ML20246A172
| ML20246A172 | |
| Person / Time | |
|---|---|
| Site: | Beaver Valley |
| Issue date: | 12/31/1988 |
| From: | Rogers J OHIO EDISON CO. |
| To: | |
| Shared Package | |
| ML20246A132 | List: |
| References | |
| NUDOCS 8905080190 | |
| Download: ML20246A172 (70) | |
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- Service Area
- Ohio Edivan Cornpany and Itnneytvania Power Company ,
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.p The Ohio Edison System is the 16th largest '
, .l Investor-owned electric system in the United ,,
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- States, based on totalkilowa'tt-hour sales. , Ohio'.
Edison Company is headq tartered in Akron, J Ohio, and its subsidiar); frnnsylvania lbwer Company; is headquartered in New Castle, i
I Iknnsylvania.' The Companies provide tvitable i . .
electric service to more than'one million cus-On the cover:
tomers n'ithin 9,000 square miles in centraland -
Knoping our serv 1ce competit\volY northeastern Oblo and Western lknnsyft'ania. 'l prir.ed is essentla to our success.
Equally important are customer -
.sirvice and participation in -
community projects like thiu l3 ornamentallighting restoration
^ in Medina, Ohio. '
f, Contents l :- . President's Message ,~ , , .2 L Review of Operations . . , ,, ,4 l'inancial Review . , , , , .. 17
... ' Stocklioider Information - , ,,,40 Directon and Management ' , , . , ,41 L,
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j , Service Area Ohio Edson Cornpany and IYnnsylvarua IN>wer Company . PA. ingfield 01110
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. The Ghio Edison $3 stern is the 16th largest i ,,
, -1 investor 9wned electric systern in the' United l States, based on total hilowatt-hour sales. Ohio
-l
. Edison Cornpanyis headquartervdin Akmn, , )1 1
. I Ohio, and its subsidiar); frnnsyltvania 16wer l
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company, is headquartered in New Castle,'. j iknnsyltrania. The Cornpaniespmt>/de reliable '
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. electric service to more than one inillion cus . <
h On the covon torners within 9,000 square miles in central arul Keeping our service competltivoit priced is essential to our success.
'riortheastern Ohio and' western lknnsylt'artia. l Ectually important are customer service and participation in community projects like this 4 ornamental fi Dhting restoration in Medina, Ohlo.
f
'l Contents i President's Me.uage. , , .2 Review of 0perations . , , , .4 11nancial Review . , , , .17 ; ' . stockholder information . . .40 Directors and Managetacnt . .41 !
J I
Fin:nci:;l Hl;hli;hto For the Years Ended December 31 1988 1987 Change fin milix>ns, except per share amounty Kilowatt-flour Sales '35,685.0 29,710.4 4 20.1 % Operating Revenues $ 2,142.6 $ 1,779.6 + 20.4 % Operating Expenses and Taxes 1,645.6 1,382.1 + 19.1 % Operating Income 497.0 397.5 + 25.0% . Allowance for Funds Used During Construction, Net 18.1 324.6 - 94.4 % interest and Other Charges 337.1 374.8 - 10.1 % Net income 218.9 412.9 - 47.0% Earnings on Common Stock 186.2 364.7 - 4 8.9% Earnings per Common Share: Ilefore Disallowance $ 2.06 $2.62 - 21.4 % After Disallowance $ 1.2 2 $2.40 - 49.2 % j Dividends per Common Share $ 1.96 $ 1.96 - Dividends on Capital Stock $ 330,7 $345.0 - 4.1 % j] Capital Expenditures: Construction of Facilities $ 182.4 $673.6 l Nuclear Fuel 32.9 24.7 ; other Caphal leases 6.3 6.9 Total $ 221.6 $705.2 - 68.6% Internally Generated Cash 102.1 153.7 - 33.6% External Financing: New Financing $ 186.5 $ 1,391.8 Redemptions and Repayments 528.5 358.6 Net External Financing $(342.0) $ 1,033.2 Return on Average Common Equity: ficfore Disallowance 11.8 % 15.0 % After Disallowance 7.0% 13.8 % ! Operating Revenues Nima Return on Average Common Equity ownm) S23 17.5 ym i 1-- . ..-.f; ': _f'
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l President's Message We set new sales and peak demand records in 1988. Based on these sales levels and several other factors, we initially reported earnings of . ]
$2.06 per share of common stock. That was less than the 52.40 we earned in 1987, but it wasn't unexpected. We had recognized earlier ;
that with a new nuclear unit going into service at the Beaver Valley l plant, there would be no equity return on the unit until we receive l regulatory approval to include it in rates. ! llowever,1988 carnings were revised in March 1989. As a result of negotiations with the staff of the Public Utilities Commission of Ohio (PUCO), we reached an agreement regarding disputed cost disallowances associated with the construction of the Beaver Valley unit as well as Unit I at the IYrry nuclear plant. Following the agreement, approved by the Commission on March 7,1989, we took a one-time, noncash net write-off of $128 million and revised earnings to $1.22 per share for 1988. While no one likes write-offs, the value of putting the uncertainties of the write-off exposure behind us is recognized by the financial -! markets as well as by your management. l Equally important, our cash position and our ability to maintain divi-dends at current levels were not affected. From a sales and operating standpoint, we had an exceptionally good year. We: w Set records in total kilowatt-hour sales of electricity and in revenues, l m Met the greatest peak dertand for electricity in our history, t Nearly doubled our sales to other utilities, t Brought the costs of Perry 1 into rates with the least possible impact on electric bills, n Further improved our financial strength by reducing interest and dividend costs, and s Met or exceeded all of our operating performance goals. Economy and Weather Help Spur Sales increased demand from industrial customers, strong sales to other utilities and a hot, dry summer combined to produce a record "In looking back on 1908, 35.7 billion kilowatt hours in sales for 1988, an increase of 20.1 percent over 1987. We also set four peak load records, the last occurring on all of us can be proud of August 2 when demand hit 5,027 megawatts. That was the third con-what the people of our secutive year in which we set new peak demand records. Companies didin delivering g.gg g,3 g ,ho hwn bl@* pin in 1988, a 1at' record amounts of elec- ] ahead of schedule, we achieved a five-year marketing goal of adding ] tricity and controlling 3M billion kilowatt hours of new business by the end of 1989. We have l expenses." now set our sights on adding another one billion kilowatt-hours of { new business this year. But the most dramatic increases in sales have been those to other , i utilities: they have more than tripled over the last five years, hitting
]
$254 million in 1988. And in 1989, the Potomac Electric Power Company j will begin buying an additional 532 million of power annually under u l J
1987 agreement that extends through the year 2005.
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Keeping Rates Competitive Knowing that each dollar we can save is equal to a dollar of revenue, we're cutting costs wherever we can to stay competitive. Among our efforts:
- In 1988 alone, we retired about $400 million in debt and preferred and preference stock, which reduces our annual interest and dividend cost by more than $50 million.
. We formed two subsidiaries in 1988 that, when fully operational, will save an estimated $10 million annually in financing our nuclear fuel inventory and accounts receivable.
e We continued to deliver reliable customer service with nearly 9 percent fewer employees than it took in 1982, which is now saving us about $26 million annually.
+ Centralizing several operations, such as dispatching and meter repair, ,
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will reduce annual expenses an estimated $3.5 million. 9
-(' , w/
t Employee safety achievements translated into savings of more than wh)f . . ,
$1.2 million in 1988. b -f We have also succeeded in working out agreements for electric rates that are competitive and fair to our stockholders and customers. <
]
In January 1988, the PUCO approved most of the terms of a rate plan h we reached with the Commission's staff and the Ohio Consumers' Counsel. The new rates, far lower than had been widely predicted, include recovery of Perry I costs and add $152 million in annual revenue. In April, the Pennsylvania Public Utility Commission approved the plan of our subsidiary, Pennsylvania Power Company, to phase in Perry I costs over several years, ultimately adding $67.1 million in annual revenue. Also in April, the PUCO approved our plan to make accounting modifications that, without affecting rates, will have a positive impact on 1989 earnings. The plan also delayed the need to bring Beaver Valley 2 into rates until 1990. Employees important to Our Success in looking back on 1988, all of us can be proud of what the people of our Companics did in delivering record amounts of electricity and controlling expenses. Many worked under difficult conditions to make sure customers had the power they needed, and those efforts are especially appreciated. Our continued progress also would not have been possible without the support of stockholders. I assure you we will do everything we can to keep earning that support.
- A wt f w, C_-
Justin T. I ogers,Jr. President Man h H.19H9 3
Review of Operations SALES RESULTS Sales set now record Strong growth in customer demand for electricity and sales to other utilities pushed our total sales to a record 35.7 billion kilowatt-hours in 1988, up 20.1 percent over the previous year. Those sales produced record operating revenues of $2.1 billion,20.4 percent better than in 1987. Fueling our record sales were an upswing in the local economy, temperature extremes that caused heavy use of electric heating and air conditioning, and continued growth in the number of customers we serve. Our aggressive marketing efforts played a major role as well. In 1984, we set out to add 3.5 billion kilowatt-hours of new sales by the end of 1989. We reached that target in 1988, a year earlier than expected, and have set a new goal of one billion additional kilowatt-hours for 1989. Area businesses contribute to sales growth Major industries like steel and automakers have become more com-petitive in U.S. and foreign markets with the help ofimproved pro-ductivity, modern operations and a lower value of the dollar overseas. Incally, the vitality of these industries led to an d.9 percent increase in kilowatt-hour sales to industrial customers in 1988. Our service area also benefits from the growth of other industries. For example, The resurgence of the steel c'ectric sales to manufacturers of plastics have grown an average of industry in our service area is 8 percent annually since 1980, and jumped 14 percent in 1988, lilustrated by Empire-Detroit Steel Division, which increased its electricity use by 25 percent g nual revenue from elect ric sales. Tb help encourage industrial gmwth, we offer special five year price incentive rates to qualifying businesses. Introduced in 1984, these special rates have helped 100 companies m , D> ..
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start up or expand their operations, creating more than 6,300 jobs and adding $27.6 million in annual electric sales revenue. Other incentives include special rates for process heating and for steel companics that use electric metal-melting furnaces. Also, heavy consumer demand has caused commercial business growth, partic-ularly for new retail shopping centers, Kilowatt hour sales to com-mercial customers were up 4.8 percent in 1988. Qualit / service esternial to residential sales , Weather conditions and the growing number of customers helped 4.' push residential sales up 4.5 percent over 1987. Quality service and
~
H I a close working relationship with heating and cooling equipment dealers and building contractors are essential to our residential marketing efforts, since about 87 percent of the energy used in g ' homes is open to electricity and competing energy sources. For . p : example, we involve dealers in our Alternative Flus program, which - . j,< . , helps make sure that heat pumps are properly installed and running M
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pump specialists follow up by inspecting each system installed by l,;, . a participating dealer. Another way we promote quality service is Wu& . -
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through our Pure Comfort Guarantee, the first of its kind in the elec- ^ as tric utility industry. Very simply, we guarantee custome". their money Sovereign Circuits, a manufac-back if, during the first year of operation, they are not satisfied with turer of prototype, multilayer a heat pump installed by a participating dealer. We also offer a special printed circuit boards for the rate for large, energy-efficient watcr heaters and low-interest financ-electronics industry, is one of ing for electric heating systems. And during the year, another 707 a growing list of companies customers took advantage of our special commercial space and locating in our service area, water-heating rate, represent!ng $l.5 million in annual revenue. l Sales to Other Utilities (bdine of kraet sur9 lU 10 0 M Nearly 9,000 residential cus-
- - i tomers were added to our system 5,0 in 1988, and everage annual
,U residential use rose to a record
- ~ - - . high of 8,425 kilowatt-hours.
i , 7
Utility sales strong despite intense competition Revenues from sales to other utilities reached a record $254.1 million as kilowatt-hour sales jumped 75.4 percent from the previous year. Controlling fuel costs has helped keep our prices competitive when market prices for the oil used by many East Coast utilities continued to fall. We increased our long-term sales commitments in January 1989 when our agreement with the Potomac Electric Power Company (PEPCO) expanded from 200 megawatts to 300 megawatts. Another M e,, .c 150 megawatts of interruptible sales will be converted to firm, long-k q , .~.< q
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term sales inJune 1989. Through the year 2005, we expect our revenue ph g. from the PEPCO agreement to average $150 million annually. x. FINANCIAL DEVELOPMENTS Rntes include new plant costs Perry Nuclear Power Plant Unit I and the Beaver Valley Power Station Unit 2 are completed and operating, and we have been working to include the costs of these units in our rates with the least impact pos-sible. In January 1988, the Public Utilities Commission of Ohio (PUCO)
.x approved our plan for a one-time rate increase of about 10 percent, or l 5152 million in annual revenue, for Perry I costs. The new rates were far lower than the 35 to 50 percent increase some groups had expect-The " Pure Comfort Guarantee" ed. In May, the Pennsylvania Public Utility Commission approved for heat pumps. which is our com' Penn Power's plan to phase in its share of Perry 1 costs gradually mament to customer satisfaction, over several years, ultimately representing 567.1 million in additional was the themo of commercials annual revenue BeavCr Valley 2 iS in service but not yet included in featurinn Cleveland Browns retail rates. As a result,1988 earnings were down, in part, because quarterback nemio Kosor.
the Company did not earn an equity return on its investment in the generating unit. Ilowever, the PUCO approved the Company's plan Annual Peak Loadwgam -- UK10
-400 But ter equipment, improved opor- ,
ating procedures and extensive .. M00 ', training enablo us to safely per- _ N00 form rnore tasks with two-man
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to make accounting modifications that will have a p' adve effect on 1989 carnings. The plan delayed until 1990 the need to include ficaver Valley 2 costs in rates. We own or lease nearly 42 percent of Heaver Valley 2 and about 35 pucent of Perry 1. Financing costs reduced With the completion of evo new generating uss in 1987, our construction spending dropped to 5189 million in 1988- the lowest point in 16 years. Nearly all of our capital needs were met with avail-able funds, rather than new issues of debt or stock We also reduced annual interest and dividend costs by more than $50 million by redeeming or retiring debt and preferred and preference stock dur- - ing the year. We expect to further reduce financing expenses with - two subsidiaries formed late in 1988 to refinance our nuclear fuel - inventory and accounts receivable. Our estimated annual savings will f j be about $ 10 million. Recognizing the Company's improved financial y ; . position, Standard & Poor's Corp. and Duff & Phelps Inc. increased s n Mv the ratings of the Company's securities. They cited the operation of m Ji-Perry I and Beaver Valley 2, inclusion of Perry I costs in electric rates and reduced construction spending.
- _~ 3 '
OPEH ATING PEFiFORM ANCE Generating plants meet customer demands Common stock dividends have The plant construction program now completed was undertaken to been paid every year since Ohio ensure a reliable supply of electricity for customers. The new units Edison was formed in 1930; up-helped us during the summer when, on four separate occasions, cus-to-date check processing and tomers set power demand records. The highest mark of 5,027 mega- rnailing equipment helps assure watts occurred on August 2. Since 1986, our peak demand has risen prompt payments to about 18.5 percent, or 784 megawatts. We avoided an estimated peak 193,000 stockholders. demand of 5,128 megawatts on August 17 with special rate l
- Constructiortetpenditurnstamoso -
. teslimated
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600. Extensive training of plant opera-
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CO tions and maintenance employees 4 helped keep our plant operating 100 of ficiency high, which helped us L , , 150 meet record customer demand in 1988. Q+Q-Q-Q-t t' O .- 11 (: 1
l agreements that allow us to reduce service temporarily to certain customers. A portion of service to 8 major industrial customers and l more than 7,000 commercial and residential customers was interrupted, reducing system peak demand 135 megawatts. In addition to reduc-ing peak demand, the agreements for interruptible service previde customers with a pricing alternative that lowers their overall energy costs. We also work to ensure that our plants perform as efficiently as possible. I)uring the year, we achieved 80.1 percent availability for 1 our coal-fired plants, which exceeded our 1988 goal. Productivity and lower costs strengthen earnings As a measure of how well we do our job, our operating effectiveness, or total power generation per dollar of operation and maintenance expense, was well above our goal in 1988. Our average system coal costs were down 2.7 percent from 1987, saving some $13.5 million in total fuel costs. Timely spot purchases of coal and flexible contracts with suppliers helped the Company maintain its status-for the sixth consecutive year-of having the lowest average fuel cost among C. -. Ohio's investor-owned electric companies. With the help of a well-qualified work force, we have a good record of finding ways to do our jobs better. For example, centralization of our dispatching opera-ticas will ultimately save about $2 million annually. Combining our With our solid transmission net-work and relinble supplies of needs by $1 million and reduced annual maintenance costs by some competitively priced electricity, we achieved a record 11 bihion kilowatt-hours iri salon to other utilities in 1988. As a result of our continuing efforts to improve performance, it now takes about 9 percent fewer employees than it did in 1982 to deliver high-quality service to a customer base that has grown by 50,000 Cost of Coal per Million Btu .
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i 1 l l l since that time. This has meant an annual savings of more than j
$26 million in wages and benefits. With emphasis on training pro-grams and improving the work environment, we continued to improve safety. Additional efforts promote good health practices to help control the rising costs of health care.
Clean-air projects seek less costly af ternatives The Company is a leader in the national clean coal research program that is seeking the most cost-effective means of reducing power plant emissions. We currently have seven projects at our power plants, with , gg Y more than 5100 million in support funds from federal and state agen-cies and private corporations. if. successful, these projects can lead to
}I[ % .1 v'% t' new technologies that will reduce emissions at a lower cost than present f methods. Meanwhile, Cor.gress is being subjected to continuing ,
y pressure to pass " acid rain" legislation regardless of costs and without benefit of results from the promising clean-coal research. SOCI AL RESPONSIBILITY Responding to community needs The 1988 summer drought took a heavy toll on the crops of our farm 42ueu-customers.1b help ease their financial burden, we offered farmers cieveland Browns quarterback whose families depend on income from crops that were destroyed by Bernie Kosar, Entertainment the drought the opportunity to defer all or part of their electric bill Tonight's Mary Hart end other payments until the 1989 harvest. For other customers who face dignitaries helped Company financial difficulty, we have a number of programs that offer various President Justin T. Rogers, Jr., types of assistance. Project Reach, now in its lifth year, provides kick off an area United way mp ign that raised a re rd one-time financial assistance to customers who have difficulty pay-8 9 # *i"i "- ing their energy bills. With employee and customer contributions matched dollar for dollar by the Companies, Proicct Reach has raised nearly 5710,000. Customers ServedinnHumi - 1.25 t .00 Last summer's severe drought
'i- 0J5 was especially hard on the crops 1 1
,, ._,, _ _, and income of area farmers, and 0.50 we responded by of fering to
~ ~ ~
0.25 defer bill payments of quahf ying J. _. custorners until the next harvest. M 0 15
Community safety is a top goal Ohio Edison's CrimeWatch and Penn Power's Utility Watch programs together represent the cornerstone of our efforts to deter crime and improve the quality of life in the communities we serve. Employees in radio-equipped vehicles are trained to recognize suspicious activi-ties and potential emergency situations and report them to officials. Our efforts include projects that help teach children safety awareness. j At schools, children learn to identify our Company vehicles as a l J '
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t place to seek help, and we distributed more than 77,000 reflective ea
%ff safety stickers so bike riders and trick-or-treaters can be mere visible ,
h.f to night traffic. To help stranded motorists get the help they need,
-s .
.' N' over the past two years we distributed 916,000 " Call Police" signs
- f , through area police departments, newspapers and our customer
.c 1 - .,
., service offices.
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4'1"(9 ' Informat!on programs help educate consumers d *. -{
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Continuing surveys point out that customers rely on us for informa-k i
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.. tion about their electrie service. We meet this need in various ways, including emphyces who volunteered their time in our Speakers Bureau and reached 59,000 customers in 1988. Schools present a As part of our community sufoty special opportunity to teach future customers about energy and the program, we distributed more than 77,000 reflective safety " E " "
stickers that help make children power plants, and we provide hundreds of classroom resources, more visibiu to night traf fic. including books, films and educational computer programs. Our mini grant program, now in its third year, provided 21 area teachers with awards of up to $300 in 1988 to develop electricity related classroom projects. 10
Fin ncist Revi1w Management Report The consolidated financial statements were prepared by the management of Ohio Edison Company, who take responsibility for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles and are consistent with other financial information appearing elsewhere in this report. Arthur Andersen & Co., independent public accountants, have issued a report on the Company's j financial statements in which they comment on various urrertainties, as shown on page 37. The Company's internal auditors, who are responsible to the Audit Committee of the Board of Directors, review the results and performance of operating units within the Company for adequacy, effectiveness and reliability of accounting and reporting systems, as well as managerial and operating controls. The Audit Committee consists of four nonemploge directors whose duties include: consideration of the ade-quacy of the internal controls of the Company and the objectivity of financial reporting; inquiry into the number, extent, adequacy and validity of regular and special audits conducted by independent public accountants and the internal auditors; the recommendation to the Board of Directors of independent accountants to conduct the normal annual audit and special purpose audits as may be required; and reporting to the Board of Directors i the Committee's findings and any recommendation for changes in scope, methods or procedures of the auJ.iting ; functions. The Audit Committee held three meetings ; during 1988. l l
/
' / 2
- 11. P Burg W. A. Daniels Senior %ce President Comptroller Chief Flaancial Otticer l
17
Managernant's Discusalon and Analysis of Rasults of Operations and Financial Condition j l Results of Operations Note 3 to the Consolidated Financial Statements). The l Kilowatt-hour sales continued their steady growth Company and Penn Power stopped deferring expenses during 1988 with a strong gain over 1987 sales. How- attributable to Perry Unit 1 in February and May 1988, i ever, results for 1988 reflect a write-off by the Company respectively, when new rates reflecting Perry Unit 1 of $201,260,000 ofits investment in Perry Unit I and costs became effective. During 1988 and 1987, the i Beaver W! ley Unit 2 during the fourth quarter of 1988 Companies deferred $147,610,000 and $71,070,000, (see Note 2 to the Consolidated Financial Statements). respectively, of operadng costs and 5134,173,000 and This write off was in addition to a $44,400,000 reserve $ 18,003,000, respectively, of interest expense asso-provided in 1987 for disallowance of Perry Unit I ciated with the units. costs and resulted in a $127,645,000 reduction to 1988 Total kilowatt-hour sales were up 20.1% in 1988 due carnings (5.84 per share of common stock). Operating principally to a 75.4% increase in sales to other utilities costs associated with these nuclear generating units, compared to 1987. Sales to system customers were at w hich began commercial operation during the fourth record kvels in 1988 with increases of 8.9%,4.8% quarter of 1987, are also renected in operating resuhs and 4.5% in kilcwatt hour sales to industrial, com-for 1988. The Companies were granted rate increases mercial and residential customers, respectively. The in the first tnif of 1988 which included recovery o r increase in kilowatt-hour sales in 1988 continues the Perry Unit I costs, but the Public Utilities Commission sales growth experienced in 1987 when total kilowatt-of Ohio (PUCO) and the Pennsylvania Public Utility hour sales increased 5.5% over 1986. Commission (PPUC) reduced the Companies' allowed Operating revenues for 1988 reflect the increases in rates of return from the previously authoriecd levels. kikiwatt-hour sales and base rates. In addition, the :
'laken together, these factors produced earnings per comparison to 1987 is affected by the " mirror CWIP" share of common stock of $1.22 in 1988 compared to adjustment recorded in 1987 as discussed in Note I to $2A0 in 1987. the Consolidated Financial Statements. The following Operating results for 1987 renect approxima ely summarizes the sources of the changes in operating 546,200,000 ($.30 per share) of noncash charges to revenues during 1988 and 1987:
carnings principally due to the disallowance reserve 1988 1987 for Perry Unit I costs and the write-off of terminated on mens ; sales to Residential, commercial construction project costs. and Industrial customers.
,I,he following summary shows, by income state- Inacased kilowait. hour sales s 915 s oo l ment caption, nonfuel expenses attributable to Perry change m base rates 101.7 (o.t)
DC"'"$C '" f"CI '""'"Y ' " Unit I and Heaver Wiley Unit 2 operations in 1988 and (32 N _ 059) 4 3 Net billed revenue inercase 16).O $4 0 1987. Also shown is the noncash return (allowance for Accrued phase in plan I f.unds used during construction) included in net in' rnenueusee below) 29.5 - l come attributable to the units in 1987 and 1986. 1:uect of revenue refund provmon.s 79.7 (3863 pm sales m tuihnes 97 4 la 6 i9c i9so
~ --" -
ith nWihonh) vhu opennon expenses s iss n s o2a s_ m inacase sMo sr~ wnrenance is 9 s2 - Pun Non for depiccianon S 3 to 9 -- A Supreme Court of Ibnnsylvania ruling with respect oenus un s 23 6 n' - to Penn Power's recovery of costs for four nuclear Allow,uu for equity funds generating units terminated in 1980 resuhed in a used duong consnwoon - 1H9 9 204 2 Allow ance for bornmed funds decrease in operating revenues, other income and used dunng conuruenon - 90.H 983 incorne taxes in 1987 of $2,300,000, $8,300,000 and
$ 3,700,000, respectively, and an increase in other The adverse eH.ect of these additional costs prior to "
interest expense of $400,000. Additionally, in 1980 a recovery through electric rates was somewhat offset by settlement agreement was adopted by the PPUC PUCO and PPUC accounting orders which permit the whereby Penn Power is currently making refunds to its Companies to del.et certain lleaver Wiley Unit 2 and customers in connection with certain income taxes Perry Unit I costs untu their recognition in rates (see . normah. zed in prior years. 'I,he ef.fect of this settlement decreased operating revenues and income taxes in 1986 by 56,500,000 and 57,200,000, respectively, and increased other interest expense by $700,000, result-ing in no material effect to 1986 net income. The net revenue effects of these transactions are reflected in l the tabic above. 18
Fuel costs increased in 1988 due to the operation of - tions, which carried an effective annual interest rate of lleaser Valley Unit 2 and Perry Unit 1. Fuel prices were 12.5%, offset by the issuance of $196,100,000 of new I down in 1987 compared to 1986, producing the over- long-term debt with an effective annualinterest rate of all reduction in 1987 fuel expense. The Companies' 6.0L Dividends on preferred and preference stock purchase of a portion of Cleveland Electric illuminating declined in 1988 as a result of the Company's redemp-Company's Perry Unit I capacity was primarily re- tion of approximately $103,200,000 of preferred and sponsible for the increase in purchased and inter- preference stock in 1988, changed power in 1988. This capacity purchase The electric utility industry is subject to innationary arrangement will end in May 1989. The Perry power pressures similar to those experienced by all other in-purchase began wah the unit's November 1987 com- dustries. Tb the extent that the Companies incur addi-mercial operation and, along with additional power tional costs or receive benefits resulting from the purchased in 1987 for sale to other utilities, resulted in effects of inflation, it is anticipated that those effects the increase in purchased and interchanged power in will ultimately be reflected in the Companies' rates. 1987 when compared to 1986. Capital Resources and Liquidity in addition to the effect of the commercial opera- With the completion of perry Unit I and Beaver Valley tion of Beaver Valley Unit 2 and Perry Unit 1, the costs Unit 2 in late 1987, capital requirements in 1988 for of displaced power resulting from preliminary opera- the Companies' construction programs, capital leases tions at these units and asbestos removal at several of and nuclear fuel were significantly reduced-to the Company's generating units were responsible for approximately $222,000,000 from the $700,000,000-the increases in other operation and maintenance 5800,000,000 level of recent years. Over the last expenses for 1987 when compared to 1986. The asbestos Dve years these requirements were approximately removal costs and costs incurred during an outage at $3,400,000,000 with about 60% of the funds provided the Bruce Mansfield Plant combined to increase main' from external sources. The 19891993 construction tenance expenses during 1987 and were primarily program and capital lease requirements are currently responsible for the decrease in 1988 maintenance estimated to be approximately $1,235,000,000 (ex-expenses when compared to 1987. cluding costs of nuclear fuel). The Companies have Several events which occurred during 1987 affect additional cash requirements of approximately the comparison of other income to 1988 and 1986. In $1,051,000,000 for the 1989-1993 period to meet addition to Penn Power's 58,300,000 write-off of the maturitics of, and sinking fund requirements for, four terminated nuclear units described above, other long-term debt, long-term obligations (excluding income for 1987 was further reduced by an additional nuclear fuel), and preferred and preference stock.
$11,000,000 write-down of the Companies' unrecovered All or a major portion of maturing debt is expected investment in the terminated units. The write-down to be refunded on or prior to maturity.
resulted from accounting standards prescribed by the Investments for additional nuclear fuel during the Financial Accounting Standards Board which require f ve years 1989-1993 are estimated to be approximately the cost of such projects to be recognized as an asset
$ 159,000,000, of which $30,000,000 applies to 1989, only to the extent of the present value of revenues to During the next five years, the related nucicar fuel be collected during the period of cost recovery from liabilities are expected to be reduced by approximately customers. Partially offsetting these reductions was a $315,000,000 as the Companies recover such costs gain of $27,700,000 recognized from sale and lease- through their electric rates.
back transactions in 1987. In accordance with PUCO At December 31,1988, the Companies had ap-orders, the Company deferred income tax expense in proximately $354,000,000 of cash and temporary cash excess of this gain, resulting in no after-tax effect investments and approximately 518,000,000 of funds on earnings. held in escrow from previous pollution control financ-The reduction in mterest on long-term debt durin8 ings. Penn Power also has $29,000,0e0 or snort-ierm 1988 and 1987 resulted from the redemption of high bank lines of credit, of which 54,000,000 was utilized coupon long-term debt. Subsequent ta December 31, as of December 31,1988. 1987, the Companies decreased their net long term debt outstanding by approximately $112,000,000, con-sisting of $308.100,000 of long term debt redemp-19
The Company recently established two wholly The PPLtC granted Penn Power a $67J00,000 base owned subsidiaries to finance nuclear fuel and accounts rate increase to be phased in beginning May 4,1988, receivable. The fuel subsidiary is expected to purchase which included investment recovery thr Perry Unit I nuclear fuel, which is currently under lease to the and associated operating costs. Reference is made to Companies, through the incurrence of approximately Note 3 to the Consolidated Financial Statements for a 5400,000.000 of a long-term bank credit agreement in discussion of the phase in of this rate increase. 1989. The other subsidiary will finance a portion of On April 14,1988, the PUCO approved the the Company's accounts receivable in 1989, initially Company's request for certain accounting modifica-through a bank credit agreement of approximately tions which will allow the Company to delay an in-
$ 120,000,000. crease in its electric rates to recover Beaver Wiley Sales by the Company of first mortgage bonds against Unit 2 costs to no sooner than January 1,1990. The property additions and of preferred stock require that Company was authorized to continue to defer nonfuel applicable earnings coverage tests be met. With respect operation and maintenance costs, depreciation ex-to the issuance of first mortgage bonds under the pense, property taxes and interest expense associated Company's first mortgage indenture, the availability of with Beaver Wiley Unit 2 until such costs are recog-property additions is more restrictive than the earn- nized in the Company's electric rates orJune 30,1990, ings test at the present time and (excluding Perry Unit whichever is earlier. In addition, the Company was 2 property additions) would limit the amount of first permitted to adjust its depreciation rates in April 1988 mortgage bonds issuable against property additions to to take into account the revised estimated service life
$137,000,000. The Company is currently able to issue of certain of its facilities, which has the effect of reduc-
$1,102,000,000 principal amount of first mortgage ing the depreciation accrual rates. The Company was bonds against previously retired bonds without the also authorized to amortize certain deferred income need to meet the above restrictions. Under the carn- tnes and investment tax credits over a period not to ings coverage test contained in its charter the Company exceed twelve months. As a result,1989 earnings will could issue at least fl06,000,000 of preferred stock at be positively affected, but with no corresponding cash an assumed dividend rate of 10.5% based on carnings flow impact, for the twelve months ended December 31,1988. If The Company plans to file for a rate increase with the Company were to issue additional debt prior to the the PUCO in 1989 principally to recover capital and time it issued preferred stock, the amount of the pre- operating costs associated with Beaver Wiley Unit 2 ferred stock which would be issuable would be reduced. and the deferred Perry Unit I and Beaver Wiley Unit 2 l During 1988 the Company's retail electric rates were costs described in Note 3 to the Consolidated Financial increased in Iwo increments, in February, rates were Statements. The specific structure of the rate request increased to produce approximately $109,000,000 of has not been finalized. Ilowever, the ultimate approach additional annual revenues. The February rate increase taken will reflect a careful balancing of shareholder included credits to customers for amounts previously and customer concerns with a view toward enhancing collected applicable to a portion of the Company's the Company's competitive position.
Perry Unit 1 investment included in rate base while it was under construction. The Perry credits ended in December 1988 at which time the Compan:'s elec-tric rates were increased to produce approximately
$38,000,000 of additional annual revenue. On Octoner 1,1988, the Company was granted an interim whole-sale rate increase (to be collected subject to refund) by the Federal Energy l(egulatory Commiwinn designed to produce 518,200,000 in additional annual operating revenues.
20
C:f rcted Fin 1ncl;l Dct3 Ohio Eddon j 1 1 1 I 1988 1987 19H6 19H5 1984 On thousands, excepi per dure arnount4 1 9PJ'd!IngAynon ,,_ s2,142,572 81,779.556 s i,741,9m s i,754,749 $ 1,637,104 Operating locorne 496,996 397,46H 392,357 380,354 342,713 Net incorne 21H,888 412,920 4to,H2H 370fsH5 339,333 l'arninys on Conirnon Stock 186,170 364.657 359,825 318,073 290164 Larnings per $ hare of Coinrnon St<x k (based on weighted average nurnber of shares outstanding during the year) 1.22 2.40 2A7 2A5 2.50 ; Dividends Declared per_ Share of Comenon St(x k 1.96 ' l .% 1.92 1.88 1.84 lbtal Assets at December 31 7,555,523 7M)?,045 7,926,343 7,325,971 6,727,7G3 I l Preferred and Preference sim k Subject to i Mandatory Redempdon 96,802 145,351 160,794 176f04 158,4H3 j Inng lerm Debt . 2,502,054 2,4 % I00 2,781,590 2,691,615 2,440,502 { lung'lerm Obligation's 706,499 H58,758 HH2.271 772,934 H56,671 i Common Stock Data The Company's Common Stock is hsted on the New York and Midwest Stock Exchanges and h traded on uther registered exchanges. Price Range of Cominon Storls 1988 19H7
--1 trv Quarter t hgh inw
~
21 1H.3/8 22 1/4 19-Sh l set ongl Quarter i hgh low n9 I/4 17 1/4 22-1/8 1H- I T2 1 Tiurd Quarter fligh I ow 19 17 3/4 23-l/4 191/H l'ourth Quarter fligh 1.ow 19 1/4 18 21-1/3 16 l/2 Yearly liigh 1.ow 21 17 1/4 23-1/4 141/2 f Pnces are bord on reports pubimbed in & hl; unctf.mrnal for New York shn k l xchange Composac Tranwrions Classification of Holders of Common Stock as of December 31,1988
. ~ . . . . . . . . . ~ . _ . _ . . _ . . . _ . _ . - . _ , _ . l Oakters of ketord shares lleid Number % Numter h.
Indinduals 1"l.075 8828 69,946,368 45.90 l'idunancs 19.638 10.13 4,905,316 3 22 llrokcts 28 0 01 15,400 0.01 Nominees 190 0.10 75 A 61,413 -i9.22 ll.uiks & l'uuncial Institutions 16 0.01 12,625 0 01 Insurance Companics & 0:her Corporations 1,252 0 65 1,441,692 0.94 I Charitahic. Heligious & Educational Insututions 453 0.23 242,073 0 16 l Di""h.If.$.Shayutgy,3her inveynientjyusts 1. I -i6 0 59 H33,026 0.54 j Total 103.79H 100 00 152.507,9 3 100 00 As of.lanuary 31,19H9, there were 192,H3; holders of Quarterly dividends of 49e per share were paid on the 152,50H,572 shares of the Compan)'s Conunon Mock. Companfs Conunon Stock during 19h8 and 19H7, Information regarding retained earnings available for payment of cash dn idends is gn en in Note 6h. l l l 21
. _ _ _ _ _ _ ~ _ _ _ _ _ _ _ _ _ _ _ _
Contolid:: tad Statbmsnts of incorna c hio t~ dim n i i I:or the Years I:nded December $1 1988 19H7 1986 1 On thouwidt except per share amountal Operating Revenues $ 2.142,572 $ 1,779,556 31,741,900 Operating Expenses and Taxes: Operation-I uel 452,535 403,794 422,830 Purchased and interchanged power net - 134,822 55,809 39,388 Other operation expenses 471,637 352,883 275,984 1htal operation 1,058,994 812,4H6 . 738,202 Maintenance 149,851 157,266 137,542 Provision for depreciation and arnortiration 223,983 166,703 153,392 General taxes 188,023 154,504 143,441 Deferred nuclear unit costs (Note 3) (147,610) (71,070) - Income taxes 172,335 162,i99 176,966 lbt21 operating expensc3 and taxes 1,645,576 1,382,088 1,349,543 Operating income 496,996 397,468 392 357 Other Income and Deductions: Allowance for equity funds nsed during construction 3,397 211,936 ZH,360 Disallowed nuclear construction costs (Note 2) (201,260) (4/i,400) - Income tax beneht from disallowed nuclear construction costs 73,615 11,681 - Mi,scellaneous, nct 38,160 40,058 18,666 income taxes--credit (provision) (3,779) 40,302 89,371 lbtal other income and deductions (89,867) 259,577 316.397 Total income 407,129 657.045 70H,754 Net interest and Other Charges: Interest on long term debt 255,346 293,6M 327,970 Interest on long term obligations 63,360 63,101 65,756 Deferred nuclear unit interest (Note 3) (134,173) (18,003) - Allowance for borrowed funds used during construction, I ner of deferred 6ncome taxes (14,664) (ll2h41) (112,449) l Other interest expense 7,405 6,917 5.438 l Subsidiary-.._.._._'s preferred stock dividend requirements- . _ . _ . _ _ _ . . _ _ 10,967 11,0H3 11,211 188,241
. _ _ _ _ _ . Net interest and other charges. _ . _ _ _ . _ . _ _ 244,125 297,926 Net income 218,888 412,920 410.828 Preferred and Preference Stock Dividend Requirements 32,718 <a H,263 51,003 l'.arnings on Corumon Mock $ 186,170 $ 364,657 $ 359.825 Wrighted Average Number of Shares I of Common Stock Outstanding I52,441 151,770 145,527
]
1 l'arnings per Share of Common Stock (based on weighted as crage number of shares ) outstandmg during the year) $ 1.22 $2.40 $2.47 Dividends Declared per Share of Common Stock $ 1,96 $ l .96 $ 1.92 The an ompanyng Noin in tomohdated hnam ul suremenn are an integral part of thew suicinennt I l 1 22 I
Concolid:t:d Oct:nca Ch:Ct3 Ohio Edison Al Det.cmber 31 1988 19M7-Un thouundN Assets Ut!!!ay Planh in nervke, at origmal cant $ 7,157,744 57,221,442 Iru- Arrumulated provision for deprectanon 1,813,611 1,5'3.762 5,344,133 5.647.6HO _ . . Construction work in progrens-Electric plant (Note 9) 4HS,539 46H.2HH Nuricar fuel 218,362 220.151 703,901 bHH.419
~~
6,048,034 6,336.099 Other Property and Investments 29,H 17 17,H3H Current Annetes Ca:,b and cnh equivaltnis 334,093 46HA08 Other tempurary ca>h investments 19,994 309,H63 He ceivabics-Customers (lew accumulated provisions of $2,H60.000 and li 9 47to), respec tively. for untollectible accounts) 1 H1,455 156.39' Other i 23,520 38.H76 Materials and supphes, at average rosi-- l'url $5,363 73.632 Other 71,274 63,'95 Prepapn 65,853 00.3H3 -
,. ..- -.- _e nt s. - - - . -
751,552 1,171,351 Deferred Charges: Ineferred nuclear unit tosts (Note 31 370,856 M9,0'3 L:namortierd sale and leaseback costs 100,495 95.7%6 Propen) uxes 90,184 95,060 l'namortizett loss on reacquired debt 49,910 22,H26 linamurtized (osh of terminated construction proircts (Note 4) 29,505 36,225 Other 85,170 42.H14 726,120 3H1,754 - 87,907,045
$ 7.5 5 5,5,,2 3 Capitalli.ation and Liabilities Capitdication l%cc s.onsohdated Statements of Capitalitauon)-
Lommon nio( k holders' equit y $ 2,530,975 82,651,325 Prrierred hint k +. Not subicci to nund,nory redempnon 312,335 362.335 Sub!cct to mand.nory redempnon 20,000 (R0t N) PrfjCrt rH t' husch ~ Subl ect to mandatory redempuon 1I,700 17,209 pfCICrred Nidit b of(:onstllidated hull.ildlar} ~ Not subject to nundatory redernpuon 48,905 41.905 Subject to mandatory redemption 65,I02 bH.142 Inng term dt bt 2,502,054 2 A74,1(K'l 5,4 H 4,071 5,675,016 InngTersu Ohfigationni Lonstru(non energy trusi(Note ') 380,000 500,000 Nutlear fuel (Notr ~') 244,148 269,720 Capual lra ,es (Note %) 82,358 89,032 706,499 H5H '58 Current I labilitirn: Currentl) payable preferred and preference stock, long tenn dcSt and long term obhgations 271,098 301,969 Notes payable to banks (Notr Hi 4,000 -- Anounts payable 133,024 156,3 H' Mrued taxes 85,250 bh. 61 Ac crued interest 79,531 H l .260 At crued revenor ref unds 7,097 37,445 Other 145,937 70.5M5 665,937 713397 Drferred Credits: Ac cumulated deterred throme taxcn 279,051 205,10M Accumulated deferred investment tax t redits 294,24 H 297,0'O Property taxes 90,184 95 060 Diber 35,533 62,036 699,016 659,274 Cmnsnitsurnts, Guaranteen and Contingenrica (Noten 2, 5 and 9)
$ 7,5 55,5 23 57.907,045 The accompanytog Notes to Lonsolid.ned I manctal sutemetus are an integral part ut these balan,c sheets 23
Consolidat:d Stctim nta of Capitalization Ohio Edi. son M Decen,ber .51 1988 1987 Cornmon Stodholderv Equityt on thousand3) Common sicn k,89 par value, authorued 175 AWX)JNIO sharrt.-- 152,503915 and 152,397,5 47 shares outstandmg, respr'.ttrely (Note 6a) 81,372,571 51,3 t ,578 Other paid in upual 732,734 '40.636 Retanmd carnmgs (Note 6b) 425,670 539. I I I i uus
.._._1.b_ial commo. n_.h._io_t k ho...l.d._er s' .equ.
2,530,975 1 651,325 i Number Of ~ Optninal Redemption Pnce shares ()utstandmg gggyegage 19HH 19H7 Per Sharc (in thouundM Prrierred Stock (Note 6t ) Curnulante. $100 par value-Authorl/.rd6,000.000inhares Not %utyrci to Mandatos y Redemption i 40% 7.2 e% 974.350 073.350 $ 103 0010H 00 8101 S'6 97,335 97,335 7.36% H 20% HOO 000 H00.000 $102 H+ 105 35 M,402 80,000 H0.000 M 64b 912% N50JXH) N50,000 $ 104 32104 56 MH 'HO H 5,00') H 5,000
'luial riot sub)cci to mandatory redemption 2.624,450 2.623. % O 8 27 4.5 5H 262,335 262 535 Subject to Mandatory Hedrmption (Note 6d)
IO 4NVl3 50% 20t1.000 600 (wiO $ 109 00 $ ?l,HIK) 20,000 00.000 Redempthin w ithif t onc vrar _
~
b3H N }) j Teital sublert to mandatory erdrmption _ 20,000 00.000 Lumulative. 525 par salue - Authiprved HJHlo.OOO sharrs Not subi nt to Mandators Redernption l Neries D 2,000.000 2,000,000 $25 75 8 51,~500 50,000 50,000 1350Senes - 1 000,000 - - - 50,000 lotal not sulyrct to rnandatory redctDpthin 1 000.000 4.000.000 $ 51500 50.000 I OO A NIO Preference Stoc k (Note hcl-Lumulain c. no par valuc~ Autheiri/rd M 000.O H)hharrs Subject u Mandatory Redempnon (Note bel 895 04 5102 50 $ctn S 14.400 l H J)OO 51.010 00 1,O'O % $ 15.300 14,400 1 H.000
$1 Hu senes AH, i l u 220,222 515 5H I,372 1,333 3a22 kedempuon within one scar (4,033) 14,214) lotal nuhi cct to mand,uury redempnon 10L510 24t222 $ 16,6'2 11,700 17,209 Preferred blot k of Consolidated hubsidlary (Nore h)
Lumulatne. S HHi p.ar value-l Authorved L.200.000 shares Niit Aunpu.t to Mandabit) Redempoon 4 bi V 910% 419 049 419.0:9 810150 105 20 5 43.540 41,905 41,905
$ulqWI to Mandator) Redernpinu1(Note ad)
H 24W l5 00% b'H.216 hotol6 $10329il3H5 8 71'6H 67,H22 09,362 licdempoon witlun one year (2,720) () ,220) hitai suht ect to rnandaturv redetupuon 6(iU2 6'H,14 2 ) Inng 'Irran Debt (Noic ofs f irst miirigagt bomb t Huo I dnun t :ompany-H 4H% weighird as trage thirrest rate, duc 19HH-199 4 91,430 149.106 lI h6% WetRhlrd ;is eragt intrrrst raf t, duc 1994 199H 291,333 i l H.515 H 35% wrighted avrtage Hurrest rate, duc 1909.200% 228,606 2 45,5(Mi 9 09% wrighted as erage interchi rate, due .:004- 200H 274,310 2'4,310 12 t4% wrighird escrage interest raf t, duc 2009 -Jul3 85,600 13H.HOO in 70% wrmhted utcrage mierest ratt, due 2014 ,010 ' 138,450 132.H00 1,102,729 1,349,097 l'ennwhansa Power Company - u Hi N, weighted averape mterest rate. duc 19HH 200H 240,440 245 HlH j lotal hrst morigage bonds 1,343,169 1.594.915 l I Sn ured noics and ohhganons Oluo I dnon tornpany -9 95% w eighted userage mterest rate, duc 19NH 2015 652,522 6 % .012 IYtllis)lVanla pt tWrt GotupJn) -9 Ot1% wt'fghted Jicragt irtlerest ralC, dut I9HH- 20l5 15 I, t 40 I $ 4,4 l 1 Amount hcid in Truster (327) (1,620) 150,M21 142.791
'lotal scruard notra and ohhganons NO3,34 3 "H",HM l'mocured notes t Ihh t I'dlMM Lompain ~ 415% Wrighlett itVCr,lgr intrirst rate, due 1990 2ti1H 463,100 35tl.OOO Ann punt held by 'Irmire (17,7H7) (21,054) 445,313 32H,9 42 ltnmvhatua Power ( ompant- 6 93% weighted ascrage interest rate. duc 20iH 10,300 -
local unstt uted notr* 455,613 32H V42 Not unamortved diu ount on dt bt and other (15,545) p. 7.OM ) long term debt dur w tthin our vrat (N4,526) Q20 505) ! i
'I. iial long term (teht 2,502.054 2 C4.l(pi ;
l local Capitalli.ation $ 5.484,071 55.6'S 016 The u ompanving %to to L.omohdaird i mancial Sta ments an un nuegral pan of One stairments 24 j i
1 ConsolidIt:d Ctatsm:nto cf Retrirnd Errnin;O Ohio Edison for the Years Ended Decernber 31 1988 1987 1980 (in thousands) Balanct at beginning of year $ 539.111 $ 471,223 $ 391,235 Net income 2 i H,888 412,920 410,828 757,999 884,143 802,063 Cash dividends on preferred and preference stock 31.948 47,691 50,693 Cash dividends on common stock 298,793 297,341 280,147 - Prermum on redempoon of preferred stock 1,588 - - 332.329 345,032 330.H10 balance at end of year $ 42 5,670 $539,i 11 $ 471,223 Consolidated Statements of Capital Stock and Other Pald-in Capital i Preferred and Preference Siock j Not Subject to bubicct to Common stock Mandat ,rv Redemption M.mdatory Redemption Other Number Par Paid in Number Par or Number Par or of Shares Wlue Capital of Shares stated Wlue of shares Stated Wlue t Dolbrs in thousnds) Halance.,lanuary 1,19H6 137,0H9,271 $ I,233,801 $609,117 9,590,399 $ 467,940 2.457,389 $ 183,495 Sale of Cornmon Stock 7,665,704 6H,991 71,074 Dividend !!cinvestment Plan 3,52H,014 31,752 37,091 Capital Stc< k l{xpense (1,099) Conversions and Redemptions-Series A Class A 1,029,392 9,265 3,108 (494,900) (12,373)
$1.HO Scrtes 502,3"O 4,521 2,853 (522,381) (7,900) .
$95 00 Senes (I,800) (1,800) {
$ l02,50 Series (900) (900)
H 24% Senes (5,000) (500) 10 4H% Senes (17,9"0) (1,797) 10.76% %"rles ll (2,710) (271) iI 00% Series I (7 937) (294) Balance, licccmber 31,19H6 149,H 14,751 1,3 4 H.333 722,156 9,095,499 455,567 1,903,691 170,033 : Sale of Common Stock 5H4,300 5,259 ?,151 l Dnidend Reinvesunent Plan 1,6*3,401 15,000 20,348 j Capital Stock Expense (l84) Conversions and Redemptions-Senes A Class A i10,448 994 333 (53,100) (1,327)
$1 H0 $ cries 211637 1,932 1,232 (242,888) (3,523)
$3 92 Series (10,400) (2,000,000) (50,000) j
$95 00 Senes (1,800) ( t ,800) 1 8102 50 Senes (900) (900) !
H.24% Senes (5,000) (500) J 10.48% Senes (40,000) (4,000) f 10.76% Series (17,290) (1,729) I II 00% Neries (?,975) {93 I Halance, December 3l .19H7 152,397,537 t,371,57H 740,636 7,042,399 404,240 1,597,H38 156,"84 Capital Stock Expense (l1) Comereons and Redemptions-
$ 1.NO Scries 110,376 993 635 (138,112) (2,0H9)
$ 95.00 $c ries (1,H00) (1,800)
$ 102.50 Series (1,800) (1,Hoo)
H 24% Series (5,000) (500) [0 4H% Series (602) (220 Ml0) (22,000) 10 76% Series (421) (240,000) (24.000) Il.00% Series (4,000) (400) 14.00% Series (7.500) (2,000Mio) (50,000) 15 Om% Series (3) (6,400) JNO) Bal.ince,1)ccernber 41,19HH 152.507,914 $ 1,372,571 $" 42,7 34 5.042,390 $ 354,240 980,726 $ 103,555 1 he ,a companying Notes to Consohdated hnanual statemcco are an inic gral part of thev n,tements l l 25 m___________.__._____________.__.___
Con olidst d Ctstamznts of Cuh FicwD Otuo Edison iot the Years Ended December 31 1988 1987 1986 l J Cash I' lows from Operating Activities: On thousands) Net income $ 218,888 3 412,920 $ 410,828 Principal noncash hems-Depreciation and amortizatkin 306,919 202,271 182,477 Deferred income taxes, net 72,744 12, % 2 145,183 Investrnent tax creditt net (2,822) 62,965 32,764 l Deferred (accrued) revenue, net (66,361) 42,584 6,536 l Allowance for equity funds used during construction (3,397) (211,936) (208,360) 1 Deferred fuel costs, net (28,666) 4,854 2,826 Write-off of disallowed plant costs 201,260 44,400 .- ( Deferred nuclear unit costs (281,783) (89,073) - l Write off of terminated construction projects - 19,751 - Gain on sale and leaseback - (27,665) -- Change in apphcable assets and liabihnen-Receivables (9.702) (22,420) 6,744 Materials and supplies 10,790 (18.0H2) (15,275) Accounts payable (7,904) 18 H97 4,671 Other 28,321 6,702 11,726 Net cash provided from operations 438,287 489,130 580.120 t ash I' lows fronn Financing Adiritiesi Lew I'inancing-- Common stock - 47,818 208,90H Inng term debt 191,962 38,725 314,344 Other (5 86) (3,786) HIS Redemptions and Repayments-Preferred and preference stock i i 1,673 70,402 5,562 inng4crm debt 331,360 243,318 225,908 fong term obl'gations 85,489 44.878 26,913 Dividend Payments-Common stock 301,043 286,072 279.076 Preterred and prcference stock 35,186 49,376 53,537 Net cash used for financing activities 678,275 611,287 66,929 Cash Flown frorn inventing Activities: Property addutor 4 192,246 555,313 601,021 Purc hase of investments 4,807 422,766 5,674 Sale of investments (296,471) (l19,087) {l15,169) Sale and leaseback of utlhty facilities - (1,308.999) -- Other (6,255) 7,868 i,672 Net cash used for (provided from) investing activities (105,673) (442,139) 493,198 Ne; inctease (decrease);n cash and cash equivalents (134,315) 319,982 19.993 Cash and cash equivalents at beginning of vear 468,408 148,426 128,433 { Cash and cash ejiuivalents at end of scar $ 334,093 $ 468,40H $ 14HA20 ! Supplernental Cash I' lows Information: Cash Paid During the Year-Interest (nct of amount 3 capitalized) $ 299,707 $ 182.851 $ 181,301 Income taxes 52,950 86.447 1,003 ne an ompanving wws no consohdawd hnannat suremenn are an integral pa,t of inese watemenn l l l 28 1 L_-_-__ _ _ _ _ -
Con:olidItzd Ctitrmsnts of Tax 03 Ohio Edison for the Years Ended December 31 1988 1987 1986 General Tatest rio thousands: Real and personal proper'y $ 90,631 $ 58,856 $ 50,006 State gross receipts 77,226 73,085 74,253 Social security and unemployment 13.577 13,583 13,776 Miscellaneous 6,589 8,980 5,406 Total general taxes $ 188,023 $ 154.'504 5143,44i Provision for income Taxes: Currently payable-Federal $ 39,143 $ 77,909 $ 5,569 g State 589 4.069 2,861 Foreign - 16 65 ]8 39,732 81,994 8,495 [5eferred, net (see below)-~ q' l'ederal 67,986 42,923 145,695 State 4,758 39 (512) 72,744 42,962 145,183 Investment tax credits, net of amortization (2,822) 62,965 32,761 lbtal provision for income uxes $ 109,654 $ 187,921 $ 186,442 income Statement Classification of Provision for Income Taxes: Operating expenses 5172,335 $ 162,199 $ 176,966 Other income '(69,836) (51,983) (89,371) Allowance for borrowed funds used during construction 7,155 77,705 98,847 lbtal provision for income taxes $ 109,654 $ 187,921 $ 186,442 Sources of Deferred Tax Expenses hceu of tax over book depreciation, net $ 60,249 $ 102,051 $ 66,092 Allowance for borrowed funds used during construction, which is ciedited to plant 7,155 77,705 98,847 Deterred fuel costs, net 10,514 (1,940) (1,649) Amortization of dcIerred interest on leased nuclear fuel, net (12,109) (455) (11,545) Deferred nuclear unit costs 85.983 33,962 - Deterred sale and leaseback costs, net 2,951 (128,524) - Plant (ost disallowance (73,615) (11,681) - Difference between tax and book revenue, net 5,882 (24,887) (3,330) lirminated construction prejects, net (2,467) (9,802) (4,073) Deferred lo3s on reacquired debt, net 9,299 4,083 6,028 l Alternative minimum ux deferral (14,336) - - other, net (6,762) 2,450 (5,187) Net deft tred tax expense $ 72,744 $ 42,962 $ 145,183 Heroncillation of lederal Income Tax Expense at Statutory Rate to Total Provi*lon for income Taxes: Itook inwmc before provision for income taxes $ 328,542 $ 600,8 4 l $ 597,270 lederalincome tax expense at. statutory rate $ 111,704 $ 240,036 $ 274,74 4 j incre;tses (reductions) m taxes resulting from- 1 Allowance for funds used duiing construction, I whkh discs not constitute uxable income (1,676) (7,267) (95,H46) I l.xcess of book oser ux depreciauon 13,143 10,741 19,317 l Sale and leaschack transactions - 16.468 - Amortization of investment tax credits (13,140) (10,058) (10.022) Effect of reduced federalincome ux rate (5,656) (3,532) - Other, net 5,279 5,533 (l,751) , hal provision for income taxes $ 109,654 $ 187,921 $ 186,442 l 1 he aaungwn mg %tts to Comolklated Snancul Statemenn are an intrpal part or these sutrmenn l l 27
Notss to Con:olidat:d Financial St:tsments
- 1. Summary of Significant Accounting Policies: plant were 3.3%,3.5% and 3.6% in 1988,1987 and The consolidated financial statements include Ohio 1986, respectively. The PUCO ordered the Company Edtson Company (Company) and its wholly owned sub- to record depreciation expense applicable to Perry sidiaries, Pennsylvania Power Company (Penn Power) and Unit 1 on a units of production basis. The Companies Ohio Edison Finance N.V. All significant intercompany recognize as depreciation expense estimated nuclear transactions have been climinated. The Company and decommissioning costs which are being recovered Penn Power (Companies) follow the accounting policies from their customers. Such amounts are invested in and practices prescribed by tne Public Utilities Commis- external decommissioning trust funds.
sion of Ohio (PUCO), the Pennsyhania Public Utility Common Ownership of Generating Facilities- The Commission (PPUC) and the Federal Energy Regulatory Companies and other Central Area Power Coordina-Commission (FERC). tion Group (CAPCO) companies own, as tenants in Revenues- The Companies' retail customers are metered common, various power generating facilities. Each of on a cycle basis. Revenue is recognized for electric service the companies is obligated to pay a share of the con-hased on meters read through the end of the month. struction costs of any jointly owned facility in the same The Financial Accounting Standards lloard (FAstl) issued proportion as its ownership interest. The Companies' 5tatement of Financial Accounting Standards (SFAS) No. 92, portions of operating expenses associated with these
" Regulated Enterprises- Accounting for Phase in Plans," jointly owned facilities are included in the correspond-which was effective for the Companies in 1988. This ing operating expenses on the Consolidated Statements statement, among other things, prescribes the account- of Income (see Note 3 with respect to the deferral of ing treatment when a regulatory commission permits a Perry Unit I and llcaver Valley Unit 2 costs). The project to be included in rate base w hile it is still classified amounts reflected on the Consolidated llalance Sheet as construction work in progress (CWIP) and subsequently under utility plant at December 31,1988, include the requires a reduction to rate base after the project is following.
placed in service until amounts collected as CWIP from 3, co m,g,cg c ,n,,,ncnun , customers have been fully refunded (referred to as Generanna Lway Puni enn mon ror work in companiev
" mirror CWIP"). In anticipation of adopting the new
'" **" * * " * ~ " ***
On thouunds) standard in 1988, the Company reduced f.ourth quarter wn 1987 operating revenues by approximately $ 42,5 H,000 sanunn a7 s 237,soo s 61.800 s s,300 casos for revenues required to be refunded to customers pri- "T$v,rMd l marily during 1988 and 1989. Partially offsetting this ni. 2 and *3 '20,400 233.900 2,200 so 6s% provision was the recording of additional allowance for "#]n
,i [ 1,v,9on 29 i,mo i2,900 cii%
funds used during construction ( AFUDC) of approximately Perry ni and
$ 24078,000, resulting in im material cifect to net income. conunon Fas thucs 1,437,500 80,500 1,200 35 24 %
Deterred I uct costs- The Companies recover fuel. perytet - - aoo m 3s 2a related costs not otherwise included in base rates from hl s4.162ano s w 200 s es.200 retail customers tbrough separate energy rates. Anv over Mudi hn nogedwen 1mgned to a
-
- h"i"M " dear spct th( nu unn"*" fuchn p or under collection resulting from the operation of these no induac,ienenou nuernn under use ana icasebac k arrangernents rates are included as adjustments to subsequent energy Nuclear Fuel- The Companies amortize the cost of rates. Accordmgly, the Companics defer the dif ference nuclear fuel based on the rate of consumption. The hetween actual fuel related costs incurred and the Companies' electric rates include amounts for the t amounts currently recovered from their customers. I future disposal of spent nuclear fuel based upon the l'tdity Plant and Depreciat on- l'tility plant reflects formula used to compute payments to the l'nited the original cost of construction (see Note 2), including States Department of Energy. I payroll and related co3ts such as taxes, pensions and Allowance f or i unds l' sed During Construction-other fringe benefits, administrative and general costs AFUDC represents the net financing costs capitalized and AFUDC.
to CWIP during the construction period. The borrowed The Companies generally provide for depreciation funds portion renects. capitalized interest payments on a straight kne basis at vanous rates over the - and the equity funds portion represents the noncash estimated lives of property included inJynt in se ice. capitalization of imputed equity costs which are The annual composite straight-line rates for electne charged to construction. During 1987 the Company l also charged AFUDC to Perry Unit I after its in-service date for rate making purposes and prior to recovery 28
through electric rates in accordance with a PUCO order. 526,000/XX) expires at the end of 2002 with the remainder AFUDC varies according to changes in the level of expiring at the end of 2003. The Companies also have CWlP and in the cost of capital. The Companies com- approximately 514,300,000 of alternative minimum tax pute AFUDC utilizing a net of tax rate, which is con- credit s available which may be carried forward indefinitely. sistent with the rate treatment. EffectiveJanuary 1,1988, The FASB has issued SI%S No. 96, " Accounting for i substantially all of the Companies' CWlP (excluding income Taxes," which, among other things, requires a ) nuclear fuel) was subject to the capitalization rules for change in the method used by enterprises to account for interest contained in the Tax Reform Act of 1986; deferred income taxes. Under the new standard, the therefore, no adjustment was necessary to reduce the Companies will be required to reduce their net deferred CWIP AFUDC rate to recognize a current income tax tax batmces to reflect the lower income tax rates incorpo-benefit The AFUDC rate related to assets financed rated in the Thx Reform Act of 1986. Instead of increas-only Ibrough the incurrence oflong term obligations ing income due to this potential reduction, the Companies ] (see Note 7) is based on actual interest accrued on the will defer these amounts and include them as a reduc- { i obligations during the period. The annual ra;es used tion to cost of service in future rate proceedings. The i by the Company for all other construction projects new standard will also require the Companies to record were 12.1% 11M% and i 1.0% in 1988,1987 and a deferred tax liability for tax benefits that have previously 1986, respectively; Penn Power's rates were 10AE been flowed through to customers and an assumed 10.1 % and 9.5% in 1988,1987 and 1986, respectively. deferred tax liability applicable to the equity component income Taxes- Details of the total provision for income of AFUDC, for which no income tax timing difference taxes are shown on the Consolidated Statements of Taxes. exists under current accounting standards. Since the The deferred income taxes result from timing differences Companies expect that the additional deferred tax lia-in the recognition of revenues and expenses for tax and bilities will be collected from their customers when the accounting purposes. taxes become payable, an asset will be recognized for The Companies alkicated the income tax benefit that pmbable future revenue The Companies are not which resulted from interest expense related to nuclear required to adopt SFAS No. 96 until 1990. However, if fuel in 1988 and CWIP in 1987 and 1986 to income taxes the Companics had adopted the new standard as of included under other income and deductions on the December 31,1988, total assets would have increased by Consolidated Statements of Income approximately $1400,000,000 with no material effect on pet income For income tax purposes, the Companies claim liberalized depreciation and, consistent with the rate Retirement lienefits- The Companies' trusteed, treatment, generally provide deferred income taxes. The noncontributory defined benefit pension plans cover Companies expect that deferred taxes which have not almost all full-time employees. Upon retirement, em-been provided will be collected from their customers ployees receive a monthly pension based on length of when the tnes become payable, based upon the estab- service and compensation. The Companies use the lished nue making practices of the PUCO, the PPUC and projected unit credit method for funding purposes and the FERC. As of December 31,1988, the cumulative net were not required to make pension contributions income tax timing differences for which deferred in- during the three years ended December 31,1988. come taxes have not been provided were approximately The following sets forth the funded status of the
$600,000,000. plans and amounts recognized on the Consolidated Proceeds from the sales of certain tax benefits in llalance Sheets:
accordance with provisions of the Economic Recovery y g,cy,ngc,33, 393g 3937 l Tax Act of 1981 are being amortitrd over the life of the Actuatw present value of related property. Proceeds attributable to investment tax benefit obhgauone credits (11C) were recorded as additional deferred FIC; vested bencrits $ 30x01 s.000 5284,970,000 3 Namested benetits t .2 i i .com o.ovo.oou 1 the remaining amounts were recorded as reductions to A cumulated benetit obligation i so9.9263Hlo $ 291.060.000 utihty plant in service Plan assets at faa salue 5 s iM A86.ooo 8 491,H26.ovo
.Ihe Companies defer llc utili/cd and amorti/e these Actuanal present value of credits to income over the estimated hfe of the related _frmected benerit obbganon 412,is- ooo 3xx.s noon property. The Ttx Reform Act of 1986 repealed the ITC Plan assets m excess or effectiveJanuary 1,1986, except for certain transition P"N#d h'"'* "h4" *" N # """ " F,086.000 "U"
tinrecognized net loss (gain) u6.038.000) properly. As of December 31,1988, approXimately l' unrecognized prior service cost 252.000 P3.ono
$29,000,000 of unused ITC was available to othet future U "'#" *"i d "" "'""""" "" WW"O U"53"A""")
Nd pen @n and $ 12ToJHJo $ W3.ooo fedend income taxes payabk, of which approximately 29
The assets of the plans consist primarily of common 1. Disallowance of Nuclear stocks, United States government bonds and corporate Construction Costs: bonds. Net pension costs for the three years ended On March 7,1989, the PUCO approved a Stipulation December 31,1988 were computed as follows: .and Recommendation entered into between the Company and the PUCO Staff in connection with the 198x iw 1986 investigations of Perry Unit I and Beaver Valley Unit 2 .I construction costs. The Office of Consumers' Counsel, t rftNaInect dunng the period si s,519soo s14.670.000 s13,210.000 which is a party in the proceedings, opposed the - Stipulati n and Recommendation and could seek to t$rbhatSN 33,9%Soo 31,206soo 2H371400 (78.079,000) (14,625,000) (74,424,000) appeal this decision. In the Stipulation and Recom-Return on pbn mets ) Net &reral mendation, the Company agreed to permanently for-(amonizauon) 22mi7,ooo o&956.oom 28s43mo bear seeking recovery of $237,000,000 of Perry Unit i Net pension cost s(6.607.000) s (5,705soo) s H,HooJM4 construction costs and $47,000,000 of Beaver Wiley - The assumed discount rate and rate of increase in Unit 2 construction costs as they relate to the Company's j future compensation levels used in determining the PUCO jurisdictional customers. As a result, the Company l actuarial present value of the projected benefit obliga- wrote off the applicable amounts, which, after giving tion were 9% and 7%, respectively, for each year. The effect to the reserve established by the Compaly in : assumed expected long-term rate of return on plan 1987 for potential disallowance of Perry Unit 1 con-assets was 10% for 1988 and 9% in 1987 and 1986. struction costs, reduced net income by $127,645,000 The Companies provide a minimum amount of (8.84 per share of common stock)in the fourth quarter noncontributory life insurance to retired employees in or 19gg, addition to optional contributory insurance. IIcalth Under the terms of the Stipulation and Recom-care benefits, which include certain employee deduct- mendation, provision is made for termination of all ' ; ibles and copayments, are also available to retired remaining issues related to construction of Perry Unit 1 employees, their dependents and, under certain cir- and Beaver Valley Unit 2 and the prudence of the , l cumstances, their survivors. The Companies pay Company's Irwestment in such units for rate making insurance premiums to cover a portion of these bene' purposes. The Company and the PUCO Staff have fits in excess of set limits; all amounts up to the limits . agreed to file within fifteen days after the PUCO Order are paid by the Companies. Expenses associated with becomes a final and non-appealable Order, a joint health care and life insurance benefits for retirees are motion in the Supreme Court of Ohio which requests charged to income during the appheable payment the dismissal and remand of the Company's appeal of a periods, and amounted to $5,302,000, $4,444,000 and January 12,1988 PUCO decision with respect to Perry
$3,128,000 in 1988,1987 and 1986, respectively. Unit I construction costs.
supplemental Cash I low s Information- The 3. Recovery of Nuclear Unit Costs: Companies adopted SFAS No. 95, " Statement of Cash The PUO ) ordered the Company to defer nonfuel Flows," for the year ended December 31,1988. The operatk J maintenance costs relating to Perry Consolidated Statements of Cash Flows for the years Unit I hum its in-service date for rate making pur-ended December 31,1987 and 1986 have been reclas' poses until February 2,1988, when Perry operating silled to conform to the 1988 presentation. All tempo- costs were recognized in the Company's electric rates. rary cash investments purchased with an initial maturity it also ordered the Company to defer nonfuel opera-of three months or less are reported as cash equwa' tion and maintenance expenses, depreciation expense, lents on the Consolidated Balance Sheets. All other propt.rty taxes and interest expense associated with temporary cash investments maturing within one year Beaver Wiley Unit 2, from its commercial operation are reported as other temporary cash investments on date until costs relating to the unit are recognized in the Consolidated Balance Sheets. The Companies the Company's electric rates or June 30, '1990, which-i record temporary cash investments at cost, which ever is earlier. The PPUC ordered Penn Power to defer approximates their market value. Noncash financing operation and maintenance costs (net of energy savings and investing activities included capital leases of from Perry Unit 1), depreciation expense, property
$43,470,000, $43,389,000 and $51,235,000 for the taxes and interest expense associated with Perry Unit 1, years 1988,1987 and 1986, respectively. Noncash from its commercial operation date until such costs investing activities also included allowance for equity were recognized in Penn Power's electric rates (see funds used during construction, below). Based on these orders, the Companies have deferred $370,856,000 through December 31,1988, for future recovery from their retail customers. 1 I
ao I
The PPUC granted Penn Power a base rate increase 5. Leases: effective my 4,1988, which included investment The Companies lease a portion of their nuclear gen-recovery for Perry Unit I and associated operating crating facilities, nuclear fuel, certain transmission costs. In its order the PPUC authorized rates designed facilities, computer equipment, office space and other to produce approximately $67,100,000 of additional property and equipment under cancelable and non-annual operating revenues to be phased in over several cancelable leases. years, such that all amounts deferred during the phase- In 1987 th7 Company sold a portion of its owner-in period will be fully recovered by the end of the ship interest m Perry Unit I and Beaver Valley Unit 2 fcurth year. For the first year, Penn Power's rates were and simultaneous 31y entered into operating leases on increased to produce approximately $24,000,000 in the portions sold for basic lease terms of approxi-additional cash revenues. The dif ference between mately 29 years. During the term of the leases the revenues actually billed and revenues that would have Company continues to be responsible, to the extent of been billed absent the phase-in plan is recognized as its combined ownership and leaschold interest, for . additional accrued revenue for financial reporting costs associated with the units including construction l purposes. Such revenues and associated interest ac- expenditures, operation and maintenance expenses, l crued in 1988 for future collection in connection with insurance, nuclear fuel, property taxes and decommis-this plan were approximately $30,045,000 and are sicaing. The leases provide for adjustments to the included in other deferred charges on the December basic rental payments for possible future changes in 31,1988 Consolidated Dalance Sheet. the federal tax code. The Company has the right, at 4 Terminated Construction Projects: the end of the respective basic lease terms, to renew inJanuary 1980, the Companies and all other CAPCO the leases for up to two years The Company also has j companics terminated plans to construct four nuclear the riglu to purchase the facilities at the expiration of generating unit Costs (including settlement of all the basic lease term or the renewal term fif elected) for asserted claims resulting from termination) unrecovered a purchase price equal to the fair market value of the facilities, by the Companies as of December 31,1988, applicable to these units amounted to approximately $29,505,000 Consistent with the regulatory treatment, the rental and will be fully recovered by the end of 1991 The payments for capital and operating leases are charged Company recovers these costs from its PUCO juris- to operating expenses on the Consolidated Statements dictional customers through an increment to the of Income. Such costs reflected on the Consolidated allowed rate of return in rate cases and as an allowable Statements of income for the three years ended operating expense from FERC jurisdictional customers. December 31,1988, are summarized as follow 3: On October 15,1987, the Supreme Coun of i9ss i9s7 39 % Pennsyhania reversed a judgment of the Common- interec on capital wealth Court of Pennsyhania which af firmed the leases s n,040.ooo s u,190nio sto,83tmoo PPI'C's decision to permit Penn Power to recover the ^"[y'f"il, j 3gg7,gg g 3.,ggg ., gg costs of the terminated units. The Supreme Court's operating leases 131,313n00 44.80x poo s,250poo decision was based on its interpretation of Section 1315 Tout rental of the Pennsyh:mia Public Utility Code (which was in omnens s i ss.2 iomoo es399am s3123xmoo effect at the time of the PPUC's rate order), which it The future minimum rental commitments as of j concluded bars the recovery of such costs through the December 31,1988, are; l rate nuking process. Penn Power wrote off the un- -- ! Capiul trases operaung Irases amortized costs of the terminated units applicable to 19
- s 39,773hoo 8 12L229,ooo its PPUC Junsdictional customers and established a i9oo 3 3,29s poo u t ppoo liability for potential customer refunds of previousiv 1991 23,29' moo 121*9poo 1992 15,175,000 uo,soi moo recoveted costs, reducing reported net income by aP- 1993 IL3umoo uostono prmimately r',3uo,000 (5.05 per share of common Years thereafter 14 s,23 mio 3. min 7Jm stot k) in the fourth quarter of 198-'. t m January 11, Tou; n,immum icase raymena s26',1 i6Soo $ 3.swu ?3 moo 1989, the U S Supreme Court upheld the Supreme Coen of Pennsylvaniis decision. *""""""'"*P4"**
i IntefeM lMflon 299[o' I I 3 (k M) l l Present ulue of nei minunum lease pa ments s I i 1.609,000 l 31
i
- 6. Capitalization: (d) Preferred Stock Subject to Mandatory Redemption-(a) Common Stock- Through the Dividend Reinvest- Annual sinking fund provisions for the Companies' ment and stock Purchase Plan, holders of common, preferred stock, which is retired at $100 per share plus preferred and preference stock can acquire additional accrued dividends, are as follows:
shares of the Company's common stock by automat- 2m Ne ' neginning ically reinvesting all or a portion of their dividends Ohio Edison- O and by making optional cash payments. Shares of a50% 40,000 Junei 1991 common stock purchased under the Plan by partici. Penn Power- , R24% 5,000 December 1 0) 1 pants may be, at the option of the Company, either i 1 n3% (ooo January 1 0; newly issued shares or shares acquired in the open 15.00 % 3,200 July is 0) 11.50 % 15,000 July 15 1989 market by an independent agent. The price of newly 13 m % 5,uou Julyi 1990 l 1ssued shares is the average of the high and low prices I t .50% 30.000 septernber i 1991 for the Company's common stock on the investment - ve t omenwmer.n ot om date as reported in The W// Streetfournal report of New York Stock Exchange Composite Transactions. The sinking fund requirements for the next five years are: The purchase price of shares acquired in the open - , 1989 s 2 320.000 I market is the average purchase price paid by the in; o dependent agent for the shares over the period of their purchase. At December 31,1988, the Company had [o 1992 id20 10,220.000 3,522,320 shares of common stock reserved for issu- 1993 to 220m ance under this plan, 1,000,000 shares reserved for (e) Preference Stock Subject to Mandatory Redemption-Issuance under a continuaus shelf registration program, The $102.50 Series and $95.00 Series cach include pro-212,310 shares reserved for possible conversion of the visions for a mandatory sinking fund to retire a minimum
$1.80 Preference Stock, and 497,276 shares reserved of 900 and 1,800 shares, respectively, on July 1 in each for issuance through the payroll-based employee stock year at $1,000 per share plus accrued dividends. No j ownership plan. $95.00 Series shares will remain outstanding afterJuly 1,-
(b) Retained Earnings- Under the Company's inden- 1989. The $1.80 Series includes a provision for a mimda-ture, the Company's consolidated retained earnings tory sinking fund to retire shares at $15.125 per share unrestricted for payment of cash dividends on the plus accrued dividends. Based on the number of $1.80 Company's common stock were $353,623,000 at Series shares outstanding at December 31,1988, no December 31,1988. shares will remain outstanding after October 1,1989. (c) Preferred and Preference Stock- At the Companies. The annual sinking fund requirements for all series of option, all pref erred and preference stock may be re, preference stock are $4,033,000 for 1989 and $900,000 deemed in whole, or in part, at any time upon not less for 1990-1993 than 30 nor more than 60 days notice, unless other. The $1.80 Series is convertible at any time into wise noted. Redemption of all preferred and preference common stock at a price of $15.125 per share, lloiders stock issued within the past five years is subject to receive one share of common stock for each share of certain restrictions regarding refunding. The optional $1.80 Preference Stock converted, subject to adjustment redemption prices shown on the Consolidated State, under certain conditions. ments of Capitalization will decline to eventual mini- (f) 1.ong:n rm Debt- The mor: gages and their supple- 1 mums per share accotding to the Charter proviskins ments, which secure all of the Companies' first mortgage that establish each series. bonds, serve as direct first mortgage liens on substantially all property and franchises, other than specifically I excepted property, owned by the Companies. Based on the amount of bonds authenticated by the Trustees through December 31,1988, the Companies' annual sinking and improvement fund requirements for all bonds issued under the mortgages amount to
$31,131,000. The Company expects to deposit funds in ,
1989 which will be withdrawn upon the surrender for cancellation of a like principal amount of bonds, which are specifically authenticated for such purposes against 32 ;
unfunded property additions or against previously tion date of Beaver Wiley Unit 2. The effective average retired bonds This method can result in minor increases annual interest rates on OEET borrowings were 8.8%, j in the amount of the annual sinking fund requirements. 8.0% and 84% during 1988,1987 and 1986, respectively. Penn Power expects to satisfy its requirements in 1989 Nuclear Fuel Financing- Ohio Edison Fuel by certifying unfunded property additions at 166-2/3% Corporation and Pennsylvania Power Fuel Corporation of the required amount- (corporations in which the Companies have no owner-As of December 31,1988, the Companies' sinking ship interest) provide funds for the procurement of fund requirements for certain series of first mortgage nuclear fuel on behalf of the Companies. The Com- , bonds and maturing long-term debt for the next fise panies also participate in arrangements wherein the ) YC"""* Central Area Energy Trust (CAET) finances the acquisi-1989 s s,s26,ooo tion of nuclear material that will ultimately be used to 1990 113.203,000 fuel various CAPCO generating units. Under ordinary 1991 125,755,000 1992 67.612 nx; circumstances, the Companies make payments for the t993 95.762.000 nuclear fuel as it is consumed. Financing on behalf of Amounts shown above for 1989 include 58,766,000 or the Companies of up to S255,000,000 (of which first mortgage bonds optionaHy redeemed subsequent $247,000,000 had been utilized as of December 31, to December 31,1988. The weighted average interest 1988)is currently available through the fuel corpora-rates shown on the Consolidated Statements of Cap- tions, either through revolving credit arrangements or vitalization relate to long-term debt outstanding at the issuance of commercial paper, which is supported December 31,1988. by bank letters of credit, or a combination of both.
'Ibtal secured and unsecured notes outstanding at Finn ing of up to $137,000,000 (of which $101,000.000 '
December 31,1988 and 1987, exclude 518,114,000 and had been utilized as of December 31,1988)is available
$ 22,678,000, respectively, of certain pollution control to CAET on behalf of the Companies, subject to notes, the proceeds of which were then in escrow certain limitations.
pending their disbursement for construction of pollu- The Companies accrue interest applicable to the tien control facilities. The Companies' obligations to nuclear fuel obligations (foi fuel not yet included in repay certain pollution control revenue bonds are utility plant in service) which is capitalized, net of secured by several series of first mortgage bonds. A income tax effect. No direct borrowings have been or portion of the unsecured notes outstanding are entitled are expected to be made against the lines of credit to the benefit of irrevocable bank letters of credit of available to the fuel corporations; the fuel corporations $346,160,000. 'to the extent that drawings are made have issued and have outstanding commercial paper under those letters of credit to pay principal of, or in. supported by the lines of credit. 'Io the extent that terest on, the pollution control revenue bonds, the borrowings are less than the $255,000,000 available Companies are entitled to a credit on the notes. The under these credit lines, the fuel corporations must , Companies pay an annual fee of 4/10% to 7/8% of the pay commitment fees of 1/8% to 1/2% on the avail-amounts of the letters of credit to the issuing banks able portions of the lines of credit. They also pay fees and is obligated to reimburse the banks for any draw. of 5/8% to 7/8% for the letters of credit on the aggre-ings thereunder, gate amount of outstanding commercial paper. Interest
- 7. Long-Term ObHgations: ums on CAU pudaw comminnents my hmn i Ohio Edison i nergy Trust (01 ET)- OEET, which
. . certain dealer placed commercial paper. The effective h,nanced part of the Company,s investment m ikaver average annual interest rates applicable to nuclear fuel Wiley Unit 2, has $500,000,000 of term loans out-
. obligations were 9.0%,8.2% and 8.0% during 1988, standm.g. The Company has transferred a portion of its 1987 and 1986, respectively, interest in lleaver Valley !! nit 2 to OEET, where the assets are used to secure OEET borrowings. Under the e ompan gewn@ apect to ma e payments agreement, the trust arrangement will be terminated apphcaW m du oMgadons dudng We nm he yms as foHows no later than December 31,1989. The Company pre-sently anticipates payments of 5120,000,000 in 1989, 1989 s 30.s68.ooo
$140,000,000 in 1990, $80,000.000 in 1991 and 1990 M *"0" 1991 e ,"2 2 om 4s $160,000,000 in 1992. 1o92 39,24 0000 Interest accrued applicable to OEET was capitalized, 1993 34
- 0""
net of income tax effect, until the commercial opera-33
1 1
- 8. Notes Payable to Banks and Lines of Credit: As of December 31,1988, the Company and Penn Penn Power has lines of credit with banks that provide Power had invested approximately $344,600,000 and for borrowings of up to 529,000,000 at the prevailing $56,000,000, respectively, applicable to Perry Unit 2.
prime or similar interest rate. Short-term borrowings Delay in the completion of the unit can be expected may be made under these lines of credit on Penn to increase its total cost by amounts which are not , ! Power's unsecured notes. Penn Power is required to presently determinable. If a decision were made to pay commitment fees that vary from 3/8% to 1/2% to terminate Unit 2, certain costs which are currently. assure the availability of those lines of credit. All of the assigned to Unit 2 would be reassigned, where appro-current lines expire December 31,1989; however, all priate, to Unit 1. However, cancellation charges payable unused lines may be canceled by the banks. to contractors and other costs of termination could be 9, Commitrnents, Guarantees and incurred. Pending completion of the CAPCO review, Contingencies: the Company is unable to predict whether the con-Construction Program- The Companies' current struction on Unit 2 will continue or, if continued, on budget forecasts reflect expenditures of approximately what basis such continuation will proceed. 51,235,000,000 for property additions and improve. If construction of Perry Unit 2 is terminated, the ments from 1989-1993, of which approximately Company would seek to recover its investment but 5245,000,000 is applicable to 1989. In addition, the cannot now predict whether its investment in Unit 2 i Companies expect to invest approximately $ 159,000,000 applicable to its PUCO Jurisdictional customers will be for nuclear fuel during the 1989-1993 period, of which recoverable. If no means of recovery of the costs of 1 approximately 530,000,000 is applicable to 1989. Unit 2, in the case of termination, were available to the The CAPCO companics are continuing to review the Company from its PUCO jurisdictional customers and status of Perry Unit 2. Currently, no significant work is no other basis for recovery could be found or an-being performed on the unit and the Companies do ticipated, the Company would be required to write off not capitalize AFUDC. Until review of the status of the portion of its investment applicable to its PUCO Unit 2 has been completed, there will be no defined jurisdictional customers. As of December 31,1988, the schedule for its completion; the construction estimates Company estimates that the maximum amount of such for the 19891993 period do not include any amounts a write-off would be approximately $210,000,000, net I applicable to Perry Unit 2 if construction of the unit of income tax effect. The Company does not presently were to be resumed. Possible alternatives being reviewed anticipate that a write-off of even this magnitude, if with respect to Unit 2 include inde0 nite suspension of required, would ofitself affect its ability to pay com-construction on the unit, resumption of work on the mon stock dividends at current levels, and studies in-unit and termination of the unit. In accordance with dicate that the magnitude of any such write-off could the CAPCO arrangements, none of these ahernatives be much smaller. If, despite hs best current informa-may be implemented without the approval of each of tion, a much larger write-off were required, depending the CAPCO companies. upon the timing involved, such a write-off could tem-Duquesne Light Company's (Duquesne) claimed "de pararily affect the Company's ability to pay common facto" abandonment, for rate making purposes, of its stock dividends at current levels. 1334% interest in Perry Unit 2 was accepted by the Based on Section 520 of the Pennsylvania Public PPUC in a 1987 rate order and Duquesne was allowed Utility Code (which specifically permits utilities to recovery of its investment in Perry Unit 2 over a ten. recover a return of, but not a return on, prudently in-year period. Duquesne has advised the PPl'C that it curred costs of any partially completed facility when will not agree to the resumption of construction of cancellation is found by the PPUC to be in the public Perry Unit 2. Duquesne's decision was independently interest for any generating unit canceled after October made and does not represent a decision on the part of 10,1985), Penn Power believes it could recover its the Companies to abandon Unit 2 for rate making or- investment in Perry Unit 2 with respect to its PPUC any other purposes. However, any future decision on jurisdictional customers. the status of Perry Unit 2 will have to take into account if a decision were made to terminate Perry Unit 2, Duquesne's position and ways will have to be found to consolidated net income would be reduced at that accommodate this position if construction on the unit time by the difference between the cost of Perry Unit 2 is to resume. and the present value of revenue to be collected from retail jurisdictional customers applicable to the unit. ! The FERC has revised its policy with respect to recover. .i ing the costs of terminated construction projects. As a l result, if Perry Unit 2 were terminated, the Companies j 34 j
would be required to write off one-half of their respec- of space limitations at certain of their plants, the - tive investments applicable to their FERC jurisdictional Companies estimate that the capital costs associated , I customers if and to the extent that the FERC revised with such installation could exceed $1,000,000,000. policy is applicable. Under such circumstances, the On December 5,1984, the federal Environmental i remaining costs, plus a return on the unamortized Protection Agency (EPA) denied petitions from the investments, would be recovered from their FERC Commonwealth of Pennsyhania and the states of New jurisdictional customers. York and Maine, which sought to force the EPA to make findings under Section 126 of the Clean Air Act. Guarantees- The Companies, together with the other CAPCO companies, have several guarantees of ceruin Secti n 126 provides a rerredy for a downwind state debt and lease obligations in connection with a coal that can show adverse impact because air pollution in supply contract for the Bruce Mansfield Plant. As of an upwind state causes nonattainment of air quality standards in the downwind state, The petition com-December 31,1988, the Companies' shares of the guarantees were 5156,000,000. The price under the plained of excessive particulate and SO2 emissions from a number of sources in Ohio and other states, including coal supply contract, which includes certain minimum payments, has been determined to be sufficient to potentially all of the Companies' Ohio plants. The satisfy the debt and lea ,e obligations. The Companies. petitioners and others appealed the EPA's decision to total payments under the coal supply contract amounted the U.S. Court of Appeals for the District of Columbia, to $100,037,000,589,094,000 and $83,106,000 during asking that the decision be reviewed and reversed, ; 1988,1987 and 1986, respectively. Under the coal modified or set aside. In July 1988, the Court upheld j' supply contract, the Companies' future rainimum the EPA's 1984 denial except for certain particulate payments are: matter portions of the New York petition which are not expected to have a significant effect on the Com-mi lN!k.[ maooo panies' operations. On October 20,1988, the petitioners appealed the Court of Appeals' decision to the U.S. [ Years therraher j@(( t,0%5 t .ooo Supreme Court. On March 6,1989, the Supreme Court declined to hear the case. In April 1988, several states, the Province of Ontario, Enviromnental Matters- Wrious federal, state and and several environmental groups petitioned the EPA local authorities regulate the Companies with regard to to conduct a rulemaking under Section 115 of the air and water quality and other environmental matters Nn M Act. Section (15 is that portion of the Clean The Companics estimate that compliance requires Air Act which addresses pollution across international I additional capital expenditures of approximately $ 153,000,000, which is included in the construction Mndah W #de h h & EM b already determined that sources in midwestern states estimate given above under " Construction Program,' contribute to air pollution which they allege is endan-for 1989 through 1993. gering public health and welfare in Canada. The EPA is As a part of the reauthorization of the Clean Air Act, being asked to officially confirm this determination. legislation has been introduced in Congress to address The EPA has informed the petitioners that it does not the so-called " acid rain" problem. Wrious bills intro-presently have sufficient information to act on the duced would require reductions in emissions of sulfur petitions. The companies are unable to predict the dioxide (50) and oxides of mtrogen from utility power . outcome of this proceeding. plants and other sources located in several states, in. During the past several years, the U.S. Court of ciuding Ohio and Pennsylvania. The Company is un-Appeals for the District of Columbia reversed several able to predict whether legislation will be enacted and. significant portions of the EPA's regulations on the if so, to what extent, if any, the emission limit.s at the methods used by the EPA to determine the amount of Companies' plants would be affected. Sub3tantial changes in the emission limits could result in the need for chtnges in coal supply, significant capital invest. ments in flue gas desulfurization or other pollution control equipmem or the closing of some coal-fired generating capacity to assure compliance. If flue gas desulfurization equipment were to be installed on all of their generating units to achieve compliance, a cir-cumstance that may be physically impossible because 35
stack height credit for establishing individual source of the cooling tower as required in the expired permit emission limits for sop Portions of the latest EPA and seeks penalties for failure to adhere to the con I regulations were reversed and remanded by the Court struction schedule in the expired permit, Because the inJanuary 1988 as a resuh of appeals by the cooling tower provisions of the expired permit have Companies and others. Review of this decision was been superseded, the Company filed a Motion to s(>ught by environmental groups before the U.S. Dismiss the proceedings. In reply to this motion, the Supreme Court and thereafter the Companies and Plaintiff acknowledged that the request for injunctive others filed their own petitions for review before that relief may now be moot but insists that penalties for Court. The Supreme Court declined to hear the case. missing schedule deadlines are appropriate. The Court After the EPA promulgates new regulations in has not yet ruled on the Company's motion. Although conformity with the final Court decision in this matter, the maximum potential penalty exposure exceeds - Ohio and Pennsylvania must then review their 56,000,000, the Company believes that the amount emission limits to ensme conformance with the new of any penalties that may be assessed will not have a i EPA regulations. Such review could result in more material adverse effect on the Company's results of stringent emission limits for some existing plants and operations. l incn ased capital costs and operating expenses. The 10. Summary of Quarterly Firancial Data Companies are currently unable to predict the (Unauditedh outcome of these proceedings. The following summarizes certain consolidated oper-In June 1987, the EPA announced regulations ating results for the four quarters of 1988 and 1987 covering small particulate matter emissions from utility March June september December boilers. Although the Companies have power plants in Three Months Ended 31,1988 30,1988 30,19H8 31,1988 On thousands enept per share amounts) one of the two counties in Ohio where EPA computer Operating Revenues s$26,752 s5l5,709 s567,072 s533.039 modeling predicts excessive small particulate emissions Operairng Expenes will be found, the Companies are unable to predict the and Taxes 410,204 403,262 437,744 394.366 ultimate effect of these regulations. Operating income i16,548 t 12,447 129,328 138,673 With respect to the environmental matters described above, the Companies expect that any resulting addi-I d S" Net laterest and 10.224 7,943 H,476 (116.510)
-Wher Charges 34 A71 48,296 52,020 53,454 tional capital costs which may be required, as well as Net inconic (inss) s 92,301 s 72,094 s 8s,784 s(31,291) any required increase in operating costs, would ulti-E' mately be tecovered from their customers. ${'$
The cooling water discharge penoit issued by the common stock _s 82.161 s 63.750 s 78,656 s(38,397) l Ohio Environmental Protection Agency (Ohio EPA)in wrighted Average 1978 for the Company's Niles Plant conramed a re- "Qfy'#[ quirement for construction of a coohng tower to elim- Outstanding 152 A03 152,406 152.447 152,50, j inate the discharge of heated water to the Mahoning Earnings (tas) River. because of potential public heahh hazards, Ohio ['j"'# 'l ,y g ,y , 3 EPA suspended the construction schedule in January ) 1985 pending the results of a health risk assessment March June september December study. Ohio EPA subsequently determined that the Three Months Ended 31.198? 30,1987 50,1987 31,1987 On thownds. ecept per share amounts) applicable water quality standards could be safely met Operaung Revenues s445,74H s443,348 s472,52s s417,935 1 by use of a thermalload management system which Operating Expenses ! would curtail operation of the Niles Plant to the extent and Taxes 33s,062 337,331 3s4.995 3s4,700 necessary to protect the fish population. Accordingly, Operaung income 110.6x6 106,017 117,530 63,235 Other income and on May 1,1987, Ohio EPA issued a new permit for the Dedutions '4,6H9 76,007 47,998 60,883 Niles Plant which substituted the load management Net laterest and _Other Charges 64,915 66,119 61,H21 51,270 system for the cooling tower On May 6,1987, the Net income s120460 s115,905 5103 ?07 s 72,H4H Justice Department, on hehalf of the EPA, sued the Earnings on Company in the U.S. District Court for the Northern common stock sios.202 s103117 s 91 A47 s 6:,391 District of Ohio alleging violation of the expired per' we@ed wenge mit. The suit seeks a court order forcing construction Number of shares of Common Atock Outstanding 150,715 151,699 1%2,279 152.3M6 Earmngs per share , of Common stock s.72 5 68 s 60 s,40 ' 36
R port of Indrpandent Public Accountants
'Ib the Stockholders and Iloard of Directors of 1
Ohio Edison Company: We have audited the accompanying consolidated balance As discussed in hote 2 to the consolidated financial j sheets and consolidated statements of capitalization of statements, the PUCO approved a Stipulation and i Ohio Edison Company (an Ohio corporation) and sub- Recommendation which had been entered into by the sidiaries as of December 31,1988 and 1987 and the Company and the statiof the PUCO. As provided for related consolidated statements of income, retained in the Stipulation and Recommendation, the Company earnings, capital stock and other paid-in capital, cash has agreed to forbear seeking recovery of certain con-flows and taxes for each of the three years in the struction costs related to Perry Unit I and fleaver period ended December 31,1988. These financial state- Valley Unit 2. The amount of these costs have been ments are the responsibihty of the Company's manage- charged to income. flowever, the PUCO Order is sub-ment. Our responsibility is to express an opinion on lect to appeal and court challenge and accordingly, the these financial statements based on our audits. ultimate outcome of the regulatory prucess cannot be We conducted our audits in accordance with gen- predicted with any degree of certainty. erally accepted auditing standards. Those standards The continued construction of Perry Unit 2 is require that we plan and perform the audit to obtain currently being reviewed by the CAPCO companies. reasonable assurance about whether the financial As discussed in Note 9 to the consolidated financial statements are free of material misstatement. An audit statements, possible alternatives be ng considered includes examining, on a test basis, evidence support- include indefinite suspension, resun.ption of work and ing the amounts and disclosures in the financial state- termination of the Unit. flecause the Companies are ments. An audit also includes assessing the accounting unable to predict the results of the revew, they cannot principles used and significant estimates made by now predict if construction of Perry Uru 2 will be management, as well as evaluating the overall financial terminated and, if terminated, to what ex'ent the statement presentation. We believe that our audits Companies' investments will be recoveralSc. provide a reasonable basis for our opinion. j In ou. opinion, the financial statements referred to above present birly, in all material respects, the finan-cial position of Ohio Edison Company and subsidiaries i h 4 ' as of December 31,1988 and 198-' and the results of Anhur Andersen & Co. their operations and their cash flows for each of the New York NY three yeais in the period ended December 31,1988, mrch ,19x9 , in conformity with generally accepted accounting principles. l l 37
Conzolidstad Financial Statietics chio Ednon 1988 19H7 1986 198 1984 1983 197H General Financial Information moum in thouuna, enqu per share amoumy Operating Resenues 32,142,572 81,779,556 81,741,900 $ 1,754,749 $ 1,637,104 81.515,852 $ H62,956 Operattug income $ 496,996 8 397,46H 1 392,357 5 380,354 8 342,713 $ 302,751 $ 123,945 Earnmgs on Common $tock $ 186,170 3 304,657 $ 359,825 5 318,073 5 290,694 8 227,843 5 61,259 Ratio of tarnings on Common Sto(k to Operaung Revenues 8.7% 20.5% 20.7 % lH i% 17.8 % 150% 7.1 % Times interest Earned Before Income Tax 1,97 x 2.60x 2 46x 2.34 x 2.34x 2.31 x 1.67x , Net l111ity Plant at December 31 86,048,034 $ 6,336,099 57,239,'41 86.644,750 8 5,9H3,214 85,246,565 82,717,820 Capital Expenditures $ 221,583 8 '05,212 5 776,l98 $ H26,994 8 HbH,099 5 1,131 $ 395,162 Capitalization at Itcember 31: Common $t(x:kholderv Equay $ 2,530,97 5 82,651,325 52,541.712 $ 2,234,156 $ 1,947,357 $ 1,711,97 4 5 851,686 Preferred and Preference $tod Not Subject to Mandatory Redempoon 354,240 404,240 455,567 467,940 455,490 404,240 306.905 Preferred and Preference Sto(k Subic(t to Mandatory Redempoon 96,802 145,351 160,794 176,694 15H,4H3 158,112 98,000 lunglirm Debt 2,502,054 2,474,100 2,781,590 2,691,615 2,449,502 2,132,137 1,343,195 Toul Capitalizaoon 85,484,071 85,675.016 $5,939 53 s5,570,405 5 5,010,H32 54,406.463 52.599,786 Capitalitauon Ranos at December 31: Common Stockholders' Equity 46.2% 46 '% 42 H% 40 1% 38 9 % 3H 9% 32.7 % ! Preferred and Preference Stock Not subicet to Mandatory Nedemption 6,4 ' .1 N4 9.I 91 1i H Preferred and Preference Stock Subicet to Mandatory Redemption 1,8 2h 2.7 32 3.1 36 3H lungTerm Debt 45.6 43.0 46 H 4H 3 4H,9 48.4 51.' 1bul Capitalization 100.0 % 100 0% 100.0 % 100 0% 100.0 % 100 0 % 100 0% Innglerm Obliganons at December 31 3 706,499 $ H5H,75H $ H82,2'l $ 772,934 $ H56,671 $ "'97,125 $ - Cost of Preferred M l'reterence $to( k Outsunding at December 41 8,71 % 9 3H% 9 66 % 10.00 % 9 87 % 9 63 %
- 99%
Co,t of Inng'lirm Ocht Outstanding at December 31 10,32 % 10 60 % 11.05 % 1! 45 % i1 52 % 10.82 %
- 7t%
Cotumon Stock Data I arnings per Average Common $ hare $ ! .21 $2 40 $ 2.47 $ 2.4 5 $2.50 $2 22 51.19 Return on Ascrage Comrnce. f(quity 7.0% 13 H% i49% 15.2 % 15 9 % 14.2 % *1%. Dis idends l' aid prr Sharc $ 1.96 $ 1.90 5I 92 $ 1 HH $184 51.80 $ l .76 Conunon slosk Divklend hayout Ratio 161 % H2 % 7H% 77 % 74 % 81 % 148 % Common Mock Dividend Yield at December 31 10.4 % 97% 9H% 11.5 % 13 6 % 14.7 % 1 l .H% Prite/I arnings Ratio at Deermber 31 15,5 84 *9 6.7 54 55 12.5
$ hares of Common Stock Outstanding at Decemlier 31 (000) 15 2,50H 152,39H 149,H15 137,0H9 122.237 108,460 52,120 book Value per Common 5 hare at December 31 $ 16,60 $17 90 $ 16 9' $ 16 30 515.93 515 'N $ 16.34 Market Prke per Common Share at De(ember 31 $1H,875 520 125 519 50 $16 375 513 50 $12 25 514.H'5 Rano of Market Pnce to Ltook Value per Share at licecmber 31 114 % 110 % 115 % 100 % H5% 7H% 91 %
38 m
ConsolidIt d Operating St:tintics chio rdrson 1988 1987 19H6 1985 1984 1983 1978 Reventa irom l'lectric sales (Thouundo ResWnrial 8 728,410 $ 622,34H $ 615,262 $ 6t4481 $ 571,878 3 540,167 $ 314,867 Commercial 533,825 454,706 449,590 433,445 *n291 385,277 205,901 Industrial 537.165 452,566 449,392 476,257 469,112 421,736 258,767 Other 65,521 69,454 64,345 61,708 57,921 69,27H 46,471 Suhtotal 1,864,921 1,599,0'2 1,578,589 1,574,891 1,499.202 1,416,458 826,006 Sales ta ruhties 254,052 156,633 137,994 159,262 117,385 76,220 9,346 Total $ 2,118,973 $ 1,755.705 ' $ 1,716,583 $ 1,734,153 $ 1,616,587 8 l,492,678 $ 835,352 Revenue from Electric Sales--% Resklenoa! 34.4 % 35 4 % 35.8 % 34.6 % 35A% 36.2 % 37.7 % Comnuxial 25.2 25.9 26.2 25.0 24.7 25 8 24.6' inOustrial 25.3 25 H 26.2 27.5 29 0 28.3 31.0 j Other 3.1 40 3.8 3.7 3.6 4.6 5.6 i Subtout 88,0 91.1 92.0 90 8 92.7 94.9 98.9 i Sales to Utihties 12.0 8.9 8.0 9.2 7.3 5.1 1.1
'lbtal 100.0 % 100.0 % 100 0 % 100 0 % 100.0 % 100.0 % 100.0 % j Nilowatt flour Sales (Wlhonn.
RcsklentMI 7,628 7,299 7,046 6,791 6,836 6.735 6,501 Commercial 6,060 5,782 5,560 5,266 5,101 5,096 4,470 Industrial 9.872 9,067 8,533 H,751 9,161 8,386 9,600
]
Other 1,159 1,310 1,192 1.149 1,075 1,2 l 1 1,309
)
Subcutal 24,719 23,458 22,33! 21,957 22,173 21,428 21,880 i sales to l'tihues 10,966 6,252 5,835 6,929 4,591 2,917 429 . j Total 35,685 29,710 28,166 28,886 26,%l 24.345 22,309 l I Customers Served at December 31 j Resklential 911,158 902,466 894,164 888.107 885,376 878,949 848.268 l Cominercial 100,808 99,322 97.3H3 96.048 90.810 90,072 86 410 industrial 2,624 2,452 2,239 2,021 1,757 1,003 1.160 Other 918 881 802 H92 721 736 6H9 btal 1,015,508 1,005,121 994.5HH 987,068 ' 78,( 6 6 970,7(x) 936,527 u, -m r,, - Astrage Annual Resklentui kWh ' sage 8,425 8,140 7,924 7,6 7,762 7,695 7,724 AverJge Residential Price per kV 'h 9.40c H 53c H.73 c 8.844 8.3?c 8.02c 4.Hac , 1 Cost of Coa! per Million iku $ 1.34 11,3H $ 1.44 $ 1.53 $ 1.59 $ 1.62 $ 1.16 Generating Capabihty at December 41: Coal 77,9 % 77.9 % 89.1 % 89.l% 89.1 % 89.2 % 85.2 % Oil 2.7 2.' 3,0 3.0 30 30. 7,4 Nuclear 19.4 19 4 7.9 7.9 7.9 7.8 7,4 Total 100.0 % 100 0 % 100 0 % 100 0 % 1(AO% 100.0 %. 100 0 % Sources of Electric Generanon: Coal 77,0% 87.4 % 91.0 % 89 3 % 90.4 % H9 8% 90 4 % Oil - - - - - - 35 Nuclear 23.0 12 6 90 10.7 9.6 la2 61
%tal 100.0 % 100.0 % 100 0 % 100.0 % 100 0 % 100 0 % 100.0 %
f rak laad -Megawans 5,027 4,579 (243 4,084 4,093 4,148 4,038 Number of Emph nees at December 31 7, t 80 7.266 7,496 7,611 7,702 6,765
}383 39
Stockholder Inform tion Stock Dividenda Annual Meeting of Stoci holders Common stock dividends of 49 cents per share were Stockholders are invited to attend the 1989 Annual Meet-paid in each quarter of 1988. For federal income tax ing on Thursday, April 27, at 10:00 a.m. in the Company's purposes, all dividends paid by the Company in 1988, General Office auditorium in Akron, Ohio. Those not I including preferred and preference stock dividends, attending can vote on the items of business by filling represented taxable income to stockhoklers. out and returning the proxy card that is mailed approx-Dividond Reinvestment Plan imately 30 days before the meeting. The Company's Dividend Reinvestment and Stock Transfer Agent Registrar Purchase Plan provides an opportunity for registered Ohio Edison Company National City 13ank, Akron stockholders to acquire shares of Ohio Edison com- Transfer Agent One Cascade Plaza mon stock. Participants in the I'lan may reinvest all 76 South Main Street Akron, Ohio 44308 or a portion of their dividends and/or make optional Akron, Ohio 44308 ) cash payments of up to $40,000 annually. At the end New Board Members of 1988, approximately 64,000 stockholders were At itsJuly r~ceting, the Company's Board of Directors enrolled in the Plan. For more information, call or write elected George M. Smart to the Board. Mr. Smart is pres-to Stockholder Services. ident and chief executive officer of the Central States l Stock Listing and Trading Can Co. in Massillon, Ohio. lie is also president and a Ohio Edison Company common stock is lived on the director of three subsidiaries: Central States Can of New York and Midwest stock exchanges under the "OEC" Canada. Ltd.; Central States Can of Puerto Rico, Inc.; trading symbol. Newspapers generally use "OhioEd" and Central States Can of Thailand. in their stock listings. On December 20,1988, the directors elected Vice a Forrn 10-K Annual Report President IL Peter Burg to senior vice president and Form 10-K, the 1988 Annual Report to the Securities member of the Board, effective February 1,1989. Mr. and Exchange Conunission, will be sent without charge Burg was also elected to the Board of Penn Power. lie , upon written request to Gregory E LaFlame, Secretary, succeeded Executive Vice President Victor A. Owoc, Ohio Edison Company,76 S. Main St., Akron, Ohio who retired with 29 years of service. Mr. Owoc elected 4j308. to retire from the Boards of both Ohio Edison and Multiplo Annual Reports Penn Power at the end ofJanuary 1989, Mr. Owoc served as chief financial ofhcer and We ate required to send at least one copy of the Annual provided wisdom, knowledge and good judgment Repon to each stockholder, but you may be receiving through a period of unprecedented demands on the more than one copy .fi you have more than one stock L,ompany's financial resources. account or you are bath a stockholder and an Ohio Edison employee or retirce. lb eliminate multiple copics Management Developments i and help us reduce costs, please wnte to Stockholder in May 1988, the Company's Board of Directors elected l Services and request that we stop mailing Annual Reports Director of Plant Accounting Howard J.1bber to assistant for a particular account, or complete and return the comptroller, succeeding Assistant Comptroller Warren card provided in this Annual Report. He sure to provide G. Fouch, who retired after 36 years of dedicated service. l l the exact registration of the stock account for which Earl T. Carey, former manager of Customer Accounts, ' you want the Annual Report mailing discontinued. was named Stark Division manager in March 1988, suc. Stockholder Assistance ceeding Robert E. Dawson, who retired with 39 years i l.or assistance or mfonnation, call and ask for Stockhokler of distinguished service. I l Services at 1-800-321-0468 in Ohio, or 1800 633a766 Lake Eric Division ManagerJames E. Markle was outside Ohio, weekdays except holidays, f. rom 8:00 a.m. elected president of Pennsyhania Power Company in ' to 4:30 p.m, Eastern time. Stockhokiers in the Akron November to succeed President A. Wayne Cole, who area and in f.oreign countries shouki call 216-38&5509. retired in March 1989. Mr. Co!e made important con-Thu can also write to Stockholder Services, Ohio tributions to both Ohio Edison and Penn Power during his more than 38 years of service. Mansfield Division l Edison C,ompany, ~6 South Ma.m Street. Akron. Ohio Manager Malcolm E. Cash replaced Mr. Markle as Like 44308. ' Eric Division manager and Fred M. lentz, Ashland Stockholders who have personal computers and District manager, succeeded Mr. Cash as Mansfield modems can call our i ulletin Board service weekdays between 100 p m. and 330 a.m., and on weekends, at Division manager. 216-38 &7937. The ser ice features d.iily stock price. and selected financial data. 40
l I Directsra cnd M n:csmant Donrci of Directors O fficers Division Managers l Robert L Kensinger I Donald C. Blasius Justin T. Rogers,Jr. President, White Consohdated Industoes Inc., Cleveland. Ohio (home President Akron Division apphances, commercial appharkes, outdoor pn> ducts, industrial j products and buildmg components) Member, Fmance Committee, RussellJ. Spetrino Gary M. Stair Nominating Committee Executive Vice President Bay Division and General Counsel ll. Peter ilurg Malcolm E. Cash i Senior Vice President of Ohio Ldison. Member, Fman(c Committee Douglas W. Tschappat lake Eric Division Executive Vice President Robert 11. Carlson Fred M. Irntz President and Chief Executive OfHcer of l'niversa6 Rundle 11. Peter ilurg Mansfield Division Corporation, New Castle, Penny lvania (plumbmg fixtures). Member. Ser,ior Vice President i Audit Comminee. Fred K. White l Robert J. McWhorter Marion Division Dr. Lucille G. Ford senior Vice President Vice President for Academic Affairs, Ashland College, Ashland, Ohio. N. Rod Monahan Chairman. Nominating Cornmtuee; Member, Finance Committee, Frank E. Derry springfield Division Vice President Robert L Inughhead Earl T, Carey 1 Retired, formerly Chairman of the Hoard, President and Chief John A, Gill stark Division Executive Officer of Weirton steel Corporation, Weirton, West Vice President Virgmla (steel products) Chairman, Compensation Committee, Edward T. Bell Member, Audit Commluce. Anthony N. G.orant Warren Division Vice President Glenn 11. Meadows Peter A. Fetterolf President and Chief Execuuve Officer of McNetl(Ohio) Corporation. Barry M. Miller Youngstown Division Akron, Ohio (various manufactured products). Member, Compensa. Vice President tion Comnuttee, Audit Commluce. David L Yeager William R. Miller Vice President Retiicd, formerly Vice Pa sident of Governmental ltrsonnel Relations, The Goodyear Tire and Rubber Company, Akron, Ohio (rubber and ' 7* related products) Member, Compensation Committee. Treasurer John Nelson William A. Daniels Retired, formerly Chairman of the lioard and Chief Executive Comptroller r Othccr of Commerrial Intertech Corp., %>ungstown, Ohio (engincered metal components) Member. Compensation Comminee. Gregory F. LaFlame secretary Charles W. Rainger President of Sandusky Ioundry & Machine Company, sandusky, Joanne Martin Ohio (centrifugal castings) Member, Compensation Committee. Assistant Secretary Justin T. Rogers, Jr. Theodore F, Struck, il President of Ohio Edison and Chairman of the lioard ofits subsiJiary, Assistant Treasurer Pennsylvania Power Chairman, Finance Conunittee, Member, Nominaung Comminee. IIUW3fd3 IUhCf Assistant Comptroller George M. Smart { President and Chief Execuuve Officer of Central States Can Cu, liarvey L Wagner < Mamilon, Ohio (rigid containers) Assistant Comptroller Douglas W. Tschappat 1%ecuitte Vice President of Ohio Ednon Frank C. Watson Rcured, formerly Pre..ident of The %>ungstown Telding and I ngineering Company. Youngstow n, Ohio (nonferrous alloys) Ch,ntman, Aud:t Commiuce, Member. NonunaMg Committee. Director Emeritus Fred 11 Zuck i l ( i i i I I
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. .a O . E:) O ;E:] S O N COM3ANY A Subsidiary of Centerior Eneigy Corporation
, ANNUAL REPORT 1988
ABOUT TOLEDO EDISON DIRECTORS The Company, a wholly-owned subsidiary of Centerior Murray R. Edelman, President of the Company and Energy Corporation, provides electric service to about Executive Vice President of Centerior Energy Corporation. 760,000 people in a 2.500-square mile area of north-Robert 1. Tarling, Chairman and Chief Executive Officer western Ohio, including the City of Toledo. The Company also provides electric energy at wholesale to 13 munici- of the Company and The Clevelard Electric illuminating pally-owned distribution systems and one rural elertnc Company and President of Centerior Energy Corporation cooperative distribution system in its serv cc area. and Centerior Service Company. The Company's 2,800 employees serve about 280,000 Richard A. Miller, Chairman and Chief Executive customers. Officer of Centerior Energy Corporation and Centerior Service Cornpany. EXECUTIVE OFFICES Donald H. Saunders, Vice President- Finance & Administration of the Company. The Toledo Edison Company 300 Madison Avenue Toledo, On 436s2 OFFICERS (419)249-S000 Chairman and Chief Executive Officer . Robert J. Farling Vice Chairman . . Paul M. Smart President . . . Murray R. Edelman Senior Vice President . Richard P. Crouse Vice President-Customer Operations . David L Monseau Vice President-Marketing . . Thomas M. Quinn Vice President - Finance
& Administration . . Donald H. Saunders Vice President- Nuclear . Donald C. Shelton Controller and Treasurer ./ames P Martin Secretary . E. l.yle Pepin CONTENTS 1 Summary of Significant Accounting Policies 3 Management's Financial Analysis and Financial Statements and Notes 21 Auditors' Report 22 Financial and Statistical Review 24 investor Information
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES General Fuel Expense } The Toledo Edison Company (Company) is a wholly- The cost of fossil fuel is charged to fuel expense based owned subsidiary of Centerior Energy Corporation on inventory usage. The cost of nuclear fuel, including (Centerior Energy). The Company's common stock interest, is charged to fuel expense based on the rate was acquired by Centerior Energy on April 29,1986, as cf consumption. Estimated future nuclear fuel a result of a June 25,1985 affiliation agreement with disposal costs are being recovered through the base The Cleveland Electric illuminating Company rates. (Cleveland Electric) approved by the share owners of both companies on November 26,1985. The Company defers the differences between actual fuel costs and estimated fuel costs currently being The Company follows the Uniform System of Accounts recovered from customers through the fuel factor. This prescribed by the federal Energy Regulatory Commis- matches fuel expenses with fuel-related revenues. sion (FERC) and adopted by The Public Utilities Commission of Ohio (PUCO). Deferred Operating Expenses and Carrying Charges The Company is a member of the Central Area Power The PUCO authorized the Company to defer interest Coordination Group (CAPCO). Other members in- carrying costs, current operating expenses (including clude Cleveland Electric, Duquesne Light Company rental payments) and depreciation for Beaver Valley (Duquesne), Ohio Edison Company and Pennsylvania Unit 2 from its commercialin-service date of Novem. Power Company. The members have constructed and ber 17,1987 through December 31,1988. The PUCO operate generation and transmission facilities for the determined that Perry Unit 1 was considered "used use of the CAPCO companies. and useful" on May 31,1987 for regulatory purposes. Consequently, the PUCO authorized the Company to Related Party Transactions defer current operating expenses and depreciation Operating expenses include those amounts for trans- for Perry Unit 1 from June 1,1987 through December actions with affiliated companies in the ordinary 22,1987, the date when these costs began to be course of business operations. recovered in rates. The PUCO authorized the deferral of interest and equity carrying costs, exclusive of those The Company's transactions with Cleveland Electric associated with current operating expenses and de-are pnrnarily for firm power, interchange power, trans- preciation, for Perry Unit 1 from June 1,1987 through mission line rentals and jointiv-owned power plant December 31,1987 and deferral of interest carrying operations and construction. See Notes 1 and 2. costs from January 1,1988 through December 31, 1988. The amounts deferred for Perry Unit 1 pursuant Centerior Service Company (Service Company), a to the PUCO accounting orders were included in wholly-owned subsidiary of Centerior Energy, was property, plant and equipment through the November formed in May 1986. The Service Company provides 18,1987 commercial-in-service date. Subsequent to management, financial, administrative, engineering, le- that date, amounts deferred were recorded as de-gal and other services to the Company and other ferred charges. See Note 7 for a discussion of regula-affiliated companies at cost. The Service Company tory matters relating to the Company's investment in billed the Company $43,000,000, $21,000,000 and these Units. The deferrals will be amortized over the
$6,000,000 in 1988,1987 and 1986, respectively, for life of the related property, such services.
Revenues DePwciation and Amortization Customers are billed on a monthly cycle basis for their The cost of property, plant and equipment, except for energy consumption, based on rate schedules author- the nuclear generating units, is depreciated over their ized by the PUCO. Prior to 1988, these revenues estimated usefullives on a straight-line basis. Annual straight-line depreciation provisions expressed as a were recorded m the accounting period during which meters were read, except for the portion of revenues percent of average depreciable utility plant in service were 3.6% in 1988 and 1987 and 3.5% in 1986. Depre-which was deferred under the mirror construction- c ation expense for the nuclear units is based on the work-in progress (CWIP) law discussed below. Utility units-of-production method. service rendered after monthly meter reading dates through the end of a calendar month (unhilled reve- Costs associated with four CAPCO nuclear generating nues) became a part of operating revenues the fol- units canceled in 1980 were written off in 1988. The lowing month. Effective January 1,1988, the Company net after-tax write-off was $6,000,000. Under the changed its method of accounting to accrue the esti- January 1989 PUCO rate order discussed in Note 7, no mated amount of revenues for sales unbilled at the specific revenues associated with these costs were end of each month. See Note 13. provided. Previously, the costs were being amortized A fuel factor is added to the base rates for electric service. This factor is designed to recover fuel costs h UC at ord rs. from customers. It is changed semiannually after a Effective July 1988, the Company began the external hearing before the PUCO. funding of future decommissioning costs for its operat-1
ing nuclear units pursuant to a PUCO order. Cash Interest Charges contributions are to be made to the funds on a , straight line basis over the remaining licensing period Interest on long-term debt reported in the statement of l for each unit. Estimated total decommissioning costs Results of Operations does not include m, terest on for the Company are $59,000,000 in 1986 dollars for nuclear fuel obligations, except for an immaterial the Davis Besse Nuclear Power Station (Davis-Besse) amount for fuel in the Davis-Besse reactor. Interest on and $28,000,000 each for Perry Unit 1 and Beaver nuclear fuel obligations for fuel under construction is Valley Unit 2 in 1987 dollars. The current level of capitahzed. See Note 5. accruals being funded and recovered in rates from Property, Plant and Equipment customers over the remaining hcensmg penods of the . Units is approximately $4,000,000 annually. The pre- Property, plant and equipment are stated at original ' sent funding requirements for Beaver Valley Unit 2 cost less any amounts ordered to be written off. In-also satisfy a similar commitment made as part of the cluded in the cost of construction are items such as sale and leaseback transaction discussed in Note 2. related payroll taxes, pensions, fringe benefits, man-agement and general overheads and AFUDC. Deferred Gain and Loss from Sales of Utility Plant AFUDC represents the estimated composite debt and equity cost of funds used to finance construction. This The Company is amortizing the applicable deferred noncash allowance is credited to income, except for gain and loss associated with the sales of utility plant in AFUDC for Perry Unit 2. Since July 1985, Perry Unit 2 1987 over the terms of leases under sale and lease- AFUDC had been credited to a deferred income ac-back agreements. See Note 2. The amortization and count. Effective January 1,1988, the Company dis-lease expense amounts are recorded as operation continued the practice of accruing AFUDC on Perry expense. Unit 2. See Note 3. The AFUDC rates, net of the income tax effect, were 10.97% in 1987 and 10.71% in federalincome Taxes 1986. The gross AFUDC rate used in 1988 was 11.62% (10.03% on a net-of-tax basis), The 1988 financial statements reflect the liability method of accounting for income taxes as a result of Maintenance and repairs are charged to expense as adopting the new standard for accounting for income incurred. Certain maintenance and repair expenses for taxes. Prior to 1988, income taxes were accounted for Perry Unit 1 and Beaver Valley Unit 2 have been by the deferred method. Under the deferred method, deferred pursuant to the PUCO accounting orders deferred taxes and deferred tax credits were not discussed above. The cost of replacing plant and adjusted for subsequent changes in federal tax rates. equipment is charged to the utility plant accounts. Tre Also, under the deferred method, the Company did cost of property retired plus removal costs, after de-not record deferred taxes on the temporary differences ducting any salvage value, is charged to the accumu-between book and tax income where the PUCO used lated provision for depreciation. the realized tax benefits to reduce allowable costs for ratemaking purposes. This practice was premised on Mrr r C. construction Work m. Progress regulatory treatment which permits recovery of such The Ohic mirror CWIP law requires that revenues deferred income taxes in future revenues. authorized by the PUCO and collected as a result of including CWIP in rate base be refunded in a subse-A major difference under the liability method is that quent period after the project is included in rate deferred tax liabilities are adjusted for subsequent tax base. Such revenues are deferred and recorded as rate changes. Also, the Company must now record refand obligations to customers. AFUDC continues to deferred taxes for all temporary differences between be capitalized during the construction period. The book and tax income. Initial application of the ac- deferred revenues are then recognized as operating counting standard in 1988 did not impact results of revenues in the statement of Results of Operations operations as the additional deferred taxes were offset over the period of the refund. Amounts collected by a regulatory asset on the balance sheet. Addition- through December 31,1988 under the mirror CWIP ally, allowance for funds used during construction law are being refunded pursuant to the January 1989 l ( AFUDC) and carrying charges that were previously PUCO rate order discussed in Note 7. I I accounted for in the statement of Results of Opera-tions on a net-of-tax or an after-tax basis are now Reclassifications and Restatements i stated on a pre tax basis. Consequently, the 1988 Certain reclassifications F we been made to prior years' federal income tax provision is equally higher. financial statements to make them comparable with 1988 financial statements and consistent with terms of For certain property, the Company received invest- the January 1989 PUCO rate order discussed in J ment tax credits which have been accounted for as Note 7. deferred credits. Prior to 1988, tax credits utilized were reflected as reductions to tax expense over the life of in 1988, a new accounting standard which requires the the related property. Under the new method of ac- presentation of a statement of cash flows in the finan-counting, the amortization of investment tax credits is cial statements was adopted. Previously, a statement reported as a reduction of depreciation expense. See of Source of Funds Invested in Plant, Facilities and Note 8 for federal income tax details. Special Deposits was presented, l i t ;
MANAGEMENT'S FINANCIAL ANALYSIS Results of Operations As discussed in Note 7, $277,000,000 of nuclear costs 1988 vs.1987 were written off in 1988 as a consequence of the January 1989 PUCO rate order. Factors contributing to the 3.8% increase in 1988 operating revenues are as follows: The total amount of AFUDC and carrying charges increase decreased in 1988. The change in status from con-Change in Operating Revenues (Decrease) struction to operation of Perry Unit 1 and Beaver Valley Unit 2 in 1987 resulted in the cessation of Electric Revenues: AFUDC. Instead, an accrual of post-in-service carrying Sales Volume . . .. .. . $ 27,000,000 charges pursuant to PUCO orders began on such Sales of Capacity to Cleveland investments not included in rate base. However, Electric . .. 32,000,000 AFUDC and carrying charges that were previously Deferred CWIP Revenues . . 7,000,000 accounted for on a net-of-tax or an after-tax basis were Fuel Cost Recovery Revenues. (41,000,000) stated on a pre-tax basis in 1988. Base Rates and Miscellaneous . . (2,000,000) Total . $ 23,000,000 Part of the proceeds from the 1987 sale and leaseback transactions was used to redeem outstanding high-
. cost securities which reduced interest expense and Total kilowatt-hour sales m. creased 11.8% in 1988.
preferred dividends in 1988. Sales growth of 5.3% in the industrial sector reflected broad-based strength in the economy, particularly Results for 1988 also included a one-time net after-tax among automobile manufacturers. Residential sales increase of $6,000,000 related to a change in account-increased 4.6% in 1988 largely because of a substan- ing for unbilled revenues. See Note 13. tially warmer summer. The hot summer also contrib-uted to a 3.1% gain in commercial sales as did new 1987 vs.1986 retail outlets. In 1988, the Company sold to Cleveland Factors contributing to the 5.7% increase in 1987 Electric a portion of its leased capacity entitlement in operating revenues are as follows: Bruce Mansfield Plant (Mansfield Plant) and Beaver Valley Unit 2 for three and two-month periods, increase respectively. The increase in revenues attributable to Change in Operating Revenues (Decrease) deferred CWIP revenues resulted from a reduction in Electric Revenues: the level of revenues deferred under the mirror Base Rates and Miscellaneous . $ 29,000,000 CWIP law. Lower fuel cost recovery revenues resulted Sales Volume . 15,000,000 principally from the greater use of lower cost nuclear Deferred CWIP Revenues . 2,000,000 fuel and the PUCO-ordered refund of certain re- Fuel Cost Recovery Revenues . (13,000,000) placement fuel and purchased power costs collected Total $ 33,000,000 from customers during a 1985-1986 Davis-Besse out-age. See Note 4. Rate increases granted to the Com- The rate increase granted to the Company in May 1987 pany in 1987 were offset by the impact of special accounted for most of the increase in base rates and contracts with large industrial customers. miscellaneous revenues in 1987. Total kilowatt-hour Operating expenses increased 22.1% in 1988. Lower s les incre sed 3.9% in 1987. Industrial sales growth was a , p rticularly m the metal fuel and purchased power expense in 1988 resulted mainly from a decrease in deferred fuel expense. ting sector. Residential and commercial sales [ Fuel and purchased power expense also was reduced incre sed 1.9% and 2.5%, respectively. The sales m-for the amortization of reserves previously established creases resulted mainly from the warmer summer but to match the PUCO-ordered refund discussed above, w re partially offset by the moderate temperatures lhe increase in other operation and maintenance during the winter. The increase in revenues attribut-expense and depreciation expense mainly resulted # " " " " ' " N* ~ from a full year of operation of Perry Unit 1 and Beaver tion in the level of revenues deferred under the mirror Valley Unit 2 and a full year of lease expense for CWIP law. Lower fuel cost recovery revenues in 1987 Beaver Valley Unit 2 and Mansfield Plant. The increase resulted from increased use of our nuclear units. in deferred operating expenses in 1988 was largely Operating expenses in 1987 increased by 3.3%. Fuel attributable to the deferral of Beaver Valley Unit 2 and purchased power expense decreased because of operating expenses for most of the year because they the retum to service of Davis-Besse late in 1986 after were not being recovered in rates, in 1987, Perry Unit an 18-month outage and the start up of Perry Unit 1 1 and Beaver Valley Unit 2 operating expenses were and Beaver Valley Unit 2 in 1987. Nuclear units deferred for only about seven and two months, provided 35% of electricity generated in 1987 com-respectively. pared to a negligible amount in 1986. The reduction in 3
l fuel and purchased power expense, lower federal average electric rates, including decreases in the fuel income taxes and savings from cost reduction pro- cost recovery factor, decreased; however, the costs of grams were offset by Mansfield Plant lease expense labor, materials and services used in operations were l and higher operation expenses and depreciation ex-higher. Changes in fuel costs do not affect our results pense for Davis-Besse. of operations since those costs are reflected in the fuel cost recovery factor included in customer bills. AFUDC and carrying charges were slightly higher .m 1987 because of an increase in the amount of invest- Inflation will continue to have a negative impact on ment not in rate base. Interest charges were higher our results of operations. The January 1989 rate order because of an increase in outstanding long-term debt. is primarily designed to recover deferred operating and capital costs of our new nuclear investments. The
. order will not afford protection against future infla-f/fect of Inflation tion. Our cost-reduction efforts to date have been inflation adversely affected results of operations over substantial and will continue to be an area of increas-the last three years. In the period 1986-1988, our ing importance as discussed in Note 7.
)
RETAINED EARNINGS THE TOI.EDO EDISON COMPANY For the years ended December 31, 1988 1987 1986 (thousands of dollars) Balance at Beginning of Year $ 297,221 $ 305,130 $ 276,588 Additions Net income (loss) . (115,452) 165,171 176,917 1 Deductions j Dividends declared: Common stoc k (61,711) (111,500) (102,918) Preferred stock (26,269) (40,212) (45,457) Preferred stock redemption expenses . . . (4,175) (21,368) - Net increase (Decrease) (207,607) (7,909) 28,542 Balance at End of Year . . $ 89,614 $ 297,221 $ 305,130 The accompanying notes and summary of significant accounting policies are an integral part of this statement. I 4
RESULTS OF OPERATIONS mHORDO ED! SON COMPAN) For the years ended December 31, 1988 1987 1986 (thousands of dollars) Operating Revenues Electric . . . . .., . $ 627,997 $605,037 $572,482 Operating Expenses fuel and purchased power . . . . ..... . 116,161 140,176 158,763 Other operation and maintenance .. . . . 358,823 223,307 167,319 Depreciation and amortization . . . .. . . . . 75,093 65,503 37,832 Taxes, other than federal income taxes . .. . . . 80,138 59,658 51,398 Perry Unit 1 and Beaver Va!!ey Unit 2 deferred operating expenses . .. . . .. . (83,813) (39,797) - Federal income taxes . .. . . ..... . . .. . . 29,242 22,747 41,150
, 575,644 471,594 456,462 Operating income . . .. . . . .. . 52,353 133,443 116,020 Nonoperating income (Loss)
Allowance for equity funds used during construction. 5,452 122,138 129,578 Other income and deductions, net . . .. . 30,233 (16,904) (1,627) Write-off of nuclear costs . .. . (276,955) - - Carrying charges on nuclear plants and other. 129,632 14,989 - Federal income taxes - credit 86,244 42,726 52,029 (25,394) 162,949 179,980 income Before Interest Charges 26,959 296,392 296,000 Interest Charges Iong term debt 150,658 182,196 170,722 Short-term debt . (135) 3,297 3,675 Allowance for borrowed funds used during construction . (1,833) (54,272) (55,314) 148,690 131,221 119,083 income (Loss) Before Cumulative Effect of an Accounting Change. . . . (121,731) 165,171 176,917 Cumulative Effect on Prior Years (to December 31,1987) of an Accounting Change for Unbilled Revenues (Net of Income Taxes of $4,177,000) . . 6,279 - - Net income (Loss) . . (115,452) 165,171 176,917 Preferred Dividend Requirements. .. . 26,983 42,749 45,243 Earnings (Loss) Available for Common Stock . $(142,435) $122,422 $131,674 The accompanying notes and summary of significant accounting policies are an integral part of this statement. 5
i MANAGEMENT'S FINANCIAL ANALYSIS Capital Resources and Liquidity land Electric's rate orders which provide for specific levels f rate increases and earnings limitations for We carry on a continuous program of constructing new facilities and modifying existing facilities to meet an-Centerior Energy through 1991. The availability of capital to meet our external financing needs depends ticipated demand for electric service and to comply up n such factors as financial market conditions, with governmental regulations. Cash requirements for the construction program and mandatory retire- "#
- I"85' ur bility to pay dividends, the size of our j mnstmch.on pmgram and our cma radngs. We em ment of securities over the three-year period 1986-pect to be able to raise cash as needed.
1988 totaled approximately $656,000,000. In 1986 and 1987, the capital required to finance our Current securities ratings for the Company are as construction program and to retire securities was ob- f0lIOW5: tained primarily from external sources. Also, m 1987, g
& Poor's investors we sold and leased back certain interests in three Corporation Service generating units as discussed in Note 2. A substantial portion of the net proceeds from the sale and lease- First mortgage bonds . . BBB- Baa3 back transactions was used in 1987 and 1988 to pay Unsecured notes. .. BB+ Bal portions of short-term debt incurred to finance the Preferred stock . .. . BB+ Ba2 construction program, to redeem outstanding securi-A write-off of the Company's investment in Perry Unit ties, to pay our construction program costs and for 2 (as discussed in Note 3 " Construction and Contin-general corporate purposes. In 1988, the Company gencies - Perry Unit 2"), depending upon the mag-issued $50,700,000, of first mortgage bonds as collat- nitude and timing of such a write-off, could reduce eral to secure its obligations in connection with the ,
retained earnings sufficiently to impair the Company's I sale of tax. exempt bonds by public authorities to assist ability to declare dividends. Such a write-off could 1 in financing certain pollution control facilities. At De-result in a default on the capitalization financial cove-cember 31,1988, the Company had $255,000,000 in nants discussed in the last paragraph of Note 2. cash and temporary cash investments available for future cash needs. Cleveland Electric and Centerior Energy are renegoti-Estimated requirements for the Company's cash con- ating certain financial covenants contained in an struction expenditures for 1989-1991 are agreement under which the two companies are facing
$270,000,000. In addition, $257,000,000 will be re- potential non-compliance after 1989. See the last quired for the redemption of debt and preferred stock paragraph of Note 2 for a discussion of the potential during this period. Nearly all of the Company's re- impact on the Company.
quirements in 1989 will be met with internal cash generation and current cash resources. We expect to The Tax Reform Act of 1986 provided for a 40% finance externally about 50% of our 1990 and 1991 average income tax rate in 1987 and a 34% income tax ; requirements. See Note 11 for mformation concerning rate in 1988 and thereafter, the repeal of the invest-rnent tax credit, scheduled reductions in investment limitations on the issuance of preferred and prefer-ence stock and debt. Our available short term bor- tax credit carryforwards, less favorable depreciation rates, a new alternative minimum tax and other items. rowing arrangements are explamed n Note 12. The changes resulted in increased tax payments and a Our ability to meet our financing needs depends upon reduction in cash flow during 1987 principally be-our internal generation of funds and the availability of cause the alternative minimum tax reduced the capital from the financial markets. The Company was amount of investment tax credits allowed as an offset granted a rate increase in 1989 and in the next two to federal income tax payable. These changes had no years pursuant to the January 1989 PUCO rate order. significant cash flow impact in 1988 because the See Note 7 for discussion of the Company's and Cleve. Company had a net operating loss for tax purposes. I 6
CASH FLOWS THE TOLEDO EDISON COMPANY for the years ended December 31, 1988 1987 1986 j (thousands of dollars) Cash Flows from Operating Activities (1) l Net income ( Loss ) . . . . . . . . . . . . . . . . . .. ....... .... ......... $(115,452) $ 165,171 $ 176,917 ) i Adjustments to Reconcile Net income (Loss) to Cash from Operating
' Activities:
Depreciation and amortization . . . . . . . . . . . . . . . ........... 75,093 65,503 37,832 (62,598) Deferred federal income taxes . . . . . . . . . . ............. ....... (150,717) 22,424 investment tax credits, net . . . . . . . . . . . . . . . ..... ............ 6,920 79,332 (21,558)- Write-off of nuclear costs . . . . . . . . . ...................... ... 276,955 - - Deferred and unbilled revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,642 20,185 21,939 De ferred f u el . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,693) 15,848 ' (3,373 ) - Interest capitalized as carrying charges . . . . . . . . . . . . . . . . . . . . . .. (129,632) (14,989) - Leased nuclear fuel amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,285 22,603 117 Deferred nuclear operating expenses . . . . . . . . . . . . . . . . . . . . . . . . (83,813) (39,797). - Allowance for equity funds used during construction . . . . . . . , . . . . (5,452) (122,138) (129,578) Amortization of reserve for Davis-Besse refund obligations to cu st o mers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... (20,777) ' . Other non-cash items . .c........................ ....... . . 9,358 '44,190 17,780 Cumulative effect of an accounting change . . . . . . . . . . . . . . . . . ' (6,279 ) - - Changes in working capital affecting operations . . . .. .... ... 45,614 29,284 44,245 Total Adjustments . . . . . . . . . . . . . . . . . . .. . ..... . 131,623 (50,696) (10,172)' Net Cash from Operating Activities . . . . . . . . . . . . . . . ...... 16,171 114,475 166,745 Cash Flows from Financing Activities (2) Pank loans, commercial paper and other short-term debt . . . . . .. . (68,000) 46,700 (7,700) Debt issues: first mortgage bonds . . . . . . . . . . ... .. ... .. ...... . .... 50,700 ' 41,000- 100,000
. Unsecured debt . . . . . . ... .. . ... .. . .... ..,. - 250,000 100,000 Preferred stock issues . . . . . . . . .... . .. . . . . ........ .. - 50,000 30,000 Common stock issues . . . . . . .. ........... ... ... . .... . .. - - 1,333 Equity contributions from parent . . . . . . . . ....... . .. . . .... -
30,000 91,059 Maturities, redemptions and sinking funds . . . .. ....... ..... ... (222,166) (550,075) (54,718) Nuclear fuel and trust obligations. . . . .. . . . ...... (32,285) (20,954) -(117) Dividends paid . . . . . . . . . ..... . . . . . . . . . , . (89,054) (155,515) (148,382) Premiums, discounts and expenses . . . . . . . ...... . . .... .,, 1,489 (2,731) (3,579) Net Cash from financing Activities . . . . . . . . ... .. (359,316) (311.575)- 107,896 Cash Flows from Investing Activities (2) Cash applied to construction . .. ... ........ ...... . . .. (113,174) .(177,019) (268,569) Interest capitalized as allowance for borrowed funds used during construction . . . . . . ....... .... ... .. . ... ...... . .... (1,833) (54,272) (55,314) Cash deposited in decommissioning trusts . .. ... . ........ .. (1,906) - - Other cash received (applied ) . . . . . . . . . .... .. .. . . .. ,, . 5,394 (22,926) (16,049) Cash received from sale and leaseback transactions, net . . . . . . . . - 1,075,988~ - Cash withdrawn from (deposited in) sale and leaseback trust . .. . 109,976 (109,976) -- Cash withdrawn from pollution control escrow account. . . . , . . 459 5,448 25,403 Net Cash from Investing Activities . . ... .. .... . . . (1,084) 717,243 (314,529) Net Change in Cash and Temporary Cash investments . . . . . . . . .. (344,229) 520,143 (39,888) Cash and Temporary Cash Investments at Beginning of Year . . . . . , . . . 599,117 78,974 118,862 Cash and Temporary Cash investments at End of Year . . . . . . . . . . .... $ 254,888 $ 599,117 $ 78,97a (1) Interest paid was $150,000,000, $183,000,000 and $170,000,000 in 1988,1987 and 1986, respectively. Income taxes paid were $24,980,000 in 1987. No income taxes were paid in 1988 and 1986. (2) Increases in Nuclear Fuel and Nuclear fuel Lease and Trust Obligations resulting from the non-cash capitalizations under nuclear fuel agreements discussed in Note 5 are excluded from this statement. The accompanying notes and summary of significant accounting policies are an integral part of this statement. 7 n
BALANCE SHEET December 31, 1988 1987 _ (thousands of dollars) Assets l l Property, Plant and Equipment Utility plant in service. .. . .. . . ... . .. . $2,438,927 $2,600,511 Less: accumulated depreciation and amortization . .. . . 487,546 419,149 1,951,381 2,181,362 Construction work in progress . . .. .. .. .. .. . . 115,978 67,704 Perry Unit 2. . . .. . .. ................ 343,126 306,570 2,410,485 2,555,636 Nuclear fuel, net of amortization . .... .. . 260,362 265,046 Other property, less accumulated depreciation . . ... 2,152 2,023 2,672,999 2,822,705 Special Deposits Pollution control construction funds, unexpended . .. 424 833 Deposits in trust, sale and leaseback proceeds. . . ... .. - 109,976 Decommissioning trusts . . . . .. .. .. . ... .. 1,906 - 2,330 110,859 Current Assets Cash and temporary cash investments . . . 254,888 599,117 Amounts due from customers and others, net ... . 49,394 62,866 Amounts due from affiliates. . . . . 31,050 15,840 Unbilled revenues . . . . .. . . . 13,415 - Materials and supplies, at average cost. . .. 24,424 21,272 fossil fuel inventory, at average cost. . .. . . . 19,189 23,245 Taxes applicable to succeeding years . . .. ... 53,752 61,614 Other .. .. . . . 1,947 14,699 J4,8,059 798,653 Deferred Charges Unamortized costs of terminated nuclear projects. .. - 17,223 Accumulated deferred (ederal income taxes . . - 246,789 Amounts due from customers for future federal income taxes . 519,238 - Unamortized loss, Beaver Valley Unit 2 sale. . . . . 127,367 134,475 Unamortized loss on reacquired debt . . . 30,809 19,784 Carrying charges and nuclear operating expenses . .. . 259,978 40,072 Other . . . 73,892 87,027 1,011,284 545,370 Total Assets . . . . . .. . $4,134,672 $4,2 77,587 The accompanying notes and summary of significant accounting policies are an integral part of this statement. 8
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L i THE TOLEDO EDlSON COMPANY b December 31, 1988 1987 j (thousands of dollars). i Capitalization and Liabilities l Capitalization Common shares, $5 par value; 60,000,000 authorized; . . 39,134,000 outstanding in 1988 and 1987. . . . . . . . . . . . . . . . , $ 195,687: - $ 195,687. Premium on capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481,081- 482,770. Other paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,059 121,059 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,614 297,221 < Com mon stock eq u ity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 887,442 .1,096,737 Preferred stock With mandatory redemption provisions . . . . . . . . . . . . . ... .. . 71,155 73,340 Without mandatory redemption provisions . . . . . . . . . ... .. 210,000 240,000 Long-term debt . . . . . . . . . . . . . . . . . . . . . . ........ ........ 1,291,444 - 1,'400,292 ~ 2,460,041 2,810,369 Other Noncurrent Liabilities Refund obligations to customers . , . . . . . . . . . . . . . . . . . . . . . . . . . 47,719 67,177 Other, primarily nuclear fuel lease and trust obligations . . . . . . . 269,345 260,429 317,064 327,606 Current liabilities Current portion of long-term debt and preferred stock . . . . . . . . . 26,932 36,932 Current portion of lease obligations . . . . . . . . . . . . . . . . . . . . . . , 38,499 30,791 Accounts payable.. ......... ........ ...... ...... . .. 99,44R 79,970 Accounts and notes payable to affiliates . . . . . . . . . . . . . . . . . . 16,059 84,269 Accrued taxes . . . . . . . . . . . . . ........ .... . ... ... ... 102,811 93,264 Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,807. 43,675 Dividends declared . . . . . . . . . . . .......... . ...... .... 6,423 . 7,497 Accrued payroll and vacations . . . . . . . . . . . . . . ...... ..... 7,728 8,116 Current portion of refund obligations to customers. . . . . . . . . . . . 34,700 - Other . . . . ... ...... ...... . . ..... ....... .. . 11,156 17,000 383,557 401,514 Deferred Credits Unamortized investment tax credits ...... .... .... ...... 105,551 101,5661 Accumulated deferred federal income taxes . . . . . . . . . . . . . . . 484,913 237,103 Reserve for Perry Unit 2 allowance for funds used during construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . 88,295 71,697 Unamortized gain, Bruce Mansfield Plant sale . . . . . . . . . . . . . 255,973 275,618 Ot h er . . . . . . . . . . . . . . . . . . . . . . . . ...... . . . .... 39,278 52,114 974,010 738,098 Total Capitalization and Liabilities . . . . . . . . . . ..... $4,134,672 $4,277,587 l l 9
STATEMENT OF CUMULATIVE THE TOLEDO EDISON COMPANY PREFERRED AND PREFERENCE STOCK 1988 Shares Current December 31, - ; Outstanding . Call Price 1988 1987 (thousands of dollars) 1
$100 par value preferred, 3,000,000 shares authorized; $25 par value preferred, 12,000,000 shares authorized; and $25 par value preference, 5,000,000 shares authorized - none outstanding Subject to mandatory redemption (less current maturities):
$ 100 par $ 11.00. . . . . . . . . . . . . . . . . 44,000 $103.50 $ 4,480 $ . 5,000 - .
9.3 75 . . . . . . . . . . . . 166,750 104.94 16,675 18,340 1 25 par 2 . 81 . . . . . . . . . . . . . . . . . . 2,000,000 27.50 50,000 50,000
$ 71,155 $ 73,340 l '
Not subject to mandatory redemption: ' 100 par 4.2 5 . . . . . . . ....... 160,000 104.625 $ 16,000 $ 16,000 4.56 . . . ..... . ...... 50,000 101.00 5,000 -5,000 4.2 5 . . . . . . . . . . . . . . 100,000 102.00 10,000 10,000-8.32.................. 100,000 102.46 10,000 - 10,000
- 7. 7 6 . . . . . . . . . . . . . . . . . . 150,000 102.437 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 2.365..........,... 1,400,000 28.45 35,000 35,000 3.47................ - - -
30,000 Series A Adjustable ...... 1,200,000 - 30,000 30,000 Series B Adjustable . . . . . . . 1,200,000 - 30,000 30,000 i
$210,000 $240,000 iL The accompanying notes and summary of significant accounting policies are an integral part of this statern'ent.
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h' NOTES TO THE FINANCIAL STATEMENTS (1) Property Owned with Other Utilities and investors The Company owns, as a tenant in common with other utilities and those investors 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. The Company's share of the operating expense of these generating units is included in the statement of Results of. Operations. Property, plant and equipment at December 31,1988 includes the following facilities owned by the Company as a tenant in common with other utilities and lessors: Owner-In- Owner- ship Plant Construction Service ship Mega- Power in Work Accumulated Generating Unit Date Share watts Source Service in Progress Depreciation (thousands of dollars) In Service: Davis-Besse . . . . . . ... , 1977 48.62 % 421 Nuclear $ 519,723 $ 86,438 $ 89,277 Perry Unit 1 & Common facilities .. 1987 19.91 237 Nuclear 911,392 1,370 43,098 Beaver Valley Unit 2 & Common facilities (Note 2) , .. 1987 1.65 14 Nuclear 179,457 ~433 8,081 Construction Suspended (Note 3): Perry Unit 2 . . . . . .... , , Uncertain 19,91 240 Nuclear - 343,126 -
$1,610,572 $431,367 $140,456 (2) Utility Plant Sale and leaseback Transactions As a result of sale and leaseback transactions com- For pfeted in 1987, the Company and Cleveland Electric For the Cleveland are co-lessees of 18.26% (152 megawatts) of Beaver Year Company Electric Valley Unit 2 and 6.5% (51 megawatts), 45.9% (358 (thousands of dollars) megawatts) and 44.38% (355 megawatts) of Units 1, 1989......... ... . ... $ 106,000 $ 63,000 2 and 3, respectively, of the coal fired Bruce Mansfield 1990.. ......... .... 106,000 63,000 Plant (Mansfield Plant) for terms of about 29W years- 1991. ,............. .. 107,000 63,000 The Company sold a substantial portion of its undi- 1992 . ........... .. 110,000 63,000 vided tenant in-common interest in Beaver Valley Unit 1993. . .... .. . .. 111,000 63,000 2 and essentially all of its interests in Units 2 and 3 of Later Years ...... .. .. 2,813,000 1,706,000 the Mansfield Plant. The Company's proceeds from Total Future Minimum the transactions totaled $1,113,100,0(f0. Cleveland Lease Payments . . . . . . $3,353,000 $2,021,000 Electric also sold essentially all of its mterests m the three units of the Mansfield Plant.
The amounts recorded by the Company as rental ex-As co-lessee with Cleveland Electric, the Company is pense for the Mansfie!d Plant leases were $43,095,000 also obligated for Cleveland Electric's lease payments. and $12,600,000 in 1988 and 1987, respectively. If Cleveland Electric is unable to make its payments Rental expenses for the Beaver Valley Unit 2 lease of under the Mansfield Plant leases, the Company would $58,254,000 and $18,300,000 in 1988 and 1987, re-be obligated to make such payments. No payments spectively, were recorded in a deferred charge account were made on behalf of Cleveland Electric in 1988. by the Company pursuant to a PUCO accounting Future minimum lease payments required under these rder. Such amounts will be amortized to expense operating leases at December 31,1988 are summa- over the life of the lease beginning in 1989. Additional rized as follows: rental expense for the Beaver Valley Unit 2 lease l charged to expense in 1988 was $13,556,000. The i additional rent expense charged to expense in 1987 was not significant. i 11
The Company is selling 150 megawatts of its Beaver could lead to the acceleration of payment of obliga-Valley Unit 2 leased capacity entitlement to Cleveland tions under those agreements. Electric commencing in November 1988. Revenues recorded for this transaction were $18,533,000 in (3) Construction and Contingencies 1988. We anticipate that this sale will continue for at Construction Program least ten years. The future minimum lease payments associated with Beaver Valley Unit 2 aggregate The estimated cos' of the Company's construction
$2,068,000,000. Program for the 1989-1991 period is $280,000,000, including AFUDC and excluding nuclear fuel. Should The Company and Cleveland Electric are responsible more stringent environmental regulations be adopted, under the leases for paying all taxes, insurance premi. particularly in the area of acid rain pollution control, ums, operation and maintenance costs and all other future construction program costs would incr"ase similar costs for all their interests in the Units sold and substantially. However, such increases would not oc-leased back. The Company and Cleveland Electric cur until after 1991, may incur additional costs in connection with capital improvements to the Units. The Cornpany and Cleve. Perry Unit 2 land Electric have options to buy the interests back at Perry Unit 2, including its share of the common facili-the end of the leases for the fair rnarket value at that ties, is about 58% complete. Construction of Perry time or to renew the leases. Additional lease provi- Unit 2 was suspended in 1985 by the CAPCO compa-sions provide other purchase options along with condi- nies pending future consideration of several alterna-tions for mandatory termination of the leases (and tives which include resumption of full construction possible repurchase of the leasehold interests) for with a revised estimated cost and completion date, obsolescence and events of default, ir.cluding those mothballing or cancellation. None of these alternatives described in the next paragraph. may be implemented without the approval of each of An agreement relating to a letter of credit issued in P#"
connection with the sale and leaseback of Beaver if Perry Unit 2 were to be canceled, the Company Valley Unit 2 contains several financial covenants af. would seek authorization from the PUCO to recover fecting the Company, Cleveland Electric and Centerior its investment in the Unit in rates. We have no assur- l Energy. Among these are coverage covenants which ance that recovery would be allowed. In the event of , require Cleveland Electric and Centerior Energy to such a cancellation, if and when it were to appear ' maintain earnings-to-interest expense ratios above probable that recovery would not be allowed, then specific levels. We believe that Cleveland Electric and the Company's net investment in Perry Unit 2 (less Centerior Energy may not be able to continue to any tax saving) would have to be written off. We comply with their respective coverage covenants after estimate that such a write-off, based on the Company's 1989. This matter is being discussed with the parties investment in this Unit as of December 31,1988, to this agreement and we believe that new require. would have been about $172,000,000, after taxes. See ments will be agreed upon. This agreement also con. Notes 2 and 11 for a discussion of other potential tains certain capitalization covenants which require consequences of such a write-off, the Company and Cleveland Electric to maintain com-Duquesne has advised the Pennsylvania Public Utility mon stock equity above specific levels and require Commission that it will not agree to resumption of Cen'erior Energy to maintain the ratio of common construction of Perry Unit 2. Duquesne is continuing stock equity and the ratio of total equity to total capitalization above specific percentages. A write-off to pay for its 13.74% ownership share of maintaining Perry Unit 2 while construction is suspended, of the Company,s and Cleveland Electric's mvestments in Perry Unit 2 could result in a default on all or some The increase in the Perry Unit 2 investment amount in of these capitalization covenants. See Note 3. Thee 1988 is primarily the result of the gross-up of AFUDC capitalization covenants also are being discussed recorded in prior periods related to the adoption of with the parties to this agreement and we believe that the new accounting standard for income taxes, new requirements will be agreed upon which could be met in the event of a write-off of the Perry Unit 2 (4) Nuclear Operations and Contingencies investments, barring unforeseen circumstances. The Operating Nuclear Units failure of the Company, Cleveland E lectric or Centerior Energy to comply with any of the covenants would A petition is pending before the Nuclear Regulatory constitute a default which could result in the accelera- Commission (NRC) and another petition is pending in tion of the obligations of the Company and Cleveland the United States Court of Appeals for the District of Electric as co-lessees of Beaver Valley Unit 2. Also, Columbia Circuit, each seeking to halt the operation such a default would constitute a default under other of Perry Unit 1 and suspend its operating license until agreements which contain cross-default provisions that certain safety-related actions are completed. We be-12 i
lieve these petitions are unlikely to succeed in 1986, The lease and borrowing rates are based on bank the NRC undertook a review of nuclear reactors de- prime and commercial paper rates. The nuclear fuel signed by Babcock & Wilcox Company, including the amounts capitalized included interest charges incurred reactor at Davis-Besse. The outcome of that review by the lessors amounting to $18,000,000 in 1988 and and its impact on the Company cannot be predicted. $17,000,000 in 1987 and 1986. Under the leases, rental payments are made as the fuel is burned in a in 1987, the PUCO ordered a refund of certain re-reactor. The estimated future lease amortization pay-placement fuel and purchased power costs . incurred ments based on projected burn are $38,000,000 in and collected from customers during an outage at 1989, $30,000,000 in 1990, $48,000,000 in 1991 and, Dav,s-Besse i in 1985 and 1986, plus mterest. The re-assuming replacement nuclear fuel financing arrange-fund is being made to customers over a period of 18 ments are entered into, $40,000,000 in 1992 and months beginning in february 1988 through operation
$46,000,000 in 1993. As these payments are made, the of the fuel cost rate adjustment. Of the $33,634,000 amount of credit available to the lessors becomes total refund to be made, $20,777,000 was refunded available to finance additional nuclear fuel.
through December 31,1988. The refund reduced cash flow but did not adversely affect results of opera- At December 31,1988, a total of $268,000,000 is tions as adequate reserves were provided in prior committed under the nuclear fuel financing programs. years. This includes nuclear fuel in the Davis-Besse, Perry Unit 1 and Beaver Valley Unit 2 reactors with remain-Other Nuclear Risks ing payments of $58,000,000, $20,000,000 and
. $12,000,000, respectively, as of December 31,1988.
T.he Company'sin. terests in nuclear units may be im-pacted by activities or events beyond the Company's control. Operating nuclear generatmg uruts have ex- (6) Nuclear Insurance perienced unplanned outages or extensions of sched- The Price-Anderson Act limits the liability of the own-uled outages because of equipment problems or new s of a nuclear power plant. This limit is covered by regulatory requirements. A major accident at a nu- private insurance amounting to $160,000,000 (which clear facility anywhere in the world could cause the will be increased to $200,000,000 in early 1989) and NRC to limit or prohibit the operation, construction or an amount provided by an industry assessment plan. In licensing of a nuclear unit. the event of a nuclear incident at any unit in the United States resulting in losses in excess of private (5) Nuclear Fuel insurance, the Companys' maximum potential assess-The Company has inventories for nuclear fuel which ment under that plan (assuming thc7 other CAPCO should provide an adequate supply into the mid- c mp nies were to contribute their proportionate share of any assessment) would be $58,503,000 (ad-1990s. Substantial additional nuclear fuel must be ob-tained to supply fuel for the remaining useful lives of lusted for inflation) per incident, but is limited to
$8,844,000 per year for each nuclear mcident.
Davis-Besse, Perry Unit 1 and Beaver Valley Unit 2. More nuclear material and fuel would be required if The CAPCO companies have insurance coverage for Perry Unit 2 were completed. damage to property at Davis-Besse, Perry and Beaver lhe Company finances nuclear fuel under two pro. V lley (including leased fuel and clean-up costs). Coverage amounted to $1,725,000,000 for each site as grams. Under one set of nuclear fuel leasing arrange. menN the Company can currently finance a maximum f January 1,19 9. Damage to property could exceed amount of $205,000,000, of which $5,000,000 of this the insurance coverage by a substantial amount. If it credit arrangement will terminale on November 30, d es, the Company's share of such amount could have 1989, $32,500,000 will terminate on November 30, a material adverse effect on the Companys' financial 1990 and $167,500,000 will terminate on November c ndition and results of operations. 30,1991. The Company expects to enter into re. The Company also has insurance coverage for the cost placement nuclear fuel financing arrangements. of any replacement power purchased after the occur-Under a second set of nuclear fuel leasing arrange-rence f certain types of accidents at our nuclear ments, the Company can currently finance a maximum "*ts. %e amount o{ We coverage is 90% of the , amount of $83,000,000. Approximately $12,100,000 est.imated difference m replacement power costs per of this credit arrangement will terminate in November week during the 52-week period starting 21 weeks 1989. The balance of the arrangement is cancelable fler an accident and 45% of such estimate per week with one year's notice by the lender. nN 52 wds. h coM and durahn of replacement power could substantially exceed the in-surance coverage. 13 J
(7) Regulatory Matters ment and other rate matters will be terminated. One party who did not sign the settlement still will have an . During the three years ended December 31,1988, the l appeal pending before the Ohio Supreme Court relat-PUCO granted increases in electnc rates to the Com-ing to the Perry Unit 1 prudence disallowance in pany as follows: which the PUCO disallowed approximately Annualized $168,000,000 of the Company's share of Perry Unit 1 Date Amount construction costs.
$$Ifjfl)# As a consequence of the order relative to the Com- ,
p ny, the Company recorded additional write-offs of 1 May 1987 ' $43.0
$35,000,000 ($21,000,000 after tax), bringing the total December 1987 0.5 write-off of nuclear costs in 1988 resulting from the On January 31,1989, the PUCO issued orders for the rder to $277,000,000 ($181,000,000 after tax).
Company and Cleveland Electric which adopted a These involved write-offs of the remaining investment settlement reached between the companies and the in f ur canceled nuclear construction projects (as majority of the interveners in then pending rate cases, discussed i}}