ML20214V405

Toledo Edison Co Annual Rept 1986

ML20214V405
Person / Time
Site:	Beaver Valley, Davis Besse, Perry, 05000000
Issue date:	12/31/1986
From:	TOLEDO EDISON CO.
To:
Shared Package
ML20214V285	List: ML20214V283 ML20214V323 ML20214V371 ML20214V405 ML20214V438
References
NUDOCS 8706120086
Download: ML20214V405 (27)

Text

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About Toledo Edison The Toledo Edison Company is a public utility engaged in the generation, transmission, distribution and sale of electric energy for about 759,000 people in a 2,500-square mile area of north-we: tern Ohio, including the City of Toledo. Toledo Edison also provides electric energy at wholesale to 13 municipally-owned distribution systems and one rural electric cooperative distribution system in its service area. The Company's 2,700 employees serve about 276,000 customers.

The Company's common stock was acquired by Centerior Energy Corporation on April 29,1986 pursuant to an affiliation agreement with The Cleveland Electric illuminating Company.

Imrtor Information Executitc offius Share On ncrInquiries The Toledo Edison Company Communications regarding stock transfer requirements, lost 300 Stadison Avenue certificates, dividends and changes of address should be directed Toledo, Ohio 43652 to Share Owner Senices at Centerior Energy Corporation. 'Ib Telephone Number (119)249 5000 reach Share Owner Senices by phone, call the following numbers:

Independent Accountants l*'"I '"II* I" Cleveland area 612 6900 Arthur Andersen & L.o.,300 Stadison Avenue ibledo, Ohio 43604 Outside Cleveland area 1 800 433 7798 Please have your account number ready when calhng.

Band Trustre omp ndence should be sent to the address of the Transfer Fhe Chaic Stanhattan llank, N. A., New %rk, N.Y.10081 Agent shown above.

Exrhange 1.isting' Diddcnd Rdnnstonent and Stock Purt ha. Plan Preferred-$25 par value-8Al%, $2.363, $1.28, $3.47, $3.75 Cederior Energy Corporation has a Dividend Reinvestment Dnd $3.72 series, Adjustable Series A and Adjustable Serien !!

and Stock Purchase Plan which provides 'Ibledo Edison share Mew Wrk Stock Exchange owners of record and other investors a convenient means of 9trferrrd-$100 par value-4 %%,8.32%,7.76% and 10% ries purchasing shares of Centerior common stock by investing a American Stock Exchange part or allof their quarterly dividends and cash payments without paying any fees In addition, individuals may establish

~

Simk Registrar an Individual Retirement Account ORA) which inve5ts in AmeriTrust Company National Association Centerior common stock through the Plan. Information and a 20 Euclid Avenue, Cleveland, Ohio 4 illi prospectus relating to the Plan and the IRA may be obtained Stock Tranpr knt from Centerior Sharc Owner Services at the above addren.

Tentenor Energy Corporation litm M.E share Owner Services The Company will furnish to share owneri, without charge, RO. Ilox 91661, Cleveland, Ohio i1101 4661 a copy of its most recent annual report to the Securities and Ewhang Cmnnunion Worm 10.K) and, upon payment of a

@ondliiyanabnt nwona ke, a copy of e ch eMt to Fonn 104 bquests The Chase Stanhattan llank, N. A., New Wik, NY 10081 should be directed to the Secretary of Centerior Energy 1212)6N4850 Corporation, l'.O. Ilox 91661, Cleseland, Ohio 11101 -1661, Notice: The annual report and the financial statementi herein are for generalinformation and are not intended to be used in connection with any sale or purchase of secuntien.

The ComMny is an equal ottortunity employer,

l Summary cf Signifiernt Acc:unting P:licie3 General The Toledo Edison Company (the Company) is a wholly-owned subsidiary of Centerior Energy Corporation (Centerior Energy). The Company's common stock was acquired by Centerior Energy on April 29,1986, as a result of a June 25,1985 affiliation agreement with The Cleveland Electric illuminating Company (Cleveland Electric) approved by the share owners of both companies on November 26,1985.

The Company follows the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission and adopted by The Public Utilities Commission of Ohio (PUCO).

Eleclassifications Certain reclassifications have been made to the prior years financial statements to conform to current year presentations.

llelated Party Transactions Operating expenses include those amounts for transactions with affiliated companies in the ordinary course of business operations.

The Company's transactions with Cleveland Electric are primarily for in-terchange power, transmission line rentals and jointly-owned power plant operations and construction. See Note 2.

Centerior Service Company (Service Company), a wholly-owned subsidiary of Centerior Energy, was formed in May 1986. The Service Company provides management, financial, administrative, engineering, legal and other tervices to the Company and other affiliated companies at cost. During 1986, the Service Company billed the Company $6,000,000 for such services.

Itevenues Customers are billed on a monthly cycle basis for their energy consumption, based on rate schedules authorized by the PUCO. These revenues are recorded in the accounting period during which meters are read. A fuel factor is added to the base rates for electric service. This factor is designed to recover fuel costs from l customers. It is changed semiannually after a hearing before the PUCO.

1 Furt i The Company defers the differences between actual fuel costs and estimated fuel costs currently being rewvered from customers. This matches fuel expenses with fuel related revenues.

The cost of nuclear fuel is charged to fuel expense based on consumption.

Estimated future nuclear fuel disposal costs are being recovered through the base rates.

Hepreciation and Amortnation The cost of property, plant and equipment, except for the Davis llesse Nuclear Power Station (Davis llesse), is depreciated over their estimated useful lives on a straight hne basis. Depreciation expense for Davis Ik sse is based on the units-of-production method. This includes a provision for decomrnissioning costs, currently estimated at $59.000,000 in 1986 dollars. There are no restrictions on the use of the amounts currently being recovered from customers through rates for decommis-sionir.,t. The equivalent straightdine provisions for depreciation, excluding Davis.

liesse, overall averaged 3.5% in 1986,1985 and 1981. The Company intends to use the units +f prmluction depreciation method for its investments in Perry Unit I and licaver Valley Unit 2, 2

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Costs associated with four Central Area Power Coordination Group (CAPCO)

I nuclear generating units cancelled in 1980 are being amortized and recovered through rates in accordance with PUCO rate orders. The unamortized balance of these costs will be amortized through 1991. No return is allowed on the unamortized balance.

in December 1986, the Financial Accounting Standards Board (FASB) issued a new pronouncer' tent, Statement of Financial Accounting Standards 90 (SFAS 90).

SFAS 90 sets forth new requirements for accounting for plant abandonments and disallowances. The new standard becomes effective in 1988. We do not believe its application will materially impact the Company's financial statements as it relates to the 1980 CAPCO abandonment loss.

Federal Income Taxes The Company has recorded as deferred federal income taxes the differences between straight-line depreciation and tax depreciation for property additions since 1973, as well as the tax effects of certain other timing differences. This treatment is

consistent with the methods used for rate-making purposes. The remaining timing differences are not deferred. They are recognized for book purposes, and in rates, in

the year they affect taxes payable. At December 31,1986, the cumulative amount of income tax timing differences for which deferred income taxes have not been provided amounted to $178,000,000. Based on PUC0 and Ohio Supreme Court decisions, such taxes can be recovered in future revenues.

j For certain property, the Company receives investment tax credits which are I accounted for as deferred credits. Tax credits utilized are reflected as reductions to tax expense over the life of the related property. See Note 8 for federalincome tax details.

, Debt Interest Interest on long term debt reported on the statement of Results of Operations includes interest on nuclear fuel obligations for fuel in the reactor. Interest on nuclear fuel obligations for fuel under construction is capitalized.

l'roperty, Plant and I:quipment i Property, plant and equipment are stated at original cost. Included in the cost of

' construction are items such as related payroll taxes, pensions, fringe benefits.

1 management and general overheads and an allowance for funds used during con-j struction ( AFUDC). AFUDC represents the estimated composite debt and equity cost of funds used to finance construction. This noncash allowance is credited to I income, except for AFUDC for Perry Unit 2. Since July 1985, Perry Unit 2 AFUDC l has been credited to a deferred income account. See Notes 3 and 7, The AFUDC rates, net of the income tax effect, were 10.71% in 1986,10.50% in 1985 and q

ranged from 10% to 10.25% in 1984.

Maintenance and repairs are charged to expense as incurred. The cost of

. replacing plant and equipment is charged to the utility plant accounts. The cost of property retired plus removal costs, after deducting any salvage value, is charged to the accumulated provision for depreciation.

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r M: nag: ment'o Financi:1 Anr. lysis Results of Operations Operating revenues in 1986 were essentially unchanged from 1985, as gains from higher retail electric sales were offset by a decline in sales to municipals and a full-year effect of the discontinuance of gas and steam heating operations in 1985.

Operating revenues increased by 7.9% in 1985 and 9.3% in 1984 as a result of increased rates and growth m electric sales. Rate increases in the three-year period 1984-1986 were slightly above the national rate of inflation. Sales showed a modest gain in the past two years, principally because of growth in the services sector of the economy.

Operating expenses increased by 2.7% in 1986,6.3% in 1985 and 9.9% in 1984. Increases in operatir:g expenses occurred in all three years as a result of inflation and basic growth in the business. Operating expenses also increased as a result of an outage at Davis-Besse which began in June 1985 and ended in December 1986. This outage also resulted in greater generation at coal-fired plants and increased purchases of power from other utilities resulting in higher costs. Most of the power purchases were made at unit prices lower than the cost of internal generation.

Earnings available for common stock in 1986 were about the same as 1985 following increases of 11.5% in 1985 and 20.7% in 1984. Earnings have been impacted by higher cost of operations which were not fully recognized in rate cases and an accounting deferral of AFUDC for Perry Unit 2, which began July 1,1985.

The AFUDC deferral did not affect cash flow during these periods, bat it did result in reductions in earnings a/ailable for common stock.

Notwithstanding the Perry Unit 2 AFUDC deferral, AFUDC has represented an increasing proportion of earnings - 130.0% in 1986,105.4% in 1985, and 99.2%

in 1984. At the same time, cash flows have been impacted by higher cost of service and the cost of additional debt and equity financing for the completion of two nuclear generating units. AFUDC will be discontinued on these facilities as they become operational.

Efful ofinflation Inflation continues to affect our business even though the 1986 rate of inflation was less significant than the already moderate rates of tne last few years. Over the three-year period 1984-1986, the Company's average electric rates have increased slightly more than the national indices for prices. In this period, increases in the cost of labor, materials and services used in operations were moderated by a downward trend in the cost of coal.

The effect of inflation on the cost of much of our new facilities has yet to be recognized in the rate-making process. Generally, we have to raise new :apital to meet growth needs at inflated costs of construction and to replace wornout items at higher replacement costs. If rate adjustments fail to compensate for the cost of new capital, an erosion of return on equity will occur. As a result, there will be a continuing need for rate relief.

We continue to seek adequate and timely rate increases for the Company and a regulatory environment which is responsive to the effect of inflation on our investment.

4

r Results of Operations The Toledo Edison Company l For the years ended December 31,

! 1986 1985' 1984 (thousands ot dollars) l Operating Revenues Electric. . . . . . .................... .... ... .. . ....... . $594,421 $589,172 $541,869

} Steam heating and gas . . . . . . . . . . ....... ... ...... .. .. .

5.761 9,436 l 594,421 594,933 _ 551,305 l

Operating Expenses Fuel and purchased power . . . . . . . . . . . . . . .. ............... . 158,763 158,990 139,780 Other operation and maintenance . .. .. ....... ......... .. . . 167,319 141,608 125,351 Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . .. .. 37,832 44,338 49,971 ,

Taxes, other than federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 52,440 48,698 46,602 l Federat income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. 50,763 61,412 66,411 467,117 455,046 428,115 t

li Operating Income . ........... . .. . . . .. ............ .. .. 127,304 139,887 123,190 l Nonoperating income i Allowance for equity funds used during construction . . . . . . . . . . . . . . 119,954 97,725 82,736 1

Other income and deductions, net . . . . .. . .......... .. (1,627) 10,669 7,876 l Federal income taxes - credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 52,029 38,167 34,335 i 170,356 146,561 124,947 I

Income Before Interest Cha rges . . . . . . . . . . . . . . . . . . . . ......... ... .. . 297,660 286,448 248,137 Interest Charges Long. term debt . .......... ......... . ........ ........... 168,275 150,021 122,518 l

i Short-term debt . . . . . . . . . . . . . . . . . . . ...... .. .. .. ......... 3,675 4,518 6,883 Allowance for borrowed funds used during construction . . . . . . . . . . . . . (51,207) (41,604) (34,790)

I 120,743 112,935 94,611 I

Net /ncome . . . . . . . . . . . . .............. ............................... 176,917 173,513 153,526 Preferred dividend requirements . . . . . . . . . . . . . . . .. .. ... . 45,243 41,362 34,996

Earnings Availablefor Common Stock. ........... . .. ...... ....... $131.674 $132,151 $118,530 1

1 The accompanying notes and summary of significant accounting policies are an integral part of this statement.

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M: nag: ment's Fin:nci:1 An lysis Capital Resources and Liquidity We carry on a continuous program of constructing new facilities to n.eet anticipated demand for electric service, to replace aging facilities and to comply with pollution control regulations. The capital requirements for this construction program over the three-year period 19841986 totaled approximately $1,200,000,000, excluding nuclear fuel. This amount includes AFUDC. The capital required to finance our construction program is obtained from funds generated internally as well as from external sources. About 69% of the construction program capital requirements over the 1984-1986 period was raised through bank borrowings, sales of securities and equity contributions from the parent company. In 1986 the Company sold

$100,000,000 of first mortgage bonds, $100,000,000 of unsecured notes and

$30,000,000 of preferred stock. Equity contributions from Centerior Energy pro-vided $91,000,000. The net proceeds from the sales of these securities and the equity contributions from the parent company have been used to pay portions of short-term debt incurred to finance the construction program, to pay the construc-tion program's costs and for general corporate purposes.

In addition to funds required for the construction program, the Company will require $410,000,000 for the retirement of debt and preferred stock during the 1987-1991 period. See Note 11 for further information concerning the first mort-gage bonds and the preferred and preference stock of the Company. The Company's available short-term financing is explained in Note 12.

Our ability to finance t!;e construction program depends upon the Company obtaining sufficient and timely rate increases and upon availability of capital to the Company and Centerior Energy. Permanent rate increases granted during recent years by the PUC0 have been significantly lower than the amounts requested. These rate decisions have limited the amount of funds we generate internally, weakened our financial condition and led to lower security ratings. See Notes 3 and 7 for a discussion concerning the risks associated with the construction cf nuclear generat-ing units and the recovery of costs through the regulatory process.

The availability of capital to meet our external financing needs depends upon such factors as financial market conditions, earnings, our ability to pay dividends, the size of the construction program and credit ratings. In 1985, rating agencies lowered their ratings on certain securities of the Company. This made our cost of capital more expensive. In April 1986, Standard and Poor's Corporation raised the Company's first mortgage bonds and preferred stock ratings to BBB- and BB+,

respectively. Moody's Investors Service rates the Company's bonds Baa3 and preferred stock Ba2.

For discussion of the cash flow impact of the Tax Reform Act of 1986, see Note 8.

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l . Ret. tined E:rnings . The Toledo Edison Company l

For the years ended December 31, 1986 1985 1984 (thousands of douars)

Balance at Beginning of }'ea r . . . . . . . . . . . . . $ 276,588 $ 221,486 $ 187,475

( . . . . .. . . . . . . . .

Additions Net income . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 176,917 173,513 153,526 l

Deductions Dividends declared Common stock. . . .. . . . . . . . . . . . . . . . . . . . . . . (102,918) (76,566) (82,900)

Preferred stock . . . . . . . . . . . . . . .. . . . . . . . . . (45,457) (41,845) (36.615)

Earnings Reinvested During the Year . . . . . . . . . . .

28,542 55,102 34,011

$ 305,130 $ 276.588 $ 221,486

- Balance at End of 1* car . . . . . . . . . .. . . . . . . . . . . . . . . . .

, Source of Funds Invested in Plant and Facilities For the years ended December 31, 1986 1985 1984 (thousands of donars)

, Providedfrom Internal Sources Net Income . . . . . . . . . . . . . .. . . . . . . . . $ 176,917 $ 173,513 $ 153,526 Principal Non-Cash Items:

Depreciation and amortization. . . . . . . . . . . . . . . . . . . 37,832 44,338 49,971 Deferred federal income taxes . . . . . . . . . . . . . . . . . . . . 32,037 12,801 19,224 Investment tax credits, net . . . . .. . . . . . . . . . . . (21,558) 6,512 9,319 Allowance for equity funds used during construction. . . . . (119,954) (97,725) (82,736)

Funds Provided from Operations .. . . . . . . . . . . 105,274 139,439 149,304 Dividends paid. .. . . . . . .. . . . . . . . . . . . . (148,382) (139,072) (114,052)

Increase in reserve for Perry Unit 2 allowance for funds used during construction . . . . . . . . . . .. . . . . . . . . . . .. . 27,079 12,460 -

Net change in working capital and other accounts. . . . 22,608 3,905 13,348 Allowance for equity funds used during construction. . . . . . 119.954 97,725 82,736 l

Funds Provided from Internal Sources . . . 126.533 114,457 131,336 l

Providedfrom External Sources Sale of Securities:

Common stock. . . . . . . . . . . . . . . . 1,333 80,885 64,299 Preferred stock . . . . . . . . . . . 30,000 30,000 65,000 First mortgage bonds. . . . . . . . . . . . . 100,000 96,800 107,300 Equity contributions from parent . . . . . . . 91,059 - -

Net change in other debt. . . . . .. . . . . . 93,535 147,346 67,846 Net change in pollution control construction funds . . . . . 25,403 (10,512) (21,215)

Net increase (decrease) in short-term debt . . . . . . . . . . . . . . (7,700) 1,000 28,000 i

Net (increase) decrease in temporary cash investments . 41,492 (31,599) (69,428)

Redemption of bonds and preferred stock.. . . . (53,031) (52,823) (14,009) l

! Net increase in other noncurrent obligations, primarily nuclear fuel obligations . . . . . . . . .. , . . 42,047 33,486 29,512 Funds Provided from External Sources . . . . . 364.138 294,583 257,305

$ 490,671 $ 409,040 $ 388,641 Total Sources of Funds . . . . . . . . .

invested in '

Construction Expenditures. .. . . . . . . . $ 449,432 $ 378,045 $ 356,221 l

Increase in Nuclear Fuel Inventory . . . . . . . 41,239 30,995 32.420 Totalinvested in Plant and Facilities . . . . . . . . $ 490,671 $ 409,040 $ 388.641 I.

l - The accompanying notes and summary of significant accounting policies are an integral part of these statements.

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Brt:nca Sheet The Toledo Edison Company December 31, l 1986 1985 l Assets Ghomnds of dollars)

Property, Plant and Equipment Utility plant in service . . . . . . . . . . . . . . . . . . . . . . . .. . .. .. $1,442,812 $1,392,346 Less: accumulated depreciation and amortization . .. .. 415,745 390,565 1,027,067 1,001,781 Construction work in progress . . ... . . .. . . ... ... 1,870,649 1,509,849 Perry Unit 2 . . . . . . . . . . .. ... . ........ ........ . . 275,055 246,568 3,172,771 2,758,198 Nuclear fuel, net of amortization . . . . ......... . .. ... .. 267,829 226,590 Other property, less accumulated depreciation. . . .. . . . . . . 1,193 1,835 3,441,793 2,986,623 Pollution Control Construction Funds, unexpended . . . . . . . . . .. . 6,331 31.734 Current Assets Cash and temporary cash investments . . . . . . . . . . .. . 78,974 118,862 Amounts due from customers and others, net . .. . . . 50,728 51,168 Amounts due from affiliates. . . . ... .. . .. . . 11,539 13,416 Materials and supplies, at average cost . . . .. . . ...... . 11,479 10,500 Fossil fuel inventory, at average cost . ... ... ... . . ... 21,182 20,720 Taxes applicable to succeeding years. . . .. .... . . 44,899 41,407 Other .. . .... ... . . . ... . . ... . 2,536 15,535 Deferred Charges 221,337 271,608 Unamortized costs of terminated projects . . . . . ... 22,408 27,593 Accumulated deferred federal income taxes . . . . . . . ... 11,223 2,475 Other.. . . .. . ... .. .. . . .. 66,436 45,260 100,067 75,328 Total Assets . . . . .. ... . .... . . . .. $3.769,528 $3,365,293 Capitalization and Liabilities Capitalization Common shares, $5 par value: 60,000,000 authorized; 39,134,000 and 38,871,000 outstanding in 1986 and 1985, respectively . . $ 195,687 $ 194,354 Premium on capital stock .. .. .... . . 482,787 478,939 Other paid-in capital . . . . . . . . .. . ... . 91,059 -

Retained earnings . . . . . .. .. ..... . .. . . .. . 305,130 276,588 Common stock equity. . . . .. . . ... . . . .. 1,074,663 949,881 Preferred stock With mandatory redemption provisions . . . . . . .. . 148,797 153,639 Without mandatory redemption provisions .. ... . .. 260,000 230,000 Long-term debt . .. .. .. .. . .. .. .. 1,480,947 1,339,268 Other Noncurrent Liabilities, primarily nuclear fuel lease and 2,964,407 2,672,788 trust obligations . . . . . . . . . . . . . .. .. .. .. 274.644 232,597 Current Liabilities  :

Current portion of long-term debt and preferred stock. . .. 28,398 24,731 Current portion of lease obligations . . . . .. . .. ... . 17,710 17,710 Notes payable to banks and others. . . .. . 15,000 29,000 Accounts payable . .... ....... . . . . .. . 62,480 56,132-  !

Accounts and notes payable to affiliates. .. ... 7,767 69 l' Accrued taxes . . . . . .. .. . 46,686 51,627 Accrued interest . . . ... . .. .. 42,955 39,952 Disidends declared . .. . . .. .. . . 11,300 11,307 Accrued payroll and vacations. , . .. .. . 8,929 6,179 Other . . . ... . . . . .. .. . . 11,518 5,222 252,743 241,929 Deferred Credits Unamortized investment tax credits. . .. 33,890 55,448 Accumulated deferred federal income taxes . . ..... . . 189,454 148,669 Reserve for Perry Unit 2 allowance for funds used during construction . . .. . . .. . . . . 39,539 12,460 Other.... . . ..... .. . 14,851 1,402 277,734 217,979 Total Capitalization and Liabilities .. . . $3,769,528 $3,365,293 The accompanying notes and summary of significant accounting policies are an integral part of this statement.

8

St t:m:nt of Cumul:tive Pr:f:rred end The Toledo Edison Company Pref:r:nce Stock December 31, Sa s Cu nt Outstanding Call 7 rice 1986 1985 (thousands of dollars)

$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 . 54,990 $ 106.00 $ 5,499 $ 5,740 9.375 . .

200,050 105.93 20,005 21,670 13.25 112,680 108.57 11,268 12,134 12.65 . 182,250 108.50 18,225 19,095 14.80 . .

288,000 110.00 28,800 30,000 1,200,000 28.75 30,000 30,000 25 par 3.75 .

3.72 . 1,400,000 28.72 35.000 35,000

$148,797 $153,639 Not subject to mandatory redemption:

100 par 4.25 160,000 104.625 $ 16,000 $ 16,000 4.56 . . 50,000 101.00 5,000 5,000 4.25 100,000 102.00 10,000 10,000 8.32 100,000 103.54 10,000 10,000 7.76 150,000 103.377 15,000 15,000 7.80 150,000 102.60 15,000 15,000 10.00 190,000 101.00 19,000 19,000 25 par 2.21 . 1,000,000 25.90 25,000 25,000 2.365 . 1,400,000 29.15 35,000 35,000 4.28 800,000 31.78 20,000 20,000 3.4 7 . . . . . . ... 1,200,000 30.97 30,000 30,000 Series A Adjustable . 1,200,000 - 30,000 30,000 Series B Adjustable 1,200,000 - 30,000 -

$260,000 $230,000 The accompanying notes and summary of significant accounting policies are an integral part of this statement.

{

9

l Not:3 to the Fin:nci:1 St t:m:nts I (1) Afiliation The affiliation between the Company and Cleveland Electric Energy common stock in exchange for each share of the under Centerior Energy became effective on April 29,1986. Company's common stock. No other securities or financial The Company's share owners received one share of Centerior obligations of the Company were affected.

(2) Property Owned with Other Utilities The Com9any owns, as tenants in common with other utilities, 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 and is obligated to pay for its respective share of the construction and operating costs. No owner is responsible for any other owner's share. The Company's share of the operating expense of properties owned with others is included in the Results of Operations. Property, plant and equipment at December 31,1986 includes the following facilities owned by the Company as tenants in common with other utilities:

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

In Service:

Davis-Besse. . . . . . . . . . . 1977 48.62 % 421 Nuclear $479,051 $ 56,846 Bruce Mansfield Unit 2. 1977 17.30 135 Coal 72,029 452 Bruce Mansfield Unit 3. 1980 19.91 159 Coal 129,859 337 Under Construction (Note 3):

Perry Unit 1 & Common Facilities . . . . . 1987 19.91 240 Nuclear -

974,722 Beaver Valley Unit 2 &.....

Common Facilities . . .. 1987 19.91 166 Nuclear -

813,744 Construction Suspended (Note 3):

Perry Unit 2. . Uncertain 19.91 240 Nuclear -

275,055

$680,939 $2,121,156 10

(3) Construction and Contingencies Construction Program The estimated cost of the Company's construction program suspend construction and operation of Perry Unit 1 because for the 19871991 period is $630,000,000, including AFUDC the seismic design of the Plant is inadequate, (b) to estab-and excluding nuclear fuel. Should more stringent environ- lish an independent design and construction verification pro-mental regulations be adopted, particularly in the area of acid gram and (c) to review the effect the affiliation will have on rain pollution control, construction program costs for this the Company's and Cleveland Electric's ability to meet the peried are not expected to increase substantially. However, liability insurance and indemnity requirements for the Perry such costs could increase substantially thereafter. Plant. No ruling has been issued on this petition.

The construction program includes the completion of the Beaver Valley Unit 2 Company's share of two nuclear generating unit projects, Perry Unit 1 and Beaver Valley Unit 2. No amount for new Beaver Valley Unit 2 currently is about 98% complete and is construction is included for a third project, Perry Unit 2, scheduled for completion around the end of 1987. The because construction of this Unit has been suspended. These estimated final cost of the Company's 166-megawatt share of generating units are owned by the five utilities in the Central the Unit is about $863,000,000, including AFUDC. An Area Power Coordination Group (CAPCO), namely, the application for an operating license for the Unit is pending Company, Cleveland Electric, Duquesne Light Company before the NRC.

(Duquesne), Ohio Edison and Pennsylvania Power. Cleveland Electric is responsible for constructing Perry Units 1 and 2 and Duquesne is responsible for constructing Beaver Valley Perry Unit 2 Unit 2.

Perry Unit 2, exclusive of the common facilities, is about 44%

complete. Including its share of the common facilities, the Perry Unit I Unit is about 58% complete. Construction of Perry Unit 2 Perry Unit I and the facilities to be used in common with was suspended in 1985 by the CAPCO companies pending Perry Unit 2 have been completed. The cost, including future consideration of several alternatives. The alternatives AFUDC, of the Company's share of Perry Unit 1 and the include resumption of full construction with a revised esti-common facilities was $975,000,000 at December 31,1986. mated cost and completion date, mothballing or cancellation.

We estimate that the Company's share of the cost will None of these alternatives may be implemented without the increase about $14,000,000 per month until the Unit approval of each of the CAPCO companies. Many factors will achieves commercial operation. be taken into account in making the decision, including cost, safety, emironmental issues and recovery of investment.

In November 1986, the Nuclear Regulatory Commission Other factors are the potential need for additional capacity (NRC) issued a full power license for Perry Unit 1. The nationwide, particularly in our region, the probable high cost Unit's power ascension and final testing program is progress- of retrofitting fossil fuel units to satisfy possible acid rain ing. Net positive generation of 20% could be achieved pollution control regulations and the incremental cost of during the first quarter of 1987 and full commercial operation completing Perry Unit 2. The timing of a decision on Perry within another five months. However, experience indicates Unit 2 will depend on developments relating to the above that significant delays in the testing program can occur. factors and possibly others.

The United States Court of Appeals for the Sixth Circuit .

The Company is continuing to capitah.ze AFUDC for is currently considering a request by an organization that the Perry Unit 2, but since July 1,1985, it has been crediting Court order the NRC to re-examine the seismic design of such AFUDC to a balance sheet deferred credit reserve Perry Unit 1 because of the earthquake which occurred near ,

instead of creditmg it to income. This deferral does not affect the Plant in January 1986 and that the Court revoke the c sh flow, but it reduces the Company's reported net income oprating license for Perry Unit 1. by about $2,400,000 per month from what it otherwise would be, The NRC currently has pending before it a request by an organization for review of certain aspects of the Perry Plant if Perry Unit 2 is cancelled, the Company will seek offsite emergency plan and to modify or terminate the Perry authorization from the PUC0 to recover its investment in the Unit 1 operating license and a request by two other organiza.

Unit in rates. We have no assurance that recmery would be tions for revocation of the Perry Unit 1 operating license allowed. In the event of such a cancellation, if it appears claiming that certain pipe hangers are defective.

probable that recovery would not be allowed, then the Com-In July 1986, an organization filed a petition in the pany's investment in Perry Unit 2 (including AFUDC), plus United States Court of Appeals in the District of Columbia any cancellation costs, less any equipment usable elsewhere seeking review of the refusal by the NRC staff to act (a) to and less any resulting tax benefit, would have to be written 11

off. We estimate that, based on the Company's investment in continue to be able to pay for their shares of each project. To this Unit at December 31,1986 and assuming a federal do so, each CAPCO company must obtain adequate and income tax rate of 34%, such a write-off would have been timely rate increases. There can be no assurance that such about $167,000,000. Based on the Company's current finan- rate increases always will be forthcoming or that some other cial position and level of annual income, such a write-off event will not adversely affect financial markets or nuclear would have a material adverse effect on the Company's projects generally, or a CAPCO company or nuclear project l results of operations and retained earnings in the period in in particular, so as to impair the ability of a CAPCO company which it were to occur. The Company's ability to continue to pay for its share. If any CAPCO company stops paying for paying dividends would not be impaired solely because of such its share, any or all of the other CAPCO companies could be a write-off. forced to accept a solution invoking substantial losses or In April 1986, Duquesne announced that it no longer additional financial burdens.

needs the capacity of Perry Unit 2. In June 1986, Duquesne In 1985, the PUC0 ordered an investigation to deter-asked the Pennsylvania Public Utility Commission (PaPUC) mine whether any Perry Unit I costs are excessive due to to permit recovery of its investment in Perry Unit 2 as imprudent management by Cleveland Electric. In August though it had abandoned the Unit, even though the CAPCO 1986, the PUC0 published the summary report of the consul-companies have not decided to cancel the Unit. Duquesne tants it hired to investigate the cost of Perry Unit 1. The has also advised the PaPUC that it will not agree to resump- consultants concluded that Cleveland Electric performed ef-tion of construction of Perry Unit 2. Duquesne is continuing fectively in managing the planning, design, licensing and to pay its share of maintaining Perry Unit 2. We do not plan construction of the Unit, except for about $229,000,000 (as currently to treat the Company's investment in Perry Unit 2 revised) of costs through 1985, including AFUDC through as abandoned for any purpose. We do not know what 1986, which the consultants believe could have been avoided arrangements might be made with Duquesne if all the other through improved management and decision-making. The CAPCO companies want to complete Perry Unit 2 and consultants also concluded that delays caused by General Duquesne does not change its position.

Electric Company in connection with the design and construc-tion of the nuclear steam supply system resulted in about Nuclear Plant Offsite Emergency Plans $673,000,000, including AFUDC through 1985, of additional In August 1986, the Governor of Ohio informed the NRC costs over which Cleveland Electric had no control. The that, because of the accident at a nuclear plant in Chernobyl, report of the consultants is not binding on the PUC0 or the USSR, in April 1986 and the earthquake near the Perry wners of Perry Unit 1. The PUCO will consider the report, Plant in January 1986, he was withdrawing his support for together with the input of its staff and other studies, to the offsite emergency plans for the Perry and Davis-Besse determine whether any Perry Unit 1 costs are excessive due Plants. These plans had been prepared with the participation to imprudent management and to determme whether any of and cooperation of the State of Ohio and local government such costs should be disallowed in rates. Hearings before officials. The State of Ohio has requested the United States the PUC0 are scheduled to begm m May 1987. The PUCO Court of Appeals for the Sixth Circuit to prohibit operation also could consider the prudency of costs incurred after of Perry Unit Land Davis-Besse and to order the NRC to re- 1985. We believe that all of Cleveland Electric's actions in examine the offsite emergency plans for both plants. The e nnection with Perry Unit I have been prudent.

Court has not yet ruled on these requests.

In February 1987, in a Duquesne rate case, the PaPUC indicated that it would adopt in its final decision in that case Other Nuclear Risks the conclusion of its administrative law judge (AU) that Experience indicates that completion of nuclear generating Perry Unit I was prudently planned, managed and con-projects usual!y involves the risks of significant cost in. structed. The AU recommended that no reduction in the creases, consguction delays and licensing difficulties. Also, allowable costs of Perry Unit I should be made for im-operating nccuar generating units have experienced unplan. prudency. Any PaPUC decision will not apply to the ned outages d extensions of scheduled outages because of Company.

equipment prjblems or new regulatory requirements. A major acciders at a nuclear facility anywhere m the world A consultant is investigating for the PaPUC whether any 4

could cause !!e NRC to limit or prohibit the operation, costs of Beaver Valley Unit 2 are excessive. Any PaPUC construction r licensing of a nuclear unit. decision will not apply to the Company. However, it is probable that the PUC0 also will investigate the costs of The su@ssful completion of the Company's nuclear Beaver Valley Unit 2 (and Perry Unit 2, if completed) construction brogram requires that the CAPCO companies incurred by the Company.

e 12

Beginning in 1988, the Company will be required to The Company replaced the power it normally would have adopt the FASB's recently issued SFAS 90. This standard will received from Davis-Besse during the outage with more impose stricter standards to be met to avoid the write-off of costly generation from its own non-nuclear generating units capitalized costs involved in abandonments of partially com- and with wholesale power purchases. The Ohio Office of pleted generating plants. It will require the immediate write- Consumers' Counsel (OCC) has requested the PUCO to off of disallowances in rates of the costs of newly completed disallow recovery of such replacement power costs claiming generating plants. Also, it will require that the accrual of that the June 9 event was the result of imprudent manage-AFUDC during the construction period be discontinued un- ment by the Company. A consultant has been engaged by less the facts and circumstances indicate that subsequent the PUCO to determine whether the June 9 event and the recovery of such amounts is probable. ensuing outage were caused by imprudent management and to determine the cost of replacement power incurred be-The book accounting for the three nuclear units dis-cause of tk ov.y aM 6e edent m wM such costs have cussed above could be affected by the implementation of en rec med hm cusemus.

SFAS 90. An abandonment, where recovery is not probable, or a disallowance will have to be immediately recognized as a The consultant's report concluded that imprudence on loss to the extent that the rate recovery process does not the part of the Company contributed to the June 9 event and provide for recovery of such costs and a return on the the subsequent outage. The consultant determined that the investment. Discontinuation of AFUDC would haee to be Company's total cost of fuel and purchased power associ-determined based on the facts and circumstances that exist. A ated with the outage from June 9,1985 to March 31,1986 potential write-off of Perry Unit 2 has been discussed above. amounted to $31,000,000. Substantially all of these costs Perry Unit 2 AFUDC is already being deferred and not have been recovered from the Company's customers. The recognized in the Company's results of operations. We Conpany intends to oppose the consultant's conclusions on cannot predict what actions the PUCO will take on any of imprudence and the amount of fuel and purchased power these issues. However, an adverse regulatory action could costs attributable to the outage. Hearings before the PUCO result in a write-off, which could have a material adverse are scheduled to begin in March 1987. The consultant's effect on the Company's financial position and results of report is not binding on the PUCO.

P"* "*' The consultant also concluded that the necessity to Because of the pending investigations and the other inspect and replace shaft assemblies on four reactor coolant uncertainties described in this Note, there can be no assur- pumps during the outage (but for reasons unrelated to the ance as to the extent to which the PUCO will allow full June 9 event) was beyond the Company's control. The recovery in rates of, and an adequate return on, the Com- consultant stated that without the pump shaft problem, the pany's investment in Perry Units 1 and 2 and Beaver Valley outage would have had a duration of about one year.

Unit 2. The likelihood of any of the described uncertainties The final resolution of the above matters is not expected g-to have a material adverse effect on future results of ize , ho e er, at on more of s ch ad erse e e s perations.

could occur. Individually, or collectively, such events could have a material adverse impact on the Company's financial A petition is pending before the NRC requesting suspen-condition, results of operations or the Company's ability to sion of the operating license of Davis-Besse because of pay dividends. See Note 7. alleged design flaws affecting safety as indicated by the operating history of Davis-Besse and similar nuclear generat-

[ ing plants designed by the same manufacturer.

l (4) Davis-Besse Nuclear Power Station On June 9,1985, Davis-Besse was shut down because of the y g failure of its main and auxiliary feedwater supply. NRC reports on the incident stated that there were deficiencies in The Company has lease and trust arrangements to finance the effectiveness of management of Davis-Besse operations nuclear material and fuel. This nuclear fuel inventory should and plant maintenance before the incident. The Company, provide an adequate supply lasting into the mid-1990s. Sub-oprator of the Plant, has substantially completed its correc- stantial additional nuclear material must be obtained in the tive action. On November 21,1986, the NRC authorized its future to supply fuel for the remaining useful lives of Perry statI to permit Davis-Besse to restart. The Plant has been Unit 1, Beaver Valley Unit 2 and Davis-Besse. More nuclear restarted. It currently is operating at around half of capacity material and fuel would be required if Perry Unit 2 is while one of the main feedwater pumps is repaired. completed.

13

The maximum amount that the Company can finance The Company has insurance coverage for damage to its under one set of nuclear fuel leasing arrangements is property at Davis-Besse and Perry (including leased fuel and

$215,000,000, it consists of a long-term lease that allows the clean-up costs) in the amount of $1,160,000,000 for each lenders to cancel their financing commitments after three plant. Damage to the Company's property could exceed the years notice. The Company's share of the maximum amount insurance coverage by a substantial amount and thereby available under another arrangement, which includes leases have a material adverse effect on the Company's financial and a trust combined, is $83,000,000. This arrangement is condition and results of operations in the period of the loss. If subject to cancellation by the lender after one year notice. the property damage insurer's reserves are inadequate to caer daims adsk e d an accident at any nuclear site in The lease and borrowing rates are based on bank prime ,

the United States, the Company is obligated to pay retro-and commercial paper rates. The amounts capitalized in-specse premiums up to $6,634,000 for this policy year. The cluded interest charges incurred by the lessors amounting Company mtends to obtam similar insurance for its other to $17,000,000 in 1986, $16,000,000 in 1985 and

$17,000,000 in 1984. Under the leases, rental payments are nuc ear s at me 6me of fud bai made as the fuel is burned in a reactor. The estimated future Insurance coverage is also held for the cost of any lease amortization payments based on projected burn are replacement power purchased after the occurrence of certain

$18,000,000 in 1987, $35,000,000 in 1988, $33,000,000 in types of accidents at Davis-Besse. The event at Davis-Besse 1989, $46,000,000 in 1990 and $44,000,000 in 1991. As described in Note 4 is not a covered event. The amount of these payments are made, the amount of credit available t the coverage is $502,000 per week during the 52-week the lessors is renewed and becomes available to finance period starting 26 weeks after an accident and $251,000 per additional nuclear fuel. week for the next 52 weeks. The cost and duration of At December 31,1986, a total of $268,000,000 is replacement power could substantially exceed the insurance committed under the leases and the trust for nuclear material coverage. Also, if the insurer's reserves are inadequate to and costs of processing it into fuel for the Company. This cover claims arising out of accidents at any nuclear units in includes nuclear fuel in the Davis-Besse and Perry Unit I the United States covered by such insurance, the Company is reactors with remaining costs of $36,000,000 for each reac. obligated to pay retrospective premiums up to $847,000 for tor, as of December 31,1986. this policy year. The Company intends to obtain similar insurance for its other nuclear units when they begin com-(6) Nudear Insurance mercial operation.

The Company and the other CAPCO companies maintain a nuclear insurance program for each nuclear plant to the m Rau Maum maximum extent available. This includes $695,000,000 of Recent Rate Increases nuclear liability coverage, as of December 31,1986, for injury to persons and their property arising out of a nuclear During the three years ended December 31,1986, the PUCO incident at each site. The coverage consists of granted increases in electric rates to the Company as

$160,000,000 of insurance and $535,000,000 of indemnity follows:

by the federal government under the Price-Anderson amend-ments to the Atomic Energy Act. The Act limits the owners, Annualized Date Amount nuclear liability to the amount of the coverage. The current ds Price-Anderson legislation expires in August 1987. Bills to Oh u amend it by increasing substantially the amount of indemnity September 1984 $17,000 have been introduced in Congress. Under the federal indem- February 1985 22,700 nity coverage, the Company is currently obligated to pay retrospective premiums up to $6,853,000 for this policy year Perry Unit I construction work in progress (CWIP) to cover any nuclear liability claims arising out of an incident amounts were not included in the rate base for either of the at any nuclear plant in the United States. increases.

14

The Company's February 1985 rate order was a tempo- Any delay in the operation of Perry Unit 1, which rary emergency rate increase. It was granted subject to prevents the Company from starting to recover in rates Perry refund if and to the extent a smaller rate increase were to be Unit 1 CWIP and operating costs in the last half of 1987, l granted in a rate case filed in June 1985. The Company was could make it necessary to consider cash conservation mea-l ordered to record a portion of its AFUDC accruals to a sures. This includes reductions in expenditures, additional l reserve account (rather than to income) in an amount requests for emergency rate relief and reexamination of the l sufficient to offset the after-tax earnings increase which the Company's common stock dividend policy.

temprary rates would cause. At December 31,1986, this AFUDC deferral amounted to $24,000,000. It is expected that when Perry Unit 1 is included in the Company's rate Perry Unit 1 Rate Treatment base, the PUC0 will either reduce rate base by the amount of the reserve or include such amount in rate base. If the The Company has asked the PUC0 to permit it to defer the latter option were chosen, future revenues would be reduced ongoing financing costs of Perry Unit 1 until subsequent by the interim revenues collected, including carrying recovery in rates is authorized. This deferral would be charges, over a period equal to that of the surcharge. calculated on a basis similar to AFUDC and would begin at the time the Unit is placed in service. It would continue until 1 Pending Applications the Unit's costs are included in rate base. The PUC0 has allowed such deferrals in similar cases for other Ohio utili-The Company filed an application in June 1985 requesting an ties. Also, the Company has requested authority to defer increase in electric rates of $103,000,000 annually (includ- Perry Unit 1 operating costs until those costs are included in ing the $22,700,000 temporary emergency rates described rates if the PUC0 denies their inclusion in the November above). Ir.clusion of Perry Unit 1 CWIP in rate base was 1986 rate application. Deferral of financing and operating requested at the maximum allowable level. Annualized Perry costs prevents a reduction in reported earnings from what Unit 1 operating expenses were c.lso requested. The PUC0 they otherwise would be, but does not produce cash flow until has deferred for an unspecified time any action on this subsequent periods when such costs are recovered in rates.

application. The temporary emergency rate increase granted in February 1985 continues in effect. The FASB continues to consider amendments to ac-In November 1986, the Company applied to the PUCO counting standards applicable to rate increase phase-in plans.

for a rate increase based on a test year ending July 31, A formal proposal which would have allowed deferral of 1987. Any rate increase resulting from the new request is not costs, including an equity return, if recoverable over not expected to become effective until late in the summer of more than 10 years, has been withdrawn. A new proposal is 1987 at the earliest. The new application includes allowances expected to be issued in 1987.

for recovery of Perry Unit 1 operating costs. The Company is asking for an increase of $109,000,000 above its current Any PUCO denial of the Company's requests to defer rates, which include the $22,700,000 a year temporary financing and operating costs or adoption of a recovery emergency rate increase. In February 1987, the Company method that does not meet the criteria of the final FASB requested the PUC0 to accelerate relief in its pending rate standard could have a material adverse impact on future cases by granting interim emergency rate relief in the results of operations. We cannot predict the outcome of the amount of $50,000,000. FASB's review or future actmns of the PUCO.

l l

l 15

- -__ _ _ . - . - ~ _ .

(8) FederalIncome Tax Federalincome tax, computed by multiplying the income before taxes by the statutory rate of 46%,is reconciled to the amount of fcderal income tax recorded on the books as follows:

For the years ended December 31, 1986 1985 1984 (thousands of dollars)

$175,651 $196,758 $185,602 Book Income Before FederalIncome Tax . .. .. ..

Tax on Book Income at Statutory Rate . . .

$ 80,800 $ 90.508 $ 85,377 Decrease in Tax Due to:

Allowance for Funds Used During Construction . 78,734 64,091 54,061 Other Items . ... . . . ... .... . 3,332 3,172 (760) 82,066 67,263 53.301 Total Federal Income Tax Expense (Credit) . . . $ (1,266) $ 23,245 $ 32,076 Federal income tax expense is recorded in the Results of Operations as follows:

For the years ended December 31, 1986 1985 1984 (thousands of dollars)

Operating Expenses Current Tax Provision . . . . . . . . . . . . . . . . . . . . $ 33,288 $ 39,778 $ 38,092 Changes in Accumulated Deferred FederalIncome '

Tax:

Accelerated Depreciation and Amortization. . 27,951 10,130 11,693 Nuclear FuelInterest Charges . .

7,606 7,054 8,007 Other Items . . . . . . . .... .. .. . . 3,529 (2,349) (5,087)

Investment Tax Credits - Net .. . ... (21,611) 6,799 13,706 Total Charged to Operating Expenses . .. 50,763 61,412 66,411 Nonoperating income Current Tax Provision . .. . (12,915) (37,777) (34,301)

Deferred Tax Provision . . (9,114) (390) (34)

Total Federalincome Tax Expense (Credit) ... . $ (1,266) $ 23,245 $ 32,076 The Company will join in the filing of a consolidated federal income tax return with the affiliated companies for 1986. The method of tax allocation approximates a separate return result for each company. Fnr 1986, the Company incurred a loss for federal income tax purposes. This loss resulted largely from the nontaxability of AFUDC and the tax depreciation treatment of its investment in Perry Unit 1. For federal income tax purposes, such loss is carried back to offset taxes paid in prior years. The resulting tax refunds will be small as the taxes paid in prior years were offset by investment tax credits to the extent allowable.

The investment tax credits previously utilized in those years are now available to be carried forward to offset future taxes payable.

Approximately $93,000,000 of unused investment tax credits are available and may be used to reduce future tax obligations.

The unused credits expire in varying amounts from 1996 to 2001. Utilization of these unused credits is limited by provisions of the Tax Reform Act of 1986 and the level of future taxable income to which such credits may be applied.

The Tax Reform Act of 1986 provides for a 40% average income tax rate in 1967 and a 34% income tax rate in 1988 and thereafter, the repeal of the investment tax credit, scheduled reductioris in investment tax credit carryforwards. less favorable depreciation rates, a new alternative ndnimum tax and other items. These changes are expected to increase our tax payrnents and reduce cash flow from what it otherwise would be starting in 1987. Most of the increase in tax payments is expected to result from the new alternative minimum tax. Tax payments required as a result of the alternative minimum tax may be utilized as a tax credit to offset future tax payments. Current income tax expenses will be based on the lower statutory rates and the effects of the alternative minimum tax will be deferred for accounting purposes.

16

, (9) Retirement income Plan and Other Post-Retirement (10) Guarantees Benefit 5 Under a long-term coal purchase arrangement, the Company A non-contributory pension plan is maintained which covers has guaranteed the loan and lease obligations of a mining all employee groups. The amount of retirement benefits company. This arrangement also requires payments to the generally depends upon the length of employee service and mining company for any actual out-of-pocket idle mine ex-earnings. Under certain circumstances, benefits can begin as penses (as advance payments for coal) when the mines are early as age 55. The plan also provides certain death and idle for reasons beyond the control of the mining company. At disability benefits, as well as certain medical benefits. December 31,1986, the principal amount of the mining Pension costs for 1986 were $5,700,000 and included company's loan and lease obligations guaranteed by the

$1,300,000 for post-retirement medical benefits and premi. Company was $32,000,000.

ums. Pension costs for 1985 and 1984 were $4,000,000 and (II) Capitalization

$3,700,000, respectively. The practice of the Company has been to fund pension costs accrued. (a) Capital Stock Transactions Funding of post-retirement medical benefits and premi. Shares sold and retired during the three years ended Decem-ums was added to the plan in 1986. The Company had been ber 31,1986 are listed below.

paying these amounts directly when due. 1986 1985 1984 Adoption of a new actuarial method increased pension Common Stock- '

costs by $200,000 in 1986. A change in the basis for pg gg . .

3,000 3,000 determining the pension contribution policy and changes m, d t l actuarial assumptions in 1986 increased pension costs by Ui[nd k se j

$2,800,000 in 1986. Plan . . . 263 1,613 1,589 The comparison of the actuarial value of the liability for Total Common accumulated plan benefits with net assets available for bene- Stock Sales . 263 4,613 4,589

, fits which follows is required under generally accepted

' Cumulative Preferred Stock accounting principles. Subject to Mandatory Re-January 1, 1986 1985 Sa es

$25 par $3.75 . .

- - 1,200 Actuarial present value of accumu- J.72 - - 1,400 lated plan benefits *:

Vested . . . . $ 74 $ 53 Retirements Nonvested . . , 4 7 $100 par $11.00 . (5) (5) (5)

$ 78 $ 60 9.375 . . (17) (17) -

i Market value of net assets available  ; ( [ [

for benefits . . . . . $120 $ 95 2,595 Net Change (41) (22) j *llased on an annual discount rate of 7% in 1986 and 8% in Cumulative Preferred Stock 1985. Not Subject to Mandatory Redemption:

l The above comparison determines the accumulated pen-S les sion plan liability as though the plan was terminated at the

$2 dates shown. It is calculated without consideration of future Ad stable Series A . -

1,200 -

increases in employees earnings. We and the Company s Adjustable Series 11. 1,200 - -

pension consultants believe that the required disclosures are Net Change . 1,200 1,200 -

misleading because they understate the fund's assets needed at those dates to provide pension benefits as they become Changes in premium on capital stock are summarized as payable under a plan intended to continue indefinitely. Deter- follows:

mining the plan liability using our long-term funding assump- 1986 1985 1984 tions indicates that on January 1,1986 the fund's liability (thousands of dollars) was slightly more than the fund's assets. Ilalance at Ileginning of Year. $478,939 $421,118 $379,766 During 19M, the FASil issued new standards for pen.

sion accounting. The Company will be required to adopt those Premium, Net of Expense

-Common Stock. . 5,051 58,728 44,321 standards in 1987. We expect that adoption of the new (1,203) (907) (2,969)

Preferred Stock .

standards will not have a material effect on the Company's llalance at End of Year. $482,787 $478,939 $421,118 financial position or results of operations.

17 l

(b) Equity Distnbution Restrictions tionallong-term debt above that outstanding at December 31, 1986. Should the Company be required to write off its At December 31,1986, the Company's retained earnings investment in Perry Unit 2, we believe such a write-off would were $305,000,000. Substantially all of the retained earnings reduce the amount of preferred stock issuable or prohibit cere available for the declaration of dividends on the Com-ssuance f preferred sM dudng h s4 sequent 12-pany's preferred and common shares. All of the Company's m nth period. The issuance of additional preferred stock at common shares are held by Centerior Energy.

any given time m the future will depend on net earnings for A loan or advance by the Company to Centerior Energy any 12 consecutive months of the 15 months preceding the requires PUC0 authorization unless it is made in the ordi- date of issuance, the interest requirements of any additional nary course of business operations in which the Company debt issued and the dividend requirements of any new acts for Centerior Energy. preferred issues.

(c) Cumulative Preferred and Preference Stock There are no restrictions on the Company's ability to SW preference sM Amounts to be paid for preferred stock which must be redeemed during the next five years are $5,000,000 in 1987, The Company's preferred stock is prior to its preference 1988 and 1989 and $8,000,000 in 1990 and 1991.

stock, and its preferred and preference stock are prior to its The annual mandatory redemption provisions are as common stock with respect to dividend and liquidation follows: rights.

Annual Mandatory Redemption Provisions Begin- (d) L ng-Term Debt and Other Borrowing Arrangements Shares to be ning Redeemed In Price Long-term debt, less current maturities, is as follows:

Preferred: First Mortgage Bonds:

Interest December 31,

$100 par $11.00 . . . . . . 5,000 1979 $100 Year of Maturity Rate 1986 1985 9.375 . . . . . . 17,000 1985 100 tthousands of dollars) 13.25 . . 9,000 1986 100 1988. . 4.00 % $ 15,000 $ 15,000 12.65 .. 8,000 1986 100 14.80 12,000 1987 100 1990.. . 14.00 65,000 65,000 1991 ... . 15.625 35,000 35,000 25 par 3.75 . . . . . . 60,000 1990 25 1991 .. 16.25 -

35,000 3.72 . 70,000 1990 25 1991...... . . 15.00 70,000 70,000

. . 1992-1996 . 9.375-16.125 364,100 264,100 The annualized cumulative preferred dividend require- 1997-2001 . 6.125-10.00 66,378 66,378 ment as of December 31,1986 is $45,000,000. 2002-2006 ... 7.50 -9.65 111,725 111,725 2007-2011 . . 9.625-11.00 126,900 126,900 The dividend rates on the Company's Adjustable Series 2012-2020 . 12.25-15.00 120.000 120,000 A and B Preferred Stock fluctuate based on prevailing 974,103 909,103 interest rates. The dividend rates for these issuances aver- Term bank loans. 6.84 14.49%,

aged 8.97% and 8.96%, respectively, in 1986. due 1987-1990 62,833 79,500 Notes,8.75-15.00%, due 1987-Under its articles of incorporation, the Company cannot 1997.. . . .. . 277,000 183,600 issue preferred stock unless certain earnings coverage re- Pollution control notes,5.20-quirements are met. Based on earnings for the 12 months 13.25%, due 1987-2015 167,600 167,700 ended December 31,1986, the Company could issue up to Other - net . .. (589) (635) approximately $80,000,000 of additional preferred stock at an assumed annual dividend rate of 11%, assuming no addi-Total Long Term Debt . $1.480,947 $1339,268 IM

Long term debt matures during the next five years as future recovery, would cause continued deterioration of this follows: $23,000,000 in 1987, $38,000,000 in 1988, coverage ratio in 1987. See Note 7.

$33,000,000 in 1989, $131,000,000 in 1990 and

$152,000,000 in 1991.

(12) Short-Term Borrowing Arrangements The mortgage of the Company constitutes a direct first mortgage lien on substantially all its property and franchises The Company's bank credit arrangements at December 31, owned. Excluded from the lien are cash, securities, accounts 1986 are as follows:

receivable, fuel, supplies and automotive equipment.

The issuance of additional refunding and non-refunding (thousands first mortgage bonds by the Company is limited by provisions doib in its mortgage. Under these provisions at December 31, Bank Lines of Credit . . . .. . .. $71,900 1986, the Company would not have been permitted to issue Borrowings Under Bank Lines of Credit. .

any non-refunding bonds. Ilowever, the Company would Revolving Underwriting Facility . . $25,000 have been able to issue $65,000,000 of refunding bonds. Borrowings Under Underwriting Facility . . $15,000 Certain unsecured loan agreements of the Company contain covenants limiting to 65% of total capitalization (as Short-term borrowing capacity authorized by the PUC0 defined) the total of funded debt and short-term debt in is $150,000,000.

excess of $150,000,000, limiting secured financing other than Annual commitment fees range from 0.375% to 0.5% on through first mortgage bonds and certam other transactions rnost of the lines of credit. The rest of the lines of credit have and requiring the Company to maintain earnings (as de- informal compensating balance arrangements. Banks expect fined) of at least 1.5 times interest on its first mortgage the Company to maintain average deposits equal to 5% to bonds. The earnings coverage ratio applies to $229,500,000 20% of the line of credit, depending upon the amounts of unsecured loans and was 1.85 at December 31,1986. borrowed. The deposits provide operating balances for the Substantial operating cost increases, if not adequately recog- Company and are not restricted legally.

nized m rates or permitted to be deferred with a promise of 19

(13) Quarterly Results of Operations (Unaudited)

The following is a tabulation of the unaudited quarterly results of operations for the two years ended December 31,1986.

Quarters ended March 31 June 30 Sept. 30 Dec.31 f (thousands of dollars) 1986 Operating Revenues . . . . . . . . . . . . ... ..... $152,730 $138,032 $154,886 $148.773 Operating income . , . . . . . . . . . . . .... ...... $ 36,358 $ 33,674 $ 34,735 $ 22,537 Ne t income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,066 $ 40,077 $ 46,304 $ 45,470 Earnings Available for Common Stock . ... .. ... $ 33,973 $ 28,545 $ 34,975 $ 34,181 1985 Operating Revenues ... ..... ..... .. . .. $151,608 $138.885 $155,230 $149,212 Operating Income . ...... ...... ....... . $ 36,605 $ 34,304 $ 40,084 $ 28,894 Nct lawme ........... . ........ ...... . $ 47,676 $ 45.076 $ 45,550 $ 35,214 Earnings Available for Common Stock .., ... $ 37,446 $ 34,880 $ 35,387 $ 24,438 i

i l

20

. --~ __- - - - - __- __-..- - - - . . _ . - .- .--

Auditors' R: port t

To the Share Owners of The Toledo Edison Company:

We have examined the balance sheet and statement of cumulative preferred and i preference stock of The Toledo Edison Company (an Ohio Corporation and wholly-1 owned subsidiary of Centerior Energy Corporation) as of December 31,1986 and 1985, and the related statements of results of operations, retained earnings and source of funds invested in plant and facilities for each of the three years in the period ended December 31,1986. Our examinations were made in accordance with

. generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

As discussed further in Note 3, the future of Perry Unit 2 is undecided.

Construction has been suspended since July 1985. Various alternatives are being 4 considered, including resuming construction, mothballing or cancelling the Unit.

Management can give no assurance when, if ever, Perry Unit 2 will go in service or whether its full investment and a return thereon will ultimately be recovered in rates charged to customers.

i As discussed further in Note 3, construction of Perry Unit I has been completed l and Beaver Valley Unit 2 is nearing completion. Recovery of the investment in i these units will be determined by a rate regulatory agency in future rate proceed-ings. As a result of investigations regarding alleged excess cost of these units and j uncertainties associated with other aspects of the nuclear program, management can i give no assurance that the full investment in these units and a return thereon will i i ultimately be recovered in rates charged to customers.

t

in our opinion, subject to the effects on the financial statements of such adjustments, if any, as might have been required had the outcome of the uncertainty

! discussed in the second paragraph been known, and subject to the effects on the j 1986 and 1985 financial statements of such adjustments, if any, as might have been i required had the outcome of the uncertainty discussed in the third paragraph been l

known, the financial statements referred to above present fairly the financial position of The Toledo Edison Company as of December 31,1986 and 1985, and the results i of its operations and source of funds invested in plant and facilities for each of the three years in the period ended December 31, 1986, all in conformity with 1 generally accepted accounting principles applied on a consistent basis.

I I Toledo, Ohio February 12,1987 Arthur Andersen & Co.

f 21

._ _ . l

Fin:nci:1 cnd Stzti: tic 1 R vi w The Toledo Edison Company Operating Revenues (thousands of dollars)

Steam Total l Total Total lleating Operatmg Year Residential Commercial Industrial Other Retail Wholesale Electne & Gas Revenues 1986 , $189 292 $133 841 $214 274 $45 825 $583 232 $11189 $594 421 $- $594 421 1985. 184 687 129 161 213 895 45 773 573 516 15 656 589 172 5 761 594 933 l 1984. 172 539 115 467 194 751 45 029 527 786 14 083 541 869 9 436 551 305 I 1983. 161 275 105 482 169 672 42 118 478 547 16 824 495 371 9 245 504 616 1982. 153 662 101 790 158 929 38 306 452 687 20 508 473 195 8 530 481 725 1976. 71 562 45 384 76 998 16 051 209 995 9 134 219 129 4 607 223 736 Operating Expenses (thousands of dollars) Income (thousands of dollars)

Federal Income Fuel & Operation Depreciation Taxes Federal income Other Before Purchased & & Other Than income Operating AFUDC- Tax- Income- Interest Year Power Maintenance Amortization FIT Taxes income Equity Credits Net Charges 1986. $1$8 763 $167 319 $37 832 $52 440 $50 763 $127 304 $119 954 $52 029 $(1627) $297 660 1985. 158 990 141 608 44 338 48 698 61 412 139 887 97 725 38 167 10 669 286 448 1984. 139 780 125 351 49 971 46 602 66 411 123 190 82 736 34 335 7 876 248 137 1983. 121 041 115 300 51 138 45 210 56 727 115 200 65 585 24 111 1 617 206 513 1982. 124 706 117 625 43 838 41 260 45 214 109 082 48 706 18 937 1 017 177 742 1976. 108 177 35 760 15 % 4 15 956 12 446 35 433 16 757 6 087 1946 60 223 income (thousands of dollars)

Earnings Return Available on Preferred for Average Interest AFUDC- Net Stock Common Equity Year Charges Debt income Dividends Stock (%)

1986. $171950 $(51207) $176 917 $45 243 $131674 13.0 %

1985. 154 539 (41 604) 173 513 41 362 132 151 15.0 1984. 129 401 (34 790) 153 526 34 996 118 530 15.4 1983. 104 475 (26 306) 128 344 30 129 98 215 14.7 1982. 94 713 (22 505) 105 534 26 221 79 313 13.6 6976. 28 460 (7 700) 39 463 7 683 31 780 13.2 Capitahzation (thousands of dollars)

Preferred Preferred Stock Stock Common without with Long-Stock Mandatory Mandatory Term Year Equity  % Redemption  % Redemption & Debt  % Total 1986. $1074 663 36 % $260 000 9% $148 797 5% $1480 947 50% $2 964 407 1985. 949 881 36 230 000 8 153 639 6 1 339 268 50 2 672 788 1984. 813 895 36 200 000 9 157 828 7 1 110 122 48 2 281 345 1983. 715 584 36 200 000 10 94 002 5 984 976 49 1 994 562 1982. 617 128 35 169 500 10 95 527 5 875 859 50 1 758 014 1976. 266 469 34 115 000 15 10 000 1 388 270 50 779 739 22

1 l

Electric Sales (millions of KWH) Electric Customers (year end) Residential Usage t

Average Average KWH Price Revenue Per Industnal Per Per KWil Customer Yezr Residential Commercial Industrial Wholesale Other Total Residential Commercial & Other Total Customer (cents) (dollars) 1986 , 1941 1 495 3 482 242 449 7 609 247 256 24 655 4 004 275 915 7 881 9.754 $768.43 1935. I901 1 436 3 429 330 451 7 547 245 485 24 261 3 942 273 688 7 770 9.72 755.00 1984. 1958 1 398 3 444 304 440 7 544 243 912 23 891 3 920 271 723 8 045 8.81 709.09 1983. 1915 1 341 3 127 320 428 7 131 242 959 23 694 3 864 270 517 7 900 8.44 655.43 1982. I911 1 326 2 873 395 413 6 918 241 492 23 495 3 815 268 802 7 906 8.04 635.82 1976. 1782 1 203 3 394 484 359 7 222 227 167 22 912 3 428 253 507 7 903 4.02 317.39 Load (megawatts) Energy (mdlions of KWil) Fuel Operable Fuel Cost Capacity Net Per Efficiency-Capacity Company Generated Purchased KWil BTU Per At Time Peak Load Year Of Peak

• Load Factor (%) Margm (%) Fossil Nuclear Total Power Total (cents) KWil 1986 1324 1423 64.8% (7.5 % 6 462 12 6 474 1689 8 163 1.82t 9 860 1985. 1 338 1 374 66.8 ( 2.7) 5 744 952 6 696 1 402 8 098 1.90 10 124 1984, 1641 1 327 68.2 19.1 5181 2 091 7 272 719 7 991 1.73 10 193 1983. 1777 1 325 65.6 25.4 4 683 2 383 7 066 593 7 659 1.67 10 337 1982. I 790 1 355 61.8 24.3 5 306 1569 6 875 510 7 385 1.80 10 221 1976. 1 465 1340 66.3 8.5 5 421 -

5 421 2 394 7 815 1.11 9 963 Investment (thousands of dollars)

Total Utihty Accumulated Construction Nuclear Property, Utthty Plant in Depreciation & Net Work In Fuel and Plant and Plant Total Other" Additions Year Service Amortization Plant Progress Equipment Assets 1986 $1442 812 $415 745 $1027 067 $2145 704 $269 022 $3 441793 $449 432 $3 769 528 1985. 1 392 346 390 565 1 001 781 1 756 417 228 425 2 986 623 378 045 3 365 293 1984. 1 372 963 363 015 1 007 948 1 413 328 1 % 530 2 617 806 356 221 2 936 162 l

1983. 1 342 057 324 826 1 017 231 1 093 699 164 115 2 275 045 294 010 2 500 526 1982. I 293 836 285 453 1 008 383 856 128 119 275 1 983 786 248 515 2 181 272 1976. 531 301 137 540 393 761 424 463 7 463 825 687 144 714 904 524 l

• Capacity was reduced because of extended generating unit outages for renovation and improvements in 1984 (85 mw),1985 (401 mw) and 1986 (416 mw).

• • 1984 and prior restated for effects of capitalization of nuclear fuel lease and financing arrangements pursuant to Statement of Financial Accounting Standards 71.

I I

(

l I

Directors Officers Richard P. Anderson, General Manager of The Andersons, a Chairman and Chief Executive Officer . . Robert 31. Ginn grain and farm supply business firm. President and Chief Operating Officer . . . Paul 31. Smart Chester Derenme, Chairman, Chief Executive Officer and

• fop tio .. . Richard P. Crouse President of Sheller Globe Corporation, a manufacturer of Vice President-Fossil Facilities . .foseph E. 3/urray automotive parts and assemblies, electrical equipment, office Vice President-Marketing . . . . .H. Alan Rudolph products and mdiation and environmental monitoring equipment.

Vice President-Finance & Administration.DonaldH. Saunders Eduin D. Dodd, Director, Consultant and Chairman Emeritus Vice President-Nuclear . . . . . . Donald C. Shciton of Owens lllinois, Inc., a manufacturer of glass, plastic, paper Assistant Vice President-Nuclear . . . . David B. Amerine and glass-ceramic products. Assistant Vice President-Administration . fames 11: Kronberg Elwood L. Elberson, Chairman, President and Chief Executive

. Assistant Vice President-Personnel . . Terry D. 3/urray Controller . . . . . . . Ralph D. Kubacki Officer of Dinner flell Foods, Inc., a major regional meat packer.

Secretary and General Counsel . . .Fredf. Lange, Jr.

Roberf 31. Ginn, Chairman and Chief Executive Officer of Toledo Treasurer . . .

. . . James P. JIartin Edison Centerior Energy Corporation, Centerior Service Company and The Cleveland Electric illuminating Company.

Isabel E JIartin, Former Consultant to the United Way Metropolitan Division in Toledo.

Richard A. Afiller, President and Chief Operating Officer of Centerior Energy Corporation and Centerior Service Company.

Henry A. Page,fr., Director of Development of The Medical College of Ohio at Toledo.

Paul 31. Smart, President and Chief Operating Officer of Toledo Edison and Executive Vice President of Centerior Energy Corporation.

Ilillard I. Ilibb, lu, Chairman and Chief Executive Officer of Ohio Citizens llank, a commercial bank.

John P. Ililliamson, Retired Chairman and Chief Executive Officer of Toledo Edison and Centerior Energy Corporation.

Roberf G. Ilingcrter, Retired Chairman of Libbey-Owens-Ford Company, a manufacturer of glass products and plastics prodtscts.

1 1

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