othe; re- ! , Ghousands of quests by agreeing to rehear specific issues raised in some of the requests. The OCC appealed the issue
) I dollars) q j February 1985 Toledo Edison $22,700 raised in its first requests for rehearings to the Ohio i j March 1985 Cleveland Electric 19,500 Supreme Court and has requested a stay relating to j June 1986 Cleveland Electric 37,000 inclusion of such costs. The Centerior Utilities and 1 March 1987 Cleveland Electric 39,600 the other parties filing requests for rehearing may also i May 1987 Toledo Edison 43,000 appeal to the same court if the PUCO denies their I December 1987 Cleveland Electric 28,800 respective requests. We believe OCC's request relat- l December 1987 Toledo Edison 4,000 ing to inclusion of Perry Unit 1 operating costs is In December 1987, the PUCO granted Cleveland unlikely to succeed.
Electric an increase in electric rates of $28,800,000 annually. However, this increase will be redued by #### #h"##'#" ###"#/0' #"####"###*#"'#
$11,800,000 on an annual basis for a period of about in February 1988, the Centerior Utilities filed notices l I
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 8enerating unit is, or l l crease reflects inclusion of a significant part of the is about to be, placed in commercial service, the E l I requested annualized operating costs for Perry Unit 1 Centerior Utilities request a rate increase to r.. ;ver and the continued inclusion of a portion of Perry all allowable costs, including current operating ex. 29 l _
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 proposals. 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 Uti:: ties 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 ;988 applications would 80 into effect. I defer costs in their initial years, but would ultimately The proposed phase in plans are expected tc .atisfy l provide for full recovery of all allowaote ecsts, in- the accounting standard for phase in plans. If the l ciuding 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 and4he 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 Potential Disallowance of Nuclear Investments 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 inay have to factor and the impact of the February 1985 emer. write off the disallowed costs o'r 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. n . the phase in plans, the amounts of the annual in- In January 1988, the PUCO issued an order statih creases following the first year have yet to be final- that approximately $627,800,000 of Perry Unit I con-ized. They will be designed to provide for the full struction costs were imprudently incurred or were recovery of allowable costs relating to our investments 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 i
alteinative to the phase in plar.s, the Centerior Utili- off and not included in their respective rate bases. ties included in their notices of intent requests for The PUCO's investigation covered the period 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. Approxi-in Perry Unit I and Beaver Valley Unit 2 on a mately $4,153,000,000 in construction costs of Perry nondeferred basis. Unit I were incurred during this period. The order 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 correct 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 reflect 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 associated rental based on the methodology used in the PUCO's order, obligations to Cleveland Electric for an undeter. is $174,100,000. The Centerior Utilities
- share of this mined period. The applications also will seek to amount is about $89,000,000.
recover c,ur investments in facilities other than Perry Specifically, the PUCO concluded that Cleveland Unit I and Beaver Valley Unit 2 and higher operatin8 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 which could tional rate increases may be requested in future years have been avoided through improved management to recover our other investments in facilities and ano 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 with the design and construction of will sponsor a settlement conference with the Center. the nuclear steam supply system and $65,300,000 of 30 m
u _. _ _ _ _ _ _ _ costs resulting from delays caused by another con- fmancial, 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 repect to the $488,000,000 but did not characterize these delays latter two costs, the PUCO concluded that these costs and costs as avoidable. The administrative 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 I construction costo in. judge's recommendations regarding disallowances or I curred after the fuel load date which are estimated to with Canatom's conclusions with respect to avoida- j be about $1,200,000,000. ble costs. Duquesne will challenge these recommen. We believe all of our expenditures for Perry Unit I dations in appropriate PaPUC proceedings. Neither
' " # 8 '# * "
were prudently incurred and that the PUCO's findings were in error. We have requested a rehearing with the Canatom report are binding on the PaPUC, the the PUCO and, if the request is demed, will appeal PUCO or the Centerior Utilities, and any decision of the order to the Ohio Supreme Court. We cannot the PaPUC will not be binding on the Centerior Utilities or the PUCO. However, the PUCO also will reasonably estimate the amount df loss, if any, that may result from the resoluuon o. this matter. Accord. investigate the prudency of the costs of the Unit and ingly, we have not written off any of our investment will review the Canatom report in determining in Perry Unit I at this time. If the PUCO's decision i.- whether to disallow the recovery by the Centerior not rever:,ed on appeal, we would be required t Utilities of any of their costs of the Unit. If it were to write off the disallowed amounts. appear probable, as a result of any. proceedings insti. tuted by the PUCO, that recoveryhn rates of any in January 1988, in a Duquesne rate case, a Penn. ~ prtion of the construction costs, including a full sylvania administrative law judge recommended to retern thereon, of Beaver Valley Unit 2 will not be the PaPUC that there be no disallowance of Perry Unit allowd, then our share of such costs would have to j 1 construction costs incurred from the tirne fuel was be writt, n off. To the extent a disallowance is attrib. loaded until the Unit began commercial operation. uted to ote leasehold interests in the Unit, we would\w The recommendation is not binding on the P2PUC, have to recoM a loss provision for the deferred and the PUCO or the Centerior Utilities. future lease rectal payments. In his January 1988 recommendation, the administra. tive law judge also recommended that the PaPUC PUCO Reserve Capcity StamSrds I disallow $372,000,000 of Beaver Valley Unit 2 con. In November 1987, tee PUCO issued an order adopt. struction costs which were incurred during the period ing a reserve capacity pcJicy. The policy sta:es 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 reserve margin exceed. total estimated cost of the Unit is $4,700,000,000. In ing 20% gives rise to a presumption of excess 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 P2PUC to evalu. Appropriate remedies for excess capacity (possibly ate Duquesne's management of the construction of including disallowance of costs in rates) will be Beaver 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 Beaver 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 circumstances and are not excessive, al.
Beaver Valley Unit 2 by an amount ranging from though they are expected to exceed the 20% bench.
$219,000,000 to $27L000.000. 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 Edison's istrative law judge recommended a disallowance of Beaver 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 sSould not be included considered avoidable 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 margins for each com. struction of Beaver Valley Unit 2 due to capacity, load, pany will not exceed the 20% benchmark. We cannot i 31 l
o
-m L 5r i
predict what, if any, determinations will be made with clied to the amount of federal income tax recorded on respect to generating capacity in the Centerior Utili- the books as follows: ties' rate applications to be 6ted in March 1988. For the years ended December 31, However, if the PUCO disallows a portion of our , 1987 investment because of an excess capacity 6nding or (thousa dollars) does not permit us to earn a full return on our Book !..come Before Fed-investment, the disallowed amount may have to be eral income Tax $ 468.959 $ 508,292 $560,803 written off. Tax on Book Income at Statutory Rate . $ 187,349 $233,814 $257,969 Dividends and Financial Uncertainties increase (Decrease) in Tax Due to: Permanent rate increases granted in 1987 and recent AFUDC and carrying years by the PUCO have been signi6cantly less than Charges . . . . . (184,564) (189,896) (165,328) the amounts requested. Our Board of Directors de. Accelerated Depreci-ation . . . . . 15,852 5,361 4,336 clared a quarterly dividend of 64 cents per share of Other items (26,166) (17,907) (20.390) common stock on January 5, j988, the same amount Total Federal Income Tax as the previous quarter. This action was taken prior to Expense (Credit) $ (72) $ 31,372 $ 76,587 the PUCO order disallowing a portion of Perry Unit . I construction costs. Future dividend action by our Federal income tax expense is recorded in the Results Board of Directors will be decided on a quarter to* of Operations as follows: , quarter basis after evaluation of Snancial results, For the years ended potential earning capacity and cash flow in light of the s December 31, anticipated outcome of our plans to phase in Perry 1987 1986 1985 IJnit I and Beaver Valley Unit 2 construction costs, Operating Expenses the potential for any material write off of our invest- Current Tax Provision $203,513 $ 87,802 $ 85,309 ment in nuclear facilities and other factors. Changes in Accumu. '(, The likelihood of the occurrence of any of the t. atters lated Deferred Fed. eral Income Tax: %* . described in Note 3 "Construction and Contingen. Accelerated Depre-cies - Perry Unit 2", Note 4 "Nuclear Operations clation and and Contingencies - Other Nuclear Risks", Note 6 Nuc e Fuel nter-and this Note 7 which could have a 6nancial impact est Charges . 15,233 17,742 17,172 on us cannot be determined at this time Based on our sale and Leaseback (356,584) - - current Snancial condition and level of annual in- p,g i$, come, a write off of our investment in Perry Unit 2 or pense . 11,685 3,547 2,224 our investment in Perry Unit I ordered to be disal. Deferred CWIP lowed pursuant to the PUCO's January 1988 order Unbi led Revenues 1 - would have a material adverse effect on our results of Perry Unit 1 Oper-operations in the period in which it were to occur ating Expenses. 29,490 - - and on retained earnings. Anv write off resulting from Other items (22,030) (4,264) 1,661 Investment Tax Credits the occurrence of any other of these matters could 137,211
- Net . (39,163) _ 26,789 have such an effect depending upon the magnitude of Total Charged to Oper-such write off. However, such a write off relating to ating Expenses. . . . 113,593 147,794 163,362 Perry Unit 2 or Perry Unit 1 individually would not Nonoperating income reduce retained earnings sufficiently to impair our Current Tax Provision (88,934) (101,102) (84,016)
C ges in A mu ability to declare dividends but together could have j such an effect. A write off due to the occurrence of any eral Income Tax: I one or more of these other matters could, depending Davis Besse Replace- l upon the magnitude and timing of such a write off, reduce retained earnings sufficiently to impair our Ot$ erit . 7. ' ) ) (2I759) Total Federa! Income Tax l ability to declare dividends. Expense (Credit) . . . . 3 (7,529) $ 31,372 $ 76,587 j (8) Federal Income Tax Approximately $27,000,000 of unused investment tax Federal income tax, computed by multiplying the credits are available and may be used to reduce income before taxes by the statutory rates, is recon- future tax obligatior.s. The unused credits expire in varying amounts in 2001 and 2002. Utilization of I 32
.h these unused credits is limited by provisions of the fys Tax Reform Act of 1986 and the level of future taxable Pension Costs:
income to which such credits may be applied. Service cost for benefits earned dur. The Tax Reform Act of 1986 provided for a 40% ing the period . . .. .. $16 In st c st n pr jected benefit ob. average income tax rate in 1987 and a 34% income tax ig , , , rate in 1988 and thereafter, the repeal of the invest
- Actual return on plan assets (37) ment tax credit, scheduled reductions in investment Net amortization and deferral . .
114) tax credit carryforwards, less favorable depreciation Net pension cost. . (3) rates, a new alternative minimum ta'x and other items. VEROP cost . . . 26 These changes have resulted in an increase in tax Net pension and VEROP costs $23
===
payments and a reduction in cash flow during 1987. 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 Decetr.ber 31,1987. vestment tax credit allowed as an offset to federal minon3 r conm income tax payable. g Actuarial present value of bene 6t obli. In December 1987, a new accounting standard for gations: l income taxes was issued. The standard requires a Vested bene 6ts . . $321 I change in the accounting and reporting for income Nonvested bene 6ts. .. 43 taxes from a deferral method to a liability approach. Accumulated bene 6t obligation . . 364 We do not anticipate adopting this standard before Effect of future compensation Ikvels. 116 the effective date of January 1989. The liability ap- Total projected bene 6t obligation . . 480 proach establishes accumulated deferred income tax Plan assets at fair market value. 610 j liabilities for amounts recorded either net of tax or Unfunded (surplus) projected benent . l after-tax and flow through accounting items and rec- obligation . . (130)' l ognizes the effect of any changes to the income tax Unrecognized net gain due to %, ' l rates. The change will result in a si 8ni6 cant increase variance between assumptions and ex. to the accumulated deferred income tax liability perience (4) reported on the balance sheet. However, the increase Unrecognized prior service cost. 7 in this liability will be primarily offset by an increase Unrecognized VEROP cost . . (6) to a regulatory asset account also on the balance Transition asset at January 1,1987, : sheet. We do not expect the adoption of this standard being amortized over 19 years 158 to have any signincant effect on our net income. Net accrued pension cost included in other deferred credits on the Balance (9) Retirement Income Plans and Other Sheet. .. $ 25 Post-Retirement Benefits Assumptions used for the actuarial calculations sum. We sponsor noncontributing pension plans which M hve are as follows: settlement (discount) cover all employee groups. The amount of retirement _ , g g benents generally depends upon the length of ser.
. increase - 5% and long term rate of return on plan vice. Under certain circumstances, benefits can begin _
as early as age 55. The plans also provide certain , death, medical and disability benefits. Our funding At January 1,1986, the fair market value of net assets policy is to be in compliance mith the Employee available for plan benents was $550,000,000 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 $267,000,000 and - for pensions. Also, during 1987 we offered a Volun. $ 26,000,000, respectively, assuming a 7% discount tary Early Retirement Opportunity Program (VEROP) rate and long term rate of return on plan assets. which was accepted by 544 of the 589 eligible Plan assets consist primarily of investments in com-employees at an estimated cost of $31,800,000. Pen- mon stock, bonds, guaranteed investment contracts sion and early retirement program costs for the years and real estate. 1985 through 1987 were $21,400,000, $18,100,000 - and $23,300,000, respectively. Net pension and early in 1986, we began to fund the post retirement medi. p 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
i vu I In 1987 and 1986 were $850,000 and $4,100,000, 18 l 85
, g k respectively. Common Stock:
Public Sales . . . . . . . . . . . . . . . - 4,000 3.000 Dividend Reinvestment and (10) Guarantees Stock Purchase Plan .. .. 4,591 4.597 5,967 Under two long. term coal purchase arrangements, Em e Savings Pl n . 8 484 Cleveland Electric has guaranteed the loan and lease Key i mployee incentive obligations of two mining companies. Toledo Edison Stock Plan . . . ......... I 22 35 1978 Key Employee Stock
.is also a party to one of these guarantee arrange. Option Plan . . . . . ... 59 114 43 ments. This arrangement also requires payments to Total Common Stock the mining company for any actual out.of pocket idle Sales .............. 5.528 9,217 9,589 Fractional Shares and Other
. mine expenses (as advance payments for coal) when Adjustments on Exchange ., the mines are idle for reasons beyond the control of of Shares . . . . . . . . . .... - (34) - 2 the mining company. At December 31,1987, the Treasury Shares . . ... . (19) (17) - Net Change . . . . . . . . 5,509 9,166 9.589 principal amount of the mining companies' loan and lease obligations guaranteed by the Centerior Utili. Cumut iv ef-refejred a , ties was $106,000,000. 1 Subject to Mandatory Re. demption: The Centerior Utilities have also guaranteed the debt Sales ^ obligation of a supplier. At December 31,1987, the Cleveland Electric principal amount of the debt obligation guaranteed Preferred: & Adjustable Series M . .. '- - 500 4 by the Centerior Utilities was $4,000,000. $9.125 series N . . . i- 750 - I Toledo Edison ' h (11) Sale of Cleveland Electric Steam System Preferred: j- Cleveland Electric sold its steam system on December
$ 25 par $2.81. . . . . . .
Retirements 2,000 - - 30,1987 for $7,000,000. A net after. tax loss of ap- Cleveland Electric proximately $18,000,000 reduced Nonoperating In. Preferred: N h come in the Results of Operations. This one. time loss 8 g$ (*,' E ll . ll ' % 7 reduced earnings per common share by 13 cents in 75.00 Series F. . . . . . (17) (17) - 1987. The sale will not have a material impact on {8j (8j { future results of operations. 3 @g y*5 $ '., ". ' . ,.fj ' 145.00 Series I . . . (4) (2) - .i 113.50 Series J . . . . . . (29) - - . 2 . . Preference: I 2 (12) Capitaln.ation $77.50 Series 1. . . . . . . (9) (l1) (l1) j
, (a) Capital Stock Transactions Toledo Edison '
Preferred: [ Shares sold and retired during the three years ended December 31,1987 are listed below. Common stock
$ 100 par $ 11.00 . . . (5) (5) (5)
(17) i j j 9.3 7 5 . . . . . . . (17) (17) activity prior to April 29,1986 has been adjusted to 13.2 5 . . . . . (121) (9) - t 12.65 . . . . (190) (10) - i reflect Cleveland Electric's 1.11 exchange ratio and 14.80 . . . (300) - - ' 25 par - Toledo Edison's one.for one exchange ratio for new -. j _ { Centerior Energy shares. Net Change . . . . . . . (1.317) 656 444 ( Cumulative Preferred Stock of f 1 Subsidiaries Not Subject to f Mandatory Redemption: I Sales ! Cleveland Electric ! Preferred: l Remarketed Series P ... 1 - - l Toledo Edison ; Preferred: [
$25 par :
Adjustable Series A ... - - 1,200 l Adjustable Series B ... - 1,200 - Retirements l Toledo Edison i Preferred:
$ 2 5 par $ 4.2 8 . . . . . . . . . (800) - -
l Net Change . . . . . . . . (799) g g Ii 34 !
. d.]
5 No new shares of common stock will be issued for the (d) Cumulatit'e Preferred and Preference Stock l Dividend Reinvestment and Stock Purchase Plan or Amounts to be paid for preferred stock which must be y the Employee Savings Plan. Shares required for the redeemed during the next five years are $10,000,000 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, Cleveland Elec-(b) Common Shares Reservedfor /ssue 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 in 1988. ployee Savings Plan and Purchase Plan were The annual mandatory redemption provisions are as 3,183,583 and 139,309 shares, respectively, at Decem. follows: ber 31,1987. Annual Mandatory Redemption Provisions Stock options to purchase unissued shares of common Shares Shares at Begin Price stock under the Key Employee incentive Stock Plan k geyeemed ion i s e and the 1978 Key Employee Stock Option Plan were ' Cleveland Electue granted at an exercise price of 1100% of the fair market value at the date of the grant. The Key Em, Preferred: s 1 00 1 8 ployee incentive Stock Plan expired in June 1987. No g [ additional options may be granted under the 1978 75.00 Series F . - 16,667 1985 1,000 '; Key Employee Stock Option Plan. The exercise prices 80.00 Series G - 6,000 1984 1,000 j 145.00 Series 11. 1,782 - 1985 1,000 ;; of option shares purchased during the three years 1,969 L 1,000 145.00 Series I . 1986 ; , ended December 31,1987 ranged from $14.09 to 113.50 series K 10,000 - 1991 1,000 .
$20.73 per share, after adjustment for the exchange Adjustable Series M 100,000 -
1991 100 ; ratio. Shares under outstanding options held by em. 9.125 Series N 150,000 - 1993 100 l ployees were as follows: Preference: l Key Employee 77.50 Series 1. - 11,400 1984 1",00 Incentive Stock Plan l Toledo Edison 4 1987 1986 1985 Preferred: Options Outstanding $100 par $11.00. 5,000 - 1979 100 at December 31: 9.375. 16,650 - 1985 100 . Shares - 30,636 58,517 25 p:r 2.81 . 400,000 - 1993 25 Option Price .
$20.21 $16.75 to I
$20.21 The annualized cumulative preferred and preference l
# #8 ## #' '
1978 Key Employee $ 73,000,000. Stock Option Plan 1987 1986 1985 The preferred dividend rates on Cleveland Electric's Cptions Outstanding Series L and M and Toledo Edison's Series A and B 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%, 7.4 8%, 1 Option Price . . $14.09 to $14.09 to $14.09 t 8.55% and 9.43%, respectively, in 1987. The dividend I
$ 20.73
$ 20.73 $ 20.73 rate on Cleveland Electric's Remarketed Series P, I which was issued in July 1987, averaged 8.66% in (c) Equity Distribution Restrictions ;9gy, l At December 31,1987, consolidated retained earn. Under its articles of incorporation, Toledo Edison cannot issue preferred stock unless certain earnings l ings were comprised almost entirely of the undistrib.
uted retained earnings of the Centerior Utilities. coverage requirements are met. Based on earnings for Substantially all of their retained earnings were avail, the 12 months ended December 31,1987, 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 Centerior Energy. an assumed annual dividend rate of 11%. Any re- ; quired write off by Toledo Edison of its plant invest-A loan or advance by a Centerior Utility to Centerior ment could adversely affect its ability to issue Energy requires PUCO authorization unless it is additional preferred stock. See Notes 3 and 7. The made in the ordinary course of business operations in issuance of additional preferred stock in the future which the Centerior Utillry acts for Centerior Energy. will depend on earnings for any 12 consecutive 35 I
7r . months of the 15 months preceding the date ofissu. Iong term debt matures during the next five years as ( ance, the interest on all long term debt issued and follows: $50,000,000 in 1988, $150,000,000 in 1989, the dividends on all preferred issues. $208,000,000 in 1990, $204,000,000 in 1991 and
$170,000,000 in 1992.
There are no restrictions on Cleveland Electric's abil. ity to issue preferred or preference stock or Toledo The mortgages of Cleveland Electric and Toledo Edison's ability to issue preference stock. Edison constitute a first mortgage lien on substantially all their property and franchises owned. Excluded With respect to dividend and liquidation rights, each from the lien are cast, securities, accounts receiva. company's preferred stock is prior to its preference ble, fuel, supplies and, in the case of Toledo Edison, stock and common stock, and each company's prefer. automotive equipment, ence stock is prior to its common stock. The issuance of additional Grst mortgage bonds by Cleveland Electric is limited by two provisions of its (e) Long Term Debt and Otber Borrowing mortgage. One relates to bondable property cover.
# #"S#'"#"" age of the bonds and the other to earnings coverage of 1.ong-term debt, less curregt maturities, for the interest on the bonds. The amount of additional Centerior Utilities is as follows: bonds issuable will depend upon unbonded bond-able property, earnings and interest on the bonds First mortgage bonds:
,g then outstanding and to be issued. Under these limits, or Average December 31, Cleveland Electric would have been permitted to Year of Maturity interest Rate 1987 1986 issue approximately $803,dp0,000 of additional (thousands ol dollars) bonds at December 31,1987h 1988. . 4.00 % $ -
$ 15,000 1989. 3.00 20,000 20,000 The issuance of additional first mortgage bonds by 1989. . 15.25 40,000 40,000 Toledo Edison also is limited by provisions in its 1989. ... .. 14.375 50,000 50,000 mortgage similar to those in Cleveland Electric's 1990. 7.125 60,000 60,000 mortgage. The mortgage also permits the inaa(ce of
'~
refunding bonds in an amount equal to retired bdmk
. . 75 35h00 which have not served as the basis for the issue of s
1991. . 14.00 25,000 25,000 1991. 15.625 - 35,000 other bonds. Under these provisions at December 31, 1991.. . 15.00 70,000 70,000 1987, Toledo Edison would have been permitted to 1992... 15.25 20,000 20,n00 issue approximately $241,00C '00 of nontefunding 1992. . . 16.125 - 60,000 bonds and $24,000,000 of refunding bonds. 1993 1997. 8.76 378.750 559,882 1998 2002.. . 8.15 100,728 115,998 Certain unsecured loan agreements of Toledo Edison 2003 2007. 9.79 269,475 284,745 contain covenants limiting to 65% of total capitaliza. 2008 2012.. 9.29 678,650 946,098 tion (as de6ned) the total of its short-term debt in 2013 2017. 10.30 872,550 572,550 excess of $150,000,000 and funded debt, limiting ' 2018 2022.... 9.02 205,300 93,800 secured 6nancing other than through first mortgage i 2,825,453 3,068,073 bonds and certain other transactions and requiring Term bank loans,8.78% Toledo Edison to maintain earnings (as defined) of at [99[e rate, due 1989-
, 179, 66 214,833 least 1.5 times interest on its 6rst mortgage bonds.
The earnings coverage ratio applies to $349,500,000 Notes,10.83% average rate, due 1989 1997... 357,000 277,000 f unsecured loans and was 2.71 at December 31, Debentures,11.25%, due 1987. 1997. .. ... ......... 125,000 - Any required write offs of the Centerior Utilities' plant Pollution control. notes, investments could significantly affect their ability to 9.69% average rate, due issue additional debt. See Notes 3 and 7. 1989 2G15 . . . . . . . . . . 223,290 223,800 , Other - net . .. ... ... 8,340 8,696 1
- Total 1.ong Term l
Debt . .... ..... $3,718,249 $3,792,402 3s
7 t 1 (13) Short Terrn Borrowing Arrangements any unused borrowings. The interest rate on borrow. Our bank credit arrangements at December 31,1987 ings is 0.375% to 0.625% (depending on usage) were as follows: above the rate which specified banks pay for Eurodot. Cleveland Toledo Service lar deposits in the London interbank markets. Electric Edison Comnany Total (thousands or dollars) At December 31, 1987, Cleveland Electric had Bank Lines of $ 37,000,000 of commercial paper outstanding. Com. re $ 152.300 $69,350 $13,000 $ 234.650 mercial paper outstanding is backed by at least an derwriting . equal amount of unused bank lines of credit. Facility . - 25,000 - 25.000 Toledo Edison Eurodoilat Toledo Edison's annual commitment fees range from
$$"I"8gree. 26,000 0.25% to 0.5% on most of its lines of credit. The rest ment . 26,000 - -
of the lines of credit have informal compensating There were no borrowings under these bank credit balance arrangements. Banks expect Toledo Edison arrangements at December 31, ly87. t maintain average deposits equal to 5% of the line of Short term borrowing capacity authorized by the PUCO is $300,000,000 for Cleveland Electric and cr , n n8 UPon tM amom bowed W -l deposits provide operating balances for Toledo
$ 150,000,000 for Toledo Edison.
Edison and are not restricted legally. Cleveland Electric Toledo Edison also has a comme,cial paper program. r Most borrowings under Cleveland Electric's short. There were no such borrowings at'. December 31, ' term bank lines of credit require a fee of approxi. l9g7' mately 0.3% per year to be paid on any unused portion of the lines of credit. For those banks without Centerior Service company fee requirements, the average daily cash balance in Fees for the Service Company's lines of credit range ' I the bmk accounts satisfied informal compensating from 0% to 0.375%. There are no informal comperisatg i
; balance arrangements, ing balance arrangements for the banks which do l Any borrowings under Cleveland Electric's Eurodollar not require a fee.
I agreement are made and paid back in United States
' Centeri r Energy Corp *ation dollars. There are no requirements that compensating balances be maintained at the banks involved. How- No formal short term borrowing arrangements were ever, a fee of 0.1875% to 0.375% per year is paid on established for Centerior Energy in 1987 or 1986.
(14) Quarterly Results of Operations (Unaudiced) The following is a tabulation of the unaudited quarterly results of operations for the two years ended December - 31,1987. Quarters ended i March 31 June 30 Sept. 30 Dec.31 Jgg7 (thousands of dollars, except per share amounts) ;
~
Operating Revenues .. . .. . . . .. .. $ 487,499 $483,995 $561,076 $412,971 Operating Income . .. .. . $ 101,514 $ 102,565 $ 131,772 $ 47,759 l . . Net Income .............. ...... .. ... . $ 106,936 $ 93,794 $ 128,305 $ 61,318 Average Common Shares (thousands) . .. . 135,926 137,661 139,552 140,596 ; Earnings per Common Share ...... ... ... $ .79 $ .68 $ .92 $ .44 Dividends Paid per Common Share ........ .... .. $ .64 $ .64 $ .64 $ .64 I986 I Operating Revenues .......... . .. .... . . .... $484,229 $442,502 $520,752 $470,247 l, l Operating Income . ...... .. ..... .... .. . $ 100,326 $ 80,568 $ 113,133 $ 65,778 l N e t I n co m e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,549 $ 81,787 $118,125 $ 92,432 Average Common Shares (thousands) . . . . . . . . . ... 126,732 128,052 129,197 131,519 i Earnings per Common Share ........... ...... .... $ .79 $ .64 $ .91 8 .70 l l Dividends Paid per Common Share ... .... . . $ .60 $ .61 $ .64 8 .64 l , 1 Operating revenues and operating income for the quarter ended December 31,1987 were reduced by approxl. l! i mately $32,000,000 and $18,000,000, respectively, resulting from the deferral of CWIP in rate base revenues j f i
, collected in prior quarters. Such deferrals were offset by the recording of AFUDC as discussed in the Summary of ;
Significant Accounting Policies which resulted in no change in net income. l l Quarterly results of operations for the quarter ended December 31,1987 differ from the unaudited amounts i
; previously reported because of year end adjustments and reclassifications made following the receipt of February 1 1988 PUCO accounting orders for Perry Unit I deferred costs and carr/ ing charges as discussed in the Summary ,)
of Accounting Policies. I 37
1 Financial and Statistical Review Centerior Energy Corporation and Subsidiaries
~
Operating Revenues (thousands of dollars) Secem Toral iI Toral TorsJ Hencing Operming . f, Year Residrecini Commercial Indusrnal Other Retail Wholciale Elecmc & Ces R evenues l~ l' 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 I 893 306 11 381 1 904 777 12 953 1 917 730 ! l 1985. 566 666 485 269 667 450 92 710 1 812 095 16 036 1 828 I31 18 866 1 846 997 1984. 548 136 454 092 636 036 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 1977.. 287 742 220 919 348 767 37 772 895 200 24 857 920 057 15 749 935 806 Operating Expenses (thousands of dollars) Whl
& Beaver Fuel & Operunon Deprecation Taxes Vaury .
Federsl Total Purchased & & Other Than Unis 2 income Operacing Year Powr Maineenance Amortizarice FIT Deferred Tases Espmses 1987. . . $470 466 $642 594 $214 421 $208 480 $(87 623) 8113 593 $1561931 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 l 1983. 454 019 884 077 145 334 172 093 - 184 157 1 339 679 l 1977. . 426 183 167 252 62 872 77 936 - 53 829 788 072 Income (thousands of dollars) . Pass Federal Income 1 Other la-Service income Bc(ore income Operating AFUDC- Income- Carrying Tas- Innereu inseves AFUDC- After Yeme income Equiry Net Charges Credies Charass Charass Debe laseres 1987. .. $383 610 $297 239 $(57 821) $39 303 $121 122 $783 453 $432 411 $(125 446) $476 488 1986. . .. 359 805 298 781 (8 108) - 116 422 766 900 404 018 (114 038) 476 920 1985. 399 036 260 632 5 825 - 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 - 47 402 579 023 258 449 (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 Stock (dollars per share & %) Prefersed & Average Reevenon Preference shares Average stock Na Oucuandang
- Equiry Dividerds Book Yes, Dividends laceme (rhousands) Earnings * (4) Dedered' Value' 1987.. . $86135 $390 353 134 395 $2.82 12.8 % $2.56 $ 22.10 1986.. ... 85 027 391 893 128 927 3.04 13.7 2.49 22.13 1985. . . .... 82 829 401 387 121 898 3.29 15.7 2.20 " 21.50 19 84 . . . . . . . . . . 78 349 366 809 107 622 3.41 16.4 2.29 20.64 1983.......... 68 555 305 815 98 240 3.11 15.7 2.19 20.24 1977. .... . 33 425 126 958 46 750 2.72 14.7 1.74 19.26 NOTE: Deca for years prior to 1986 are the result of combining and restating Oeveland Ekctnc and Toledo Edison data.
' Outstanding shares for the periods prior to 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 frorn its usual date in 1985 to January 1986 in order to synchronize Toledo Edison's d!vidend declaration and payment schedules with Cleveland Electric's prior to the affiliation.
38
u I Electric Sales (millions of KWH) Electric Customers (year end) Residential Usage Average Average KWH Pnce Revenue Per Indusenal , Per Per KWH Cuscorner 1 l Year Raidential Commercial Indusersal Whoiciale Other Total Residential Cmeerch! & Other Toril Cusroener (cents) (dollars) 1987. 6 659 6 350 11 985 399 949 26 3'2 903 365 90 148 12 240 1 005 753 7 217 9.46e $685.43 1986. 6 527 6 239 1I409 242 909 25 326 898 583 87 947 12 012 998 542 7 108 9.18 654.99 1985. 6 309 5 952 11 410 331 865 24 867 892 727 87 442 12 023 992 192 6 900 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 85 769 11557 983 350 6 967 8.64 603.22 1977. 6 074 5 240 12 350 1097 793 25 554 863 323 79 467 11 044 953 834 6 993 4.74 326.87 I.md (megawatts) Energy (millions of KWH) Fuel Operable Capacacy . Fue4 Ccat At Time Nc Per E&ciency. Company Gennseed Purchased KWH BTU Per Or Peak Load Capacity Year Peak" ' !. cad Factor (%) Margin (%) Fossil Nudear Total Power Total (cents) KWH 1987. 5 955 5 173 63.6% 13.1% 20 878 6 897 27 775 600 28 376 1.53e 10 461 i 1986. 5 199 5 021 63.0 3.4 22 694 24 22 718 4 552 27 27k 1.79 10 292 1985. 4 539 4 512 69.1 5.9 21 610 1 %4 23 574 3 283 26 857 . 1.85 10 313 1984. 5 338 4 659 66.1 12.7 19 930 4 303 24 233 2 350 26 583 1.71 10 349 1983 6 218 4 717 63.1 24.1 19 487 4 895 24 382 1287 25 669 1.72 10 419 1977. 5 552 4 734 65.5 14.7 23 862 463 24 325 3 113 27 438 1.21 10 364 Investment (thousands of dollars) h 4 ., Total Unliry Accumulated Construcnon Nudear Propeny. Unlary Hans in Deprecmica ei Net Work in Fuel and Plant and Plant Total Year Savice Amomancion Mans Progress Other"" Equipment Addinons Assets 1987. . $8 349 696 $1324 446 $7 025 250 $1007 707 $656 350 $8 689 307 8 933 744 $11282 659 1986. 4 639 542 1 367 662 3 271 880 5 213 541 652 564 9 137 985 1 120 017 9 967 571 1985. 4 481 451 1 264 931 3 216 520 4 280 584 564 276 8 061 380 983 750 9 002 119 1984. 4 281 856 1 163 994 3 117 862 3 526 978 485 207 7 130 047 938 509 8 049 712 1983 4 180 192 1 047 318 3 132 874 2 710 352 392 268 6 235 494 784 715 6 921 890 1977. . 2 358 076 582 613 1 775 463 1 014 372 53 279 2 843 114 481 022 3 247 056 Capitalization (thousands of dollars) Preferred Preferred & stock Preference withouc kock wuh Common Mandatory Mandacory 1.ong-kock Redemptson Redemption Term Year Equiry S Provisions % Provia.ons % Debt % Tocal 1987. $3109 060 41% $457 334 6% $343 985 4% $3 718 249 49% $7 628 628 1986. 2 991 341 39 404 021 5 487 814 7 3 792 402 49 7 675 578 197,5 . 2 710 098 39 374 021 5 468 306 7 3 438 928 49 6 991 353 1984. 2 403 234 39 344 021 6 450 646 7 2 993 770 48 6 191 671 1983. . . 2 065 340 39 344 021 6 412 002 8 2 503 859 47 5 325 222 1977. 955 616 34 245 071 9 195 000 7 1 380 179 50 2 775 866
* *
- Capacity was reduced because of extended generating unit outages for renovarloo and improvements in 1984 (720 mv),1985 (1,490 mw) and 1986 (856 mw).
** *
- 1984 and prior restated for effects of Capitalization of nuclear fuel lease and financing mngements pursuant to Statement of Financial Accounting Standards 71.
39
c - - - - - - - - - - - - - - _ t
.i Bcard of Directors 1
Richard R Anderson, President and Chief Executive Sister Afary Afarthe Reinhard, SND, President of N Officer The Andersons Management Corporation, a Notre Dame College of Ohio in Cleveland. g grain, farm supply and retailing firm. Paul Af. Smart, President of The Toledo Edison i Leigh Carter, President and Chief Operating Officer of Company and Executive Vice President of the Company. The BFGoodrich Compar.y, a producer of chemicals, llerbert E. Strawbridge, Director and retired Chairman plastics and acrospace products. Also Chairman of of The Higbec Company, a department store in Tremco, Incorporated, a m:nufacturer of specialty Northern Ohio. chemical products, a wholly owned subsidiary of The BFGoodrich Company. Williamf. Williams, Chairman and Chief Executive Thomas A. Commes, President and Chief Operating 8 Officer of The Sherwin Williams Company, a manufacturer of paints and painting supplies. Chester Devenow, Chairman and ChieI Executive Officer of Sheller Globe Corporation, a manufacturer 9 of automotive parts and assemblies, electrical equipment and radiation and environmental monitoring equipment. - , Edwin D. Dodd, Retired Chairman and Chief k I Executive Officer of Owens Illinois, Inc., a ommittees of the Board k manufacturer of glass, plastic, paper and glass ceramic ( products- Audit Executive Nominating Robert Af. Ginn, Chairman and Chief Executive Officer Williams, Chmn. Ginn, Chmn. Mosier, Chinn of the Company, Centerior Service Company, The Dodd Anderson Anderson s Cleveland Electric illum!ruting Company and The Kault Strawbridge Carter Toledo Edison Company. Reinhard Commes Finance Devenow q Roy H. Holdt, Retired Chairman of White Consolidated Industries, Inc., a manufacturer of products for the Compensation Miller, Chmn. Dodd , Carter, Chmn. Anderson OING I home, principally major appliances, and machinery and equipment for industry. Devenow Commes llo!dt George //. Kault, Chairman and Chicf Executive Officer hard s dt l' of Premix, Inc., a developer, manufacturer and fabricator Strawbridg-of thermoset reinforced composite materials. Wliiams l Richard A. Afiller President of the Company and i Centerior Service Company. , Frank E. Afosier PresMent of BP America Inc. and President and Chicf Operating Officer of The Standard j Oil Company, a producer and refiner of petroleum i l I, products. 1 4 l l l i 1 1 1 I i
" }
i .. . _ _ ------------ n
q Executives of the Company and Subsidlaries Centerior Energy Corporation Operating Companies The Cleveland Electric illuminating Company Chairman and Chicf Executive Officer. . Robert Af. Ginn Chairman and President . Richard A. Afiller Chief Executive Officet. , Robert Af. Ginn Executive Vice President . RobertJ. Farling President . . RobertJ. Farling , Executive Vice President . Paul Af. Smart Senior Vice President . . Alan D. Wright Senior Vice President . , Lyman C. Phillips Vice President-Marketing . . Gary). Greben Vice President Vice President-Nuclear . Alvin Kaplan
& General Counsel l'ictorE Greenslade Vice President-Finance, Vice President Finance and Administration & Legal . . John S. Levicki Chief Financial Officer . EdgarII. Afangan3 Vice President-Distribution Treasurer . Gary A1. Isawkinson & Services. William K. AlcClung Secretary . E. Lyle Pepin Vice President-Power Supply . . Richard A. Peterka Secretary & General Counsel . Car / E. Chancellor <
Controller . RaymondJ.Jircusek Centerior Service Company Treasurer Tpnce R. Aforan l Chairman and
. Robert Af. Ginn l Chief Executive Officer.
I President . Richard A. Afiller The Toledo Edison Company Senior Vice President-Finance Chairman and . and Chicf Financial Officer . . Edgar /I. Afaugans Vice President-Fossil Chief Executive Officer. President . Robert Af. Ginn
. Paul Af. Smart Operations & Engineering . Richard R Crouse Executive Vice President . Lyman C. Phillips Vice President-Nuclear Afurray R. Edelman Senior Vice President-Vice President Engineering & Operations , Richard R Cruuse
& General Counsel t'ictor E Greenslade Vice President-Vice President-System Customer Operations . . David L Afonscau Engineering & Operations William D. Afasters Vice President-Market!ng . Thomas Af. Quinn Vice President-Administration . Stanley E. Wertheim V ce 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 R Afartin Treasurer . Gary Af. Isawkinson Secretary and Tcc1 surer .Jennifer A1. Shriver Secretary . E. Lyle Pepin h
4
e hare Owner information Dividend Reinvestment and Stock Purchase Plan Share 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 certificates, dividends and changes of address should customers of the Company's subsidiaries a convenient be directed to Share Owner Services at the Company. To reach Share Owner Services by phone, call the i means of purchasing shares of Company common stock by irwesting a part or all of their quarterly dividends following numbers: as well as making cash irwestments. In addition, Localcalls in individuals may establish an Individual Retirement Cleveland area 6424900 or 447 2400 . i Account (IRA) which irwests in Company common stock ' Outside Cleveland area 1 800-433-7794 through the Plan. Information and a prospectus relating to the Plan and the IRA may be obtained from Share Please have your account number ready when calling. Owner Services at the Cog 1pany. Audio Cassettes Available
- Share owners with impaired vision may obtain audio The Company will furnish to share owners, without cassettes of the Company'sQuarterly Reports and Annual charge, a copy of its most recent annual report to the Report To obtain a cassett(simply write or call Share 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 Centerior Energy Corporation %, " 6200 Oak Tree Boulevard, Independence, Ohio Independent Accountants Telephone Number (216)447-3100 Arthur Andersen & Co.,1717 East Ninth Street Cleveland, Ohio 44114 Mall Address Centerior Energy Corporation l P.O. Box 94661, Cleveland, Ohio 44101-4661 Common Stock Listed on the New York, Midwest and Pacific Stock Exchanges. New York Stock Exchange symbol-CX. Annual Meeting The annual meeting of the share owners of the Company Registrar will be held April 26,1988. Owners of common stock as of February 26,1988, the record date for the meeting, AmeriTrust Company National Association will be eligible to vote on matters brougnt up for share 900 Euclid Avenue, Cleveland, Ohio 44114 owners' consideration. , ( Notice: The annual report and the financial statements Transfer Agent herein are for the generalinformation of the share wners of the Company and are not intended to be used Centerior Energy Corporation in connection with any sale or purchase of securities. Share Owner Services P.O. Box 94661, Cleveland, Ohio 44101 4661 Stock transfers may be presented at Wells Fargo The Company is an equal opportunity employer. Securities Clearance Corporation,45 Broad Street, New York, N.Y.10004. l 42 l
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