ML20214V371
| ML20214V371 | |
| Person / Time | |
|---|---|
| Site: | Beaver Valley, Davis Besse, Perry, 05000000 |
| Issue date: | 12/31/1986 |
| From: | CLEVELAND ELECTRIC ILLUMINATING CO. |
| To: | |
| Shared Package | |
| ML20214V285 | List: |
| References | |
| NUDOCS 8706120070 | |
| Download: ML20214V371 (26) | |
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About Clev: land El;ctric The Company provides electric service to an area of northeastern Stock Registrar Ohio extending 100 miles along the southern shore of 12ke Erie AmeriTrust Company National Association from Pernsyhania on the east through the city of Avon Lake on 900 Euclid Avenue, Cleveland, Ohio 44114 the west. The southern boundary of the service area is approx-imately 17 miles south of Lake Erie. The complete boundary Stock Transfer Agent prescribes an area of about 1,700 square miles. Total population Centerior Energy Corporation served is about 1,850,000. Although the principal city in the Share Owner Services service area is Cleveland, the Company derives about 75% of P.O. Box 94661, Cleveland, Ohio 44101-4661 its total electric revenue from customers outside the city. Stock transfers may be presented at Wells Fargo Securities About 99% of the Company's operating revenues is Clearance Corporation,45 Broad Street, New York, N.Y.10004. derived from the sale of electric energy. The Company also provides steam service for heating and other purposes in the downtown area of Cleveland. The Company's common stock mis acquired by Centerior Sharc OrcnerInquin'es Energy Corporation on April 29,1986 pursuant to an affiliation Communications regarding stock transfer requirements, lost agreement with The Toledo Edison Company. certificates, dividends and changes of address should be directed to Share Owner Services at Centerior Energy Corporation. To reach Share Owner Services by phone, call the following numbers : kcalcallsin Investor Information Cleveland area 642-6900 Outside Cleveland area 1 800-433-7794 Executire Offices Please have your account number ready when calling. Illuminating Building Correspondence should be sent to the address of the Transfer '55 Public Square, Cleveland, Ohio Agent shown above. Telephone Number (216) 622-9800 Dividend Reinvestment and Stock Purchase Plan MailAddress Centerior Energy Corporation has a Dividend Reinvestment P.O. Box 5000, Cleveland, Ohio 41101 and Stock Purchase Plan which provides Cleveland Electric share owners of record and other investom a convenient means N dhade of purchasing shares of Centerior common stock by investing a Arthur Andersen & Co.,1717 East Ninth Street part or all of their quarterly dividends and cash payments Cleveland, Ohio 44114 without paying any fees. In addition, individuals may establish Ilond Trustce and Registrar an Individual Retirement Account (IRA) which invests in Centerior common stock through the Plan. Information and a Storgan Guaranty Trust Company of New York for all series. prospectus relating to the Plan and the IRA may be obtamed Communications regarding bond registration requirements and from Centerior Share Owner Services at the above address. lost certificates should be directed to Alorgan Guaranty Trust f,o"" IM Company of New York,30 West Broadway, New York, N.Y.10015. Telephone Number (212) 587 6469. The Company will furnish to share owners, without charge, a copy of its most recent annual report to the Securities and IlondIhying Accnt Exchange Commission (Form 10-K) and, upon payment'of a Alanufacturers Hanover Trust Company,40 Wall Street, New reasonable fee, a copy of each exhibit to Form 10-K. Requests York, N.Y.10015 and AmenTrust Company National Association, should be directed to the Secretary of Centerior Energy 900 Euclid Avenue, Cleveland, Ohio 44114 -Co-paying agents Corporation, P.O. Box 94661 Cleveland, Ohio 44101-4661. for the Notice: The annual report and the financial statements herein 3% Series due 1989 4%% Series due 1993 re for generalinformation and are not intended to be used m 3%% Series due 1993 connection with any sale or purchase of securities. h! organ Guaranty Trust Company of New Wrk,30 West The Company is an equal opportunity employer. Broadway, New York, N.Y.10015-Ibying agent for all other series of bonds. Inquiries regarding interest payments shoukt be directed to either Alanufacturers llanover Trust Company or Storgan Guaranty Trust Company of New Wrk for the series of bonds for which each acts as paying agent as noted above. Exchange Listings Preferred Stock Series A, B and L are listed on the New York Stock Exchange. I
Summary cf Significant Accounting P:licien General The Cleveland Electric Illuminating 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 Toledo Edison Company (Toledo Edison) approved by the share owners of both compaaies 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 Com-mission of Ohio (PUCO). Consolidation The financial statements include the accounts of wholly-owned subsidiaries, which in the aggregate are not material. Rnlassification Certain reclassifications have been made to the prior years financial statements to conform to current year presentations. Related Party Transactions Operating revenues and expenses include those amounts for transactions with affiliated companies in the ordinary course of business operations. The Company's transactions with Toledo Edison are primarily for interchange 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 services to the Company and other affiliated companies at cost. During 1986, the Service Company billed the Company $16,000,000 for such services. Revenues 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 customers. It is changed semiannually after a hearing before the PUCO. The steam fuel rate is adjusted each month for the costs paid for fuel in the preceding month. Fuel The Company defers the differences between actual fuel costs and estimated fuel costs currently being recovered from customers. This matches fuel expenses with fuel-related revenues. The cost of nuclear fuel, including interest, is charged to fuel expense based on consumption. Estimated future nuclear fuel disposal costs are being recovered through the base rates. Depreciation and Amorti:ation The cost of property, plant and equipment, except for the Davis-Besse Nuclear Power Station (Davis-Besse), is depreciated over their estimated useful lives on a straight line basis. Depreciation expense for Davis-Besse is based on the units-of-production method. This includes a provision for decommissioning costs, currently estimated at $63,000,000 in 1986 dollars. There are no restrictions on the use of the amounts currently being recovered from customers through rates for decommis-sioning. The equivalent straight line provisions for depreciation, excluding Davis-Besse, overall averaged 3.7% in 1986,3.5% in 1985 and 3.2% in 1984. The Company intends to use the units-of production depreciation method for its invest-ments in Perry Unit 1 and Beaver Valley Unit 2. 2 ~ . - - - - _ _ _ _ _ _ _ _ _ _ _ _ _ _- - . - _ _ . _ _ _ - _ - _ _ . _ _ _ _ _ _ _ - _ _ _ _ _ _ . _ . _ - - _ _ - . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _ _ _ _ - _ _ _ _ - _ .
l Costs associated with four Central Area Power Coordination Group (CAPCO) 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 pronouncement, 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. FederalIncome Taxes The Company has recorded as deferred federal income taxes the differences between straight-line depreciation and tax depreciation for property additions since 1976, 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 $283,000,000. Based on PUC0 and Ohio Supreme Court decisions, such taxes can be recovered in future revenues. For certain property, the C r..pany receives investment tax credits which are 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 10- a debt reported on the statement of Results of Operations does not include ir- n nuclear fuel obligations. Interest on nuclear fuel obligations for fuel undet m.uction is capitalized. Property, Plant and Equipment 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, management and general overheads and an allowance for funds used during con-struction ( AFUDC). AFUDC represents the estimated composite debt and equity cost of funds used to finance construction. This noncash allowance is credited to income, except for AFUDC for Perry Unit 2. Since July 1985, Perry Unit 2 AFUDC has been credited to a deferred income account. See Notes 3 and 7. The AFUDC rates, net of the income tax effect, were 10.58% in 1986,10.73% in 1985 and 10.66% 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. 3
M: nag: ment'c Financial An: lysis Results of Operations Operating revenues increased by 5.9% in 1986, following increases of 3.2% in 1985 and 0.4% in 1984. These revenue gains resulted from increases in retail electric rates, which were below the national rate of inflation, and modest growth in l kilowatt hour sales. Sales to commercial customers have increased nearly 4% per year because of growth in the services sector of the economy. Growth in the residential classification has averaged about 1% per year with some year-to-year gains and losses because of variations in weather. Sales to industrial customers were level in 1985 but slipped 0.7% in 1986 largely because of lower steel activity. Operating expenses increased by 10.1% in 1986,4.4% in 1985 and 0.1% in 1984. The increases in 1986 and 1985 were primarily the result of the outage at Davis-Besse which began in June 1985 and ended in December 1986. Expenses in 1986 also increased as a result of other major generating unit outages for mainte-nance and : epairs. These outages resulted in greater generation at coal-fired plants and increased power purchases from other utilities, resulting in higher costs. Most of these power purchases were made at unit prices lower than the cost of internal generation. Operating expenses also increased in each year because of inflation and growth in the business. Earnings available for common stock declined by 3.4% in 1986 following increases of 8.4% in 1985 and 19.6% in 1984. The trend in earnings reflects 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, but it did result in reductions in earnings available for common stock. Notwithstanding the Perry Unit 2 AFUDC deferral, AFUDC has represented an increasing proportion of earnings - 92.9% in 1986,81.7% in 1985 and 69.1% 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. Efut ofinflation Inflation continues to affect our business even though the 1986 rate of inf'ation was less significant than the already moderate rates of the last few years. Over the three-year period 1934-1986, the Company's average electric rates have increased less 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 capital to meet growth needs at inflated costs of construction and to replace worn-out 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 l regulatory environment which is responsive to the effect of inSation on our mvestment. 1 I 4
Resulta cf Oper:tions The Cleveland Electric illuminating Company and Subsidiaries For the years ended December 31, 1986 1985 1984 (thousands of dollars) Operating Revenues Electric. , , , . $1,314,771 $1,240,885 $1,200,465 Steam heating . . .. . . . . . 12,953 13,105 14,888 1,327,724 1,253,990 1,215,353 Operating Expenses Fuel and purchased power . 363,518 351,854 313,412 Other operation and maintenance. . . 388,388 310,694 280,888 Depreciation and amortization. . . . 103,179 96,995 95,274 Taxes, other than federal income taxes. . . . 143,495 133,348 132,313 Federal income taxes . . . 97,074 101,950 131,355 1,095,654 994,841 953,242 Operating income . . . . . . . . 232,070 259,149 262,111 Nonoperating income Allowance for equity funds used during construction. . 178,826 162.907 130,421 Other income and deductions, net . (6,255) (4,844) 3,680 Federal income taxes - credit . . 64,544 48,608 35,t)99 237,115 206,671 169,200 Income Before Interest Charges . . . 469,185 465,820 431,311 Interest Charges Long-term debt . I'28,932 210,891 177,246 Short-term debt . 3.201 1,399 3,618 Allowance for borrowed funds used during construction . (62,832) (57,173) (41,185) 169,301 155,117 139,679 Net Income. . . . 299,884 310,703 291,632 Preferred and preference dividend requirements. . 39,784 41,467 43,353 Earnings Availablefor Common Stock . . . $ 260,100 $ 269,236 $ 248,279 The accompanying notes and summary of significant accounting policies are an integral part of this statement. 5
M:n:g: ment's Fin nci:1 An ly:is Capital Resources and Liquidity We carry on a continuous program of constructing new facilities to meet 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 1984-1986 totaled approximately $1,900,000,000, 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 6?% 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 obtained
$225,000,000 in three sales of first mortgage bonds, $74,000,000 in a preferred stock sale and, prior to April 29,1986, $27,000,000 in common stock sales. Equity contributions from Centerior Energy provided $79,000,000. 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 construc-tion program, to pay the construction program's costs and for general corporate purposes.
In addition to funds required for the construction program, the Company will require $428,000,000 for the retirement of debt and preferred stock during the . 1987-1991 period. The Company also is required to offer to purchase $72,000,000 ) of preferred and preference stock during the same period. See Note 11 for further j information concerning the first mortgage 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 the 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 PUCO 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 of 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 further lowered its ratings on the first mortgage bonds and preferred stock of the Company to BBB- and BB+, respectively. Moody's Investors Service rates the Company's bonds and preferred stock Baa2. For discussion of the cash flow impact of the Tax Reform Act of 1986, see Note 8. I l 6
R:trined Eirnings The Cleveland Electric Illuminating Company and Subsidiaries For the years ended December 31, 1986 1985 1984 (thousands of dollars) Balance at Beginning of 1' ear . . . . . . . . .... . .. . .. . .... .. $ 547,671 $ 471,163 $ 388,217 Additions Net income .. .. ... .. . ... . .... .. ..... ... ..... 299,884 310,703 291,632 Deductions Dividends declared Common stock . . . . . . . . . . . . .... .. . .. .... . . (276,849) (193,238) (164,690) Preferred stock . . . . . . . ... . .. . . (45,025) (37,637) (39,799) Preference stock. .. ... . .. . ... ... ... (2,872) (3,314) (4,197) Cost of issuing equity securities . . . . . . . .. . . . . .. (4) (6) - Earnings Reinvested During the Year . . .. .. . (24,866) 76,508 82,946 Balance at End of l' ear . . . . . ... .. . . . . .. $ 522,805 $ 547,671 $ 471,163 Source of Funds Invested in Plant and Facilities For the years ended December 31, 1986 1985 1984 (thousands of dollars) Providedfrom internal Sources Net Income . . . . . . . . . . . . . . .. ... .. .. $ 299.884 $ 310,703 $ 291,632 Principal Non-Cash Items: Depreciation and amortization.. . . . .... .. 103,179 96,995 95,274 Deferred federal income taxes . . .. . . . . . . .. . 54,693 57,078 27,522 Investment tax credits, net . . . . . (17,551) 11,971 46,776 Allowance for equity funds used during construction. . . .. (178,826) (162.907) 1 130,421) Funds Provided from Operations . . . . . . . . . . . . . . . . . . . 261,379 313,840 330,783 Dividends paid . . . . . . . . . .. .. .. . (255,895) (234,189) (208,686) Increase in reserve for Perry Unit 2 allowance for funds used during construction . . . . . . . . . . . . . ... .. . . . . 36,446 17,962 - Net change in working capital and other accounts . . . . . 16,854 (21,994) (17,602) Allowance for equity funds used during construction. .. .. .. 178.826 162,907 130,421 Funds Provided from Internal Sources . . . . .. . . 237,610 238.526 234,916 Providedfrom External Sources Sale of Securities: Common stock. . . . . . . . . .. . 26,688 94,401 154,377 Preferred stock . . . . . . 73,968 49,000 - First mortgage bonds. . . . ... 225,000 289,170 337,900 Equity contributions from parent . .. 78,687 - - Net change in other debt. . .. . (10,205) (33,158) 70,156 Net change in pollution control construction funds . .. .. .. 31,046 7,968 (42,804) Net increase (decrease) in short-term debt . . .. . . 30,807 (18,978) - Net (increase) decrease in temporary cash investments . . 61,425 43,943 (88,466) Redemption of bonds, preferred and preference stock . . . .. (73,818) (68,473) (78,400) Net increase in other noncurrent obligations, primarily nuclear fuel obligations . . . . . . . . . . . . . . . .. 34,376 43,010 38,820 Funds Provided from External Sources . . . . . 477,974 406,883 391,583 Total Sources of Funds . . . . .. . . . $ 715,584 $ 645,409 $ 626,499 invested in Construction Expenditures. .. . . . .. $ 670,585 $ 605,705 $ 582,288 Increase in Nuclear Fuel Inventory . 44,999 39,704 44,211 Total invested in Plant and Facilities . . .. . . . $ 715,584 $ 645,409 $ 626,499 The accompanying notes and summary of significant accounting policies are an integral part of these statements. 7 _ _ _ _ _ _ _ _ _ _ _ _ J
l Binca Sheet The Cleveland Electric Illuminating Company and Subsidiaries December 31, 1986 1985 Assets (thousands of dollars) I'roperty, Plant and Equipment Utility plant in service . . .... . . $3,196,730 $3,089,105 Less: accumulated depreciation and amortization , . . 951,917 874,366 2,244,813 2,214,739 Construction work in progress . . 2,640,313 2,165,501 Perry Unit 2 . . .. . .. . 427,524 358,666 5,312,650 4,738,906 Nuclear fuel, r.et of amortization . . . . 345,522 300,523 Other property, less accumulated depreciation. .. 38,020 35,328 5,696,192 5,074,757 Pollution Control Construction Funds, unexpended . 22,408 53,454 Current Assets Cash and temporary cash investments . . 27,583 85,102 Amounts due from customers and others, not 141,849 131,224 Amounts due from affiliates . 462 318 Materials and supplies, at average cost . . 33,057 31,784 Fusil fuel inventory, at average cost . . 41,240 51,241 Taxes applicable to succeeding years. . 110,474 105,121 Other .. .. . . 7,132 3,863 361,797 408,653 I)eferred Charges Unamortized costs of terminated projects. 37,701 44,083 Accumulated deferred federal income taxes . . 17,991 6,991 Other . 73,603 62,622 129,295 113,696 Total Assets . . . $6,209,692 $5,650,560 Capitalization and Liabilities Capitali:ation Common shares, without par value 105,000,000 authorized; 79,591,000 and 78,523,000 outstanding in 1986 and 1985, respectively .... . $1,242,482 $1,216,049 Other paid-in capital . . 78,687 - Retained earnings . . . . 522,805 547,671 Common stock equity. 1,843,974 1,763,720 Preferred stock With mandatory redemption provisions . . . . . . 316.217 280,467 Without mandatory redemption provisions 144,021 144,021 Preference stock with mandatory redemption provisions 22,800 34,200 Long-term debt . 2,311,455 2,099,660 4,638,467 4,322.068 Other Noncurrent Liabilities, primarily nuclear fuel lease aml trust obligations . . 334,552 300,176 Current I.iabilities Current portion of long term debt and preferred stock. 26,961 48,161 Current portion of lease obligations . . 35,760 23,366 Notes payable to banks and others. 30,929 122 Accounts payable .... . .. . . . 117,889 113,917 Accounts payable to affiliates . 17,501 16,199 Accrued taxes . . 146,199 141,308 ' Accrued interest . . . .................. .... 49,203 45,231 Dividends declared, includes $59,500,000 payable to parent 68,851 - Accrued payroll and vacations. . 21,649 20,622 l Other . . . 14,624 9,218 ' fleferred Credits
- 6 4l8'l44 Unamortized investment tax credits. 259,785 277,336 Accumulated deferred federalincome taxes . ..... 337,527 271,834 Reserve for Perry Unit 2 allowance for funds used during construction . . 54,408 17,962 Other . 55,387 43,040 707,107 610,172 Total Capitalization and Liabilities $6,209.692 $5,650,560 The accompanying notes and summary of significant accounting pohcies are an integral part of this statement. )
8
St:t; ment cf Cumul:tiva Pr:f:rred cnd Prefer:nc3 Stock The Cleveland Electric illuminating Company and Subsidiaries Safes Cur nt December 31. Outstanding Call [' rice 1986 1985 (thousands of dollars) Without par value,4,000,000 preferred and 3,000,000 preference shares authorized Subject to mandatory redemption (less current maturities): Preferred: 210,000 $ 103.00 $ 21,000 $ 22,000
$ 7.35 Series C . . . ..
39,000 42,000 88.00 Series E . . 39,000 1,049.74 75.00 Series F . . . 33,333 1,000.00 33,333 50,000 80.00 Series G. 16,000 1,008.89 16,000 24,0J0 145.00 Series H .. .. 23,154 - 23,154 24,936 27,562 27,562 29,531 145.00 Series I . . . 29,000 113.50 Series J . . . 23,200 1,050.44 23,200 10,000 10,000 10,000 113.50 Series K. . . . . Adjustable Series M 500.000 108.02 49,000 49,000 9.125 Series N. . . . 750,000 109.13 73,968 -
$316,217 $280,467 Preference:
77.50 Series 1 . . 22,800 1,006.46 $ 22,800 $ 34,200 Not subject to mandatory redemption: Preferred: 7.40 Series A . . . 500,000 101.00 $ 50,000 $ 50,000 450,000 103.78 45,071 45,071 7.56 Series B . . . . . Adjustable Series L . . .. .. 500,000 108.02 48,950 48.950
$144,021 $144,021 The accompanying notes and summary of significant accounting policies are an integral part of this statement.
9 J
N:tes ta the Finrnci:1 Stat:m:nts (1) Affiliation The affiliation between the Company and Toledo Edison shares of Centerior Energy common stock in exchange for s under Centerior Energy became effective on April 29,198' . each share of the Company's common stock. No other securi- l ilolders of the Company's common stock received 1.11 ties or financial obligations of the Company were affected. (2) Property Owned with Other Utilities The Company owns, as tenants in common with other utilit et certain generating units as listed below. Each owner owns an undivided share in the entire unit. Each owner has the right to a grcentage of the generating capabihty of each unit equal to its ownership shart and is obligated to pay for its respective share of the construction and operatmg costs. No owner is responsible for any other r,wner's share. Property, plant and equipment at Df cember 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 m Progress (thousands of dollars) In-Service: liydro-Seneca Pumped Storage . . 1970 80.00 % 305 Electric $ 58,131 $ 318 Eastlake Unit 5 . . . . . . . . 1972 68.80 446 Coal 116,360 14,099 Ilruce Mansfield Unit 1. 1976 6.50 51 Coal 26,294 174 Davis-llesse. . . . . . . . . . . ,. . 1977 51.38 445 Nuclear 503,299 39,502 Ilruce Mansfield Unit 2. 1977 28.60 223 Coat 117,941 1,153 Ilruce Mansfield Unit 3. . 1980 24.47 196 Coal 157,003 595 Under Construction (Note 3): Perry Unit 1 & Common Facilities . . . . . ..... 1987 31.11 375 Nuclear - 1,502,704 lleaver Valley Unit 2 & Common Facilities . . . 1987 24.47 204 Nuclear - 1,008,608 Construction Suspended (Note 3): Perry Unit 2. . Uncertain 31.11 375 Nuclear - 427,524
$979.028 $2,994.677 The accumulated depreciation for Seneca at December 31,1986 was $15,000,000. Depreciation on all otbr plant in-service owned with other utilities has been accumulated on an account basis with all other depreciable property rather than by specific units of depreciable property. The Company's share of the operating expense of properties owned with others is included in the Results of Operations.
Under an agreement between Ohio Edison Company (Ohio Edison), Pennsylvania Power Company (Pennsylvania Power) and the Company, Ohio Edison and Pennsylvania Power will make firm power purchases of 80 megawatts of the Company's 375-megawatt ownership interest in Perry Unit 1 over an 18-month period, commencing with initial commercial operation of the Umt. In s
-+ s- 4 A-.. - - , _ _ - -
_ -- . # s- m. >-+& -_. (3) Construction and Contingencies Construction Program The estimated cost of the Company's construction program seeking review of the refusal by the NRC stafT to act (a) to for the 1987 1991 period is $1,470,000,000, including suspend construction and operation of Perry Unit 1 because AFUDC and excluding nuclear fuel. Should more stringent the seismic design of the Plant is inadequate, (b) to estab-environmental regulations be adopted, particularly in the area lish an independent design and construction verification pro-of acid rain pollution control, construction program costs for gram and (c) to review the effect the affiliation will have on
- this period are not expected to increase substantially. How- the Company's and Toledo Edison's ability to meet the ever, such costs could increase substantially thereafter. liability insurance and indemnity requirements for the Perry The construction program includes the completion of the Company's share of two nuclear generating unit projects, Ile ver Valley Unit 2 Perry Unit 1 and lleaver Valley Unit 2. No amount for new construction is included for a third project, Perry Unit 2. Ileaver Valley Unit 2 currently is about 98% complete and is because construction of this Unit has been suspended. These scheduled for completion around the end of 1987. The j
4 generating units are owned by the five utilities m the Central estimated final cost of the Company's 204-megawatt share of i Area Power Coordination Group (CAPCO), namely, the the Unit is about $1,061,000,000, including AFUDC. An
; Company, Toledo Edison, Duquesne Light Company (Du- application for an operating license for the Unit is pending i quesne), Ohio Edison and Pennsylvania Power. The Company before the NRC.
is responsible for constructing Perry Units 1 and 2 and Duquesne is responsible for constructing fleaver Valley Perry Unit 2 Unit 2. Perry Unit 2, exclusive of the common facilities,is about 44% Perry Unit I complete. Including its share of the common facilities, the Unit is about 58% complete. Construction of Perry Unit 2 Perry Unit 1 and the facilities to be used in common with w s 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 $1,503,000,000 at December 31, mated cost and completion date, mothballing or cancellation. 1986. We estimate that the Company's share of the cost will None of these alternatives may be implemented without the increase about $21,000,000 per month until the Unit approval of each of the CAPCO companies. Many factors will achieves commercial operation. be taken into account m making the decision, meluding cost, safety, environmental 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 Perrj Unit 1. The nationwide, particularly in our region, the probable high ccst i Unit's power ascension and final testing program is progress, of retrofitting fossil fuel units to satisfy possible acid rain i ing. Net positive generation of 20% could be achieved pollution control regulations and the incremental cost of i during the first quarter of 1987 and full commercial operation I within another five months. Ilowever, experience indicates e mpleting Perry Unit 2. The timing of a decision on Perry 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 capitalize AFUDC for is currently considering a request by an organization that the Court order the NRC to re-examine the seismic design of Perry Unit 2, but since July 1,1985, it has been crediting such AFUDC to a balance sheet deferred credit reserve Perry Unit 1 because of the earthquake which occurred near instead of crediting it to income. This deferral does not affect the Plant in january 1986 and that the Court revoke the cash flow, but it reduces the Company's reported net income operating license for Perry Unit 1, by about $3,100,000 per month from what it otherwise The NRC currently has pending before it a request by an would be. organization for review of certain aspects of the Perry Plant If Perry Unit 2 is cancelled, the Company will seek o!Tsite emergency plan and to modify or terminate the Perry Unit 1 operating license and a request by two other organiza. authorization from the PUCO to recover its investment in the Unit in rates. We have no assurance that recovery 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 11
elsewhere and less any resulting tax benefit, would have to be continue to be able to pay for their shares of each project. To written off. We estimate that, based on the Company's do so, each CAPCO company must obtain adequate and investment in this Unit at December 31,1986 and awming timely rate increases. There can be no assurance that such a federalincome tax rate of 34%, such a write-off would rate increases always will be forthcoming or that some other have been about $261,000,000. Based on the Company's event will not adversely affect financial markets or nuclear current financial position and level of annualincome, such a projects generally, or a CAPCO company or nuclear project write-orf would have a material adverse effect on the Com- in particular, so as to impair the ability of a CAPCO company pany's results of operations and retained earnings in the to pay for its share. If any CAPCO company stops paying for period in which it were to occur. The Company's ability to its share, any or all of the other CAPCO companies could be continue paying dividends would not be impaired solely be- forced to accept a solution invoMng substantial losses or cause of such a write-off. additional financial burdens. In April 1986, Duquesne announced that it no longer needs the capacity of Perry Unit 2. In June 1986, Duquesne In 1985, the PUC0 ordered an m.vestigation 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 the Company. In August 1986, the though it had abandoned the Unit, even though the CAPCO PUC0 published the summary report of the consultants it companies have not decided to cancel the Unit. Duquesne hired to investigate the cost of Perry Unit 1. The consultants has also advised the PaPUC that it will not agree to resump, concluded that the Company performed effectively in manag-tion of construction of Perry Unit 2. Duquesne is continuing ing the planning, design, licensing and construction of the to pay its share of maintaining Perry Unit 2. We do not plan Unit, except for about $229,000,000 (as revised) of costs currently to treat the Company's investment in Perry Unit 2 through 1985, mcluding AFUDC through 1986, which the as abandoned for any purpose. We do not know what consultants believe could have been avoided through im-arrangements might be made with Duquesne if all the other proved management and decision-making. The consultants CAPCO companies want to complete Perry Unit 2 and also concluded that delays caused by General Electric Com-Duquesne does not change its position. pany in connection with the design and construction of the nuclear steam supply system resulted in about $673,000,000, Nuclear Plant Offsite Emergency Plans including AFUDC through 1985, of additional costs over which the Company had no control. The report of the In August 1986, the Governor of Ohio informed the NRC consultants is not binding on the PUC0 or the owners of that, because of the accident at a nuclear plant in Chernobyl, Perry Unit 1. The PUC0 will consider the report, together USSR, in April 1986 and the earthquake near the Perry with the input of its staff and other studies, to determine Plant in January 1986, he was withdrawing his support for whether any Perry Unit 1 costs are excessive due to impru-the offsite emergency plans for the Perry and Davis-Besse dent management and to determine whether any of such Plants. These plans had been prepared with the participation costs should be disallowed in rates. Hearings before the and cooperation of the State of Ohio and local government PUC0 are scheduled to begin in May 1987. The PUC0 also officials. The State of Ohio has requested the United States could consider the prudency of costs incurred after 1985. I Court of Appeals for the Sixth Circuit to prohibit operation We believe that all of the Company's actions in connection of Perry Unit I and Davis-Besse and to order the NRC to re- with Perry Unit I have been prudent, examine the offsite emergency plans for both plants. The 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 (ALj) that Experience indicates that completion of nuclear generating Perry Unit I was prudently planned, managed and con-projects usually myolves the risks of significant cost m- structed. The ALJ recommended that no reduction in the allowable costs of Perry Unit I should be made for im-creases, construction delays and licensing difficulties. Also, operating nuclear generatmg umts have experienced unplan- prudency. Any PaPUC decision will not apply to the Company' ned outages or extensions of scheduled outages because of equipment problems or new regulatory requirements. A ., major accident at a nuclear facility anywhere in the world A e nsultant is mvestigating for the PaPUC whether any could cause the NRC to limit or prohibit the operation, c sts of Beaver Valley Unit 2 are excessive. Any PaPUC construction or licensing of a nuclear unit. decision will not apply to the Company. Ilowever, it is probable that the PUC0 also v ill investigate the costs of The successful completion of the Company's nuclear Beaver Valley Unit 2 (and Perry Unit 2, if completed) construction program requires that the CAPCO companies incurred by the Company. 12
l 1 l 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 invcived 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 PUC0 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 Toledo Edison. A consultant has been engaged by less the facts and circumstances indicate that subsequent the PUC0 to determine whether the June 9 event and the recovery of such amounts is probable. ensuing outage were caused by imprudent management and The book accounting for the three nuclear units dis- to determine the cost of replacement power incurred be-cause d & outage aM Ge exW M wM such costs have
. cussed above could be affected by the implementation of ! been recovered from customers.
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 Toledo Edison 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 have 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 patential 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 Company intends to oppose the consultant's conclusions on cannot predict what actions the PUC0 will take on any of imprudence and the amount of fuel and purchased power these issues. Ilowever, an adverse regulatory action could costs attributable to the outage. Ilearings before the PUC0 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.
operations. 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 PUC0 will allow full June 9 event) was beycnd Toledo Edison'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 resultmg m an adverse outcome varies. It should be recog-nized, however, that one or more of such adverse events to have a material adverse effect on future results of perations. [ could occur. Individually, or collectively, such events could i 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-l (1) Davis Besse Nudrar Power Station ing plants designed by the same manufacturer. On June 9,1985, Davis-Besse was shut down because of the i failure of its main and auxiliary feedwater supply. NRC m A. udrar Fud
- 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 i and plant maintenance before the incident. Toledo Edison, provide an adequate supply lasting into the mid-1990s. Sub-l operator 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 usefullives of Perry staff 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.
i l 1 i 13
The maximum amount that the Company can finance plant. Damage to the Company's property could exceed the under one set of nuclear fuel leasing arrangements is insurance coverage by a substantial amount and thereby
$280,000,000. It consists of a long-term lease that allows the have a material adverse effect on the Company's financial lenders to cancel their financing commitments after three condition and results of operations in the period of the loss. If years notice. The Company's share of the maximum amount the property damage insurer's reserves are inadequate to available under another arrangement, which includes leases cover claims arising out of an accident at any nuclear site in and a trust combined, is $90,000,000. This arrangement is the United States, the Company is obligated to pay retro-subject to cancellation by the lender after one year notice. spective premiums up to $8,088,000 for this policy year. The Company intends to obtain similar insurance for its other The lease and borrowing rates are based on bank prime nuclear units at the time of fuelload, and commercial paper rates. The amounts capitalized in-cluded interest charges incurred by the lessors amounting to insurance coverage is also held for the cost of any
$22,000,000 in 1986 and 1985 and $25,000,000 in 1984. replacement power purchased after the occurrence of certain Under the leases, rental payments are made as the fuel is types of accidents at Davis-Besse. The event at Davis-llesse burned in a reactor. The estimated future lease amortization described in Note 4 is not a covered event. The amount of payments based on projected burn are $34,000,000 in 1987. the coverage is $1,222,000 per week during the 52-week
$44,000,000 in 1988, $41,000,000 in 1989, $57,000,000 in period starting 26 weeks after an accident and $611,000 per 1990 and $55,000,000 in 1991. As these payments are week for the next 52 weeks. The cost and duration of made, the amount of credit available to the lessors is renewed replacement power could substantially exceed the insurance and becomes available to fmance additional nuclear fuel. coverage. Also, if the insurer's reserves are inadequate to e la ns a ng e d ac&nu at any nuckar ungn At December 31,1986, a total of $346,000,000 is the Umted States covered by such insurance, the Company is committed under the leases and the trust for nuclear material obligated to pay retrospective premiums up to $2,059,000 and costs of processing it into fuel for the Company. This for this policy year. The Company intends to obtain similar meludes nuclear fuel in the Davis Besse and Perry Unit 1 insurance for its other nuclear units when they begin com-reactors with remaining costs of $38,000,000 and mercial operation.
$56,000,000, respectively, as of December 31,1986.
(6) Nuclear Insurance (7) Rate Matters The Company and the other CAPCO companies maintain a Recent Rate Increases nuclear insurance program for each nuclear plant to the maximum extent available. This includes $695,000,000 of During the three years ended December 31,1986, the PUC0 nuclear liability coverage, as of December 31,1986, for granted increases in electric rates to the Company as injury to persons and their property arising out of a nuclear I II *5 incident at each site. The coverage consists of Annualized I
$160,000,000 of insurance and $535,000,000 of indemnity Date Amount by the federal government under the Price Anderson amend- Ohouunds ments to the Atomic Energy Act. The Act limits the owners' of dollarsi nuclear liability to the amount of the coverage. The current March 1985 $19,500 Price-Anderson legislation expires in August 1987. Ilills to June 1986 37,000 amend it by increasing substantially the amount of indemnity have been introduced in Congress. Under the federal indem. Perry Unit 1 construction work in progress (CWIP) nity coverage, the Company is currently obligated to pay amounts were not included in the rate base for either of the retrospective premiums up to $8,249,000 for this policy year increases, llowever, the Company's June 1986 order pro-to cover any nuclear liability claims arising out of an incident vided for a delayed increase, amounting to $39,800,000 at any nuclear plant in the United States, annually, based on inclusion of $193,000,000 of Perry Unit 1 CWIP in rate base. This delayed increase will become The Company has insurance coverage for damage to its effective when Perry Unit 1 produces at least 20% net property at Davis-llesse and Perry (including leased fuel and positive generation. This could occur during the first quarter clean up costs) in the amount of $1,160,000,000 for each of 1987. See Note 3, Perry Unit 1, It
m f Pending Applications the time the Unit is placed in service. It would continue until the Unit's costs are included in rate base. The PUC0 has , in November 1986, the Company applied to the PUC0 for a allowed such deferrals m similar cases for other Ohio utih-rate increase based on a test year ending July 31,1987 Any ties. Also, the Company has requested authority to defer rate increase resulting from the new request is not expected Pury Unit 1 operating costs until those costs are meluded m, 2 to become effective until late in the summer of 1987 at the . r tes ,fi the PUC0 demes their mclusion m the November ! earliest. The new application includes allowances for recovery 1986 rate application. Deferral of financing and operating i of Perry Unit 1 operating costs. The Company is seeking a , e sts prevents a reduction m reported earnmgs from what
$217,000,000 increase, after adjustment for the they otherwise would be, but does not produce cash flow until i $39,800,000 delayed increase authorized in June 1986.
- subsequent periods when such costs are recovered m rates.
Any delay in the operation of Perry Unit 1, which i prevents the Company from starting to recover in rates Perry The FASil continues to consider amendments to ac-I Unit 1 CWIP and operating costs in the last half of 1987, counting standards applicable to rate increase phase-in plans. could make it necessary to consider cash conservation mea. A formal proposal which would have allowed deferral of 4 sures. This includes reductions in expenditures, requests for costs, including an equity return, if recoverable over not emergency rate relief and reexamination of the Company's more than 10 years, has been withdrawn. A new proposal is i common stock dividend policy, expected to be issued in 1987. Any PUC0 denial of the Company's requests to defer ! Perry Unit 1 Rate Treatment
- financing and operating costs or adoption of a recovery
! The Company has asked the PUC0 to permit it to defer the method that does not meet the criteria of the final FASil l ongoing financing costs of Perry Unit I until subsequent standard could have a material adverse impact on future i recovery in rates is authorized. This deferral would be results of operations. We cannot predict the outcome of the j calculated on a basis similar to AFUDC and would begin at FASIfs review or future actions of the PUCO.
1 ) ( ( l i i 1 ) t l l ts
(8) FederalIncome Tax Federal income tax, computed by multiplying the income before taxes by the statutory rate of 46%,is reconciled to the amount of federal income tax recorded on the books as follows: For the years ended December 31, 1986 1985 1984 (thousands of dollars) Book income Befort Fednal income Tax . . . . . . . . . . . . . . . . $332,414 $364.045 $387,888 Tax on Book Income at Statutory Rate . . . . . . . $152,910 $167,461 $178,428 Decrease in Tax Due to: Allowance for Funds Used During Construction . . 111,162 101,237 78,939 Other Items . .................... ...... . 9,218 12,882 3,233 120,380 114,119 82,172 Total Fednal Income Tax Expenst. . . . .... ... ...... $ 32,530 $ 53,342 $ 96.256 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 Expensn Current Tax Provision . . . . . . . . . . . . . . . . . . . . . . $ 54,557 $ 45,531 $ 56,029 Changes in Accumulated Deferred Federal Income Tax: Accelerated Depreciation and Amortization . . . . . 54,179 20,077 23,957 Nuclear Fuel Interest Charges . . . . . . . . .. 10,136 10,118 - Other items . . . . . . . . ....... . ... . .... (4,247) 6,234 4,594 investrnent Tax Credits - Net . . . . . . . . . ..... . (17,551) 19,990 46,775 Total Charged to Operating Expenses . . ........ 97,074 101,950 131,355 Nonopnating income Current Tax Provision . . . . . . . ............. (58,338) (46,239) (33,240) Deferred Tax Provision . . . . . . . . . . . . . . . .. .. (6.206) (2,369) (1,859) Totaf federal lncome Tax Expenu. . . .., , . ,, .. .. . $ 32.530 $ 53,342 $ 96.256 The Company will join in the filing of a consolidated federal income tax return with the affdiated companies for 1986. The method of tax alk> cation approximates a separate return result for each company. For 1986, the Company incurred a loss for federalincome 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 oliset by investment tax credits to the extent allowable. The investment tax credits previou.dy utilized in those years are now available to be carried forward to ofiset future taxes payable. Approximately $61,000.000 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 1987 and a 34% income tax rate in 1988 and thereafter, the repeal of the investment tax credit, scheduled reductions in investment tax credit carryforwards,less favorable depreciation rates, a new alternative minimum tax and other items. These changes are expected to increase our tax payments 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 otiset 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
d l 1 (9) Retirement income Plan and Other Post Retirement During 1985, the FASU issued new standards for pen-l Benefiti sion accounting. The Company will be required to adopt those I standards in 1987. We expect that adoption of the new 1 A non-contributory pension plan is maintained which covers standards will not have a material effect on the Company's i all employee groups. The amount of retirement benefits financial position or results of operations.
; generally depends upon the length of employee service and i carnings. Under certain circumstances, benefits can begin as (10) Greantres ,
early as age 55. The plan also provides certain death and Under two long term coal purchase arrangements, the Com-disability benefits, as well as certain medical benefits. J pany has guaranteed the loan and lease obligations of two i Pension costs for 1986 were $17,800,000 and included mining companies. One of these arrangements also requires I
$4,100,000 for post retirement medical benefits and premi- payments to the mining company for any actual out-of-ums. Pension costs for 1985 and 1984 were $17,400,000 pocket idle mine expenses (as advance payments for coal) l when the mines are idle for reasons beyond the control of the l and $15,300,000, respectively. The practice of the Company has ben to fund pension costs accrued. mining company. At December 31, 1986, the principal amount of the mining companies' loan and lease obligations Pension costs for 1986 included funding of post retire. guaranteed by the Company was $80,000,000, ment medical benefits and premiums. The Company had been paying these amounts directly when due. IIll Cdei'alitatiod I i (a) Capital Stock Transactions I Adoption of a new actuarial method increased pension Shares sold and retired during the three years ended Decem- ;
i costs by $3,500,000 in 1986. A change in the basis for ber 31,1986 are listed below, j determining the pension contribution policy and changes in actuarial assumptions in 1986 reduced pension costs by 1986 1985 1984 j $5,900,000 in 1986. ( thouurutof ihue.) Common Stock: The comparison of the actuarial value of the liability for Public Sales . . . . . . . . . . . - - 5,000 { J accumulated plan benefits with net assets available for bene- Dividend Reinvestment fits which follows is required under generally accepted and Stock Purchase
- 3,922 3,329 j Pla n . . . . . ........ 880 accounting principles. Employee Savings Plan . . 124 394 419 January 1, Em loyee Thrift Plan . . . -
96 93
! 1986 1985 Ke Employee incentive
, Em ot sinus, . tock Plan . . . . . . 10 31 - ! P I **'- -54 39 1 la 1.r f ffts*: l Ve st ed . . . . . . . . . . . . . . . . . . . . $193 $172 Total Common 22 16 Stock Sales . . . . 4.482 8,842 Nonvested . . . . . . . . . . . . . . . . . 3 68 ! $215 $188 Cumulative Preferred and Market value of net assets available Preference Stock for benefits . . . . . . . . . . . . . . . . . $430 $350 Subject to Mandatory
== === Redemption:
! Sales ollased on an annual discount rate of 7% in 1986 and 6.5% in PMerred-
- 1985. Adjustable Series M .
500 - l $9.125 Series N . . .. 750 - - l The almvc comparison determines the accumulated pen- Retirements sion plan liabihty as though the plan was terminated at the PMerred-l dates shown. It is calculated without consideration of future (10) (10) (10) 4
$ 7.35 Series C . . . .
increases in employees' carnings. We and the Company's 88.00 Series E . , . . . . (3) (3) (3) pension consultants beheve that the required disclosures are 75.00 Series F . , . . . (17) - - misleading because they understate the fund's assets needed 80.00 Series G . . . (8) (8) (8) i r ... (2) - at those dates to provide pension benefits as they become , , payable under a plan intended to continue indefimtely. Deter- pg gg, l
- mining the plan habihty using our long term funding auump' 77.50 S'eries 1 .. (11) (11) (11)
I tions indicates that on January 1,1986 the fund's habihty Net Change 697 (32)
- e 46,6 ==--
, was shghtly more than the fund's acets. ! u I
i l l (b) Equity Distribution Restrictions The annualized cumulative preferred and preference , l At December 31,1986, consolidated retained earnings were dividend requirement as of December 31,1986 is
$4 ,000,000.
i $523,000,000. The retained earnings were available for the ;
; declaration of dividends on the Company's preferred, prefer. The dividend rates on the Company's Series L and hl : ; ence and common shares. All of the Company's common Preferred Stock fluctuate based on prevailing interest rates. l . shares are held by Centerior Energy. The dividend rates for these issuances averaged 8.77% and l
- 7. % respectkly, in 1986.
A loan or advance by the Company to Centerior Energy l l requires PUC0 authorization unless it is made in the ordi- There are no restrictions on the Company's ability to !
; nary course of business operations in which the Company issue preferred or preference stock. !
j acts for Centerior Energy. 1 The Company's preferred stock is prior to its preference
. (c) Cumulative Preferred and Preference Stock stock, and its preferred and preference stock are prior to its
{ Amounts to be paid for preferred stock which must be comm n stock with respect to dividend and liquidation t rights. redeemed during the next five years are $14,000,000 in each [
; year 1987 through 1990 and $31,000.000 in 1991. In addition, the Company must offer to purchase preferred and (d) Long Term Debt and Other llorrowing Arrangements preference stock having a total redemption price of Long term debt,less current maturities,is as follows: $
$36,000,000 in both 1987 and 1988 and none in 1989 First Mortgage lionds: i
) through 1991. Interest December 31, ;
i Year of Maturity Rate 1986 1985 1 I The annual mandatory redemption provisions are as I"U"*" gidolg i Annual Mandatory 1989.......... 15.25 40,000 40,000 Redemption Provmons 1989.. ....... 14.375 50,000 50,000 ' 4 1990....... .. 7.125 60.000 60,000 j
- Shares 1991. ....... 8.375 35,000 35,000 Shares at Ilegin- 1991........., 14.00 25,000 25,000 l to be lloiders' ning 1992-1996 .... 3.875-15.75 234,578 184,578
! Redeemed _ Option In Price 1997 2001 .... 6.20 15.75 55,020 25,020 ,
Pref"'"d*. 2002 2006 ,.... 6.20 15,75 203,020 183,020 l 1 2007 2011 ,,.. 6.20 15.75 419,255 419,255 J $ 7.35 Series C . . . 10,000 - 1984 $ 100 2012 2020 ... . 6.00 16.625 88.00 Series E . ,, 3,000 1,000 952,097 _ 827,097 l 1 - 1981 ! ! 75.00 Series F . . , - 16,667 1985 1,000 2,093,970 1,868,970 I 80.00 Series G . - 8.000 1984 1,000 Term bank loans, 6.425 9.01%, , j 145.00 Series 11. 1,782 - 1985 1,000 due 19871993 . . . . ...... 152,000 165,000 ' , 145.00 Series 1. . . . 1,969 - 1986 1,000 Pollution control notes,5.10-
- 113.50 Series J . , . . 5,800 -
1987 1,000 6.70%, due 1987 2012 . . . . . . . . 56,200 56,610 !
- 113.50 Series K . . . 10,000 -
1991 1,000 4 Adjustable Series M 100,000 - 1991 100 Ghn - net . . ...... .... .... ,3,285 ,J,080 ! i 9.125 Series N . . . 150,000 - 1993 100 Total Long Term Debt . . . . . . $2,311,455 A2,099,660
'~ l Preference: i' j 77.50 Series 1 .. - 11,400 1984 1,000 , i i
l } 1 i I [ i J j r i' l I \ , . in l 4 { 1 -
Long-term debt matures during the next five years as The Company must pay annual commitment fees of approxi-folloos: $13,000,000 in 1987, $15,000,000 in 1988, mately 0.3% on the average daily unused portion of the
$125,000,000 in 1989, $95,000.000 in 1990 and credit agreement. At the Company's option, all obligations $91,000,000 in 1991. outstanding at March 31,1988 may be converted into an amo za eegear loan. A ecem 31, N, there The mortgage of the Company constitutes a direct first mwings under is agreement, were n mortgage lien on substantially all its property and franchises owned. Excluded from the lien are cash, securities, accounts receivable, fuel and supplies. N' N""' U ""I"# A * "K""U The issuance of additional non refunding first mortgage The Company's bank credit arrangements at December 31, 1986 are as follows:
bonds by the Company is limited by two provisions of its mortgage, one relating to bondable property coverage of the Amount Imnds and the other to earnings coverage of interest on the (thouunds of douars) bonds. The amount of additional non-refunding bonds issuable llank Lines of Credit . . . .. $156,300 at any given time wdl depend upon unbonded bondable ik>rrowings Under llank prop 2rty at the time, earnings at the time and interest on the ! 1.ines of Credit . . . . . ... imnds then outstanding and to be issued. The mortgage also permits the issuance of refunding bonds in an amount equal to Short-term borrowing capacity authorized by the PUCO retired tmnds which have not served as the basis for the s $300,000,000. Issue of other bonds, Under these limits, the Company would have been permitted to issue approximately $1,025,000,000 Most borrowings under the Company's short term bank of additional non refunding bonds and $19,000,000 of re. lines of credit do not require compensating balances but do funding bonds at December 31,1986, require a fee of approximately 0.3% per year to be paid on any unused portion of the lines of credit. For those banks In November 1985, the Company arranged a bank re- without fee requirements, the average daily cash balance in volving credit agreement providing for borrowings of up to the bank accounts satisfied informal compensating balance
$150,000,000. Tius agreement serves as a backup source of arrangements.
funds for the Company's construction program. Interest rates on borrowings under the agreement will vary depend- At December 31,1986, the Company had $31,000,000 ing upon the amount of the total borrowings then outstand- of commercial paper outstanding. Commercial paper out-ing and, at the Company's option, may be based upon the standing is backed by at least an equal amount of unused prevaihng prime rate or certain other interest measurements, bank lines of credit. l l l i { l ,- I l l ( 19 l L - - --- _ _ _ - . . - . . . . .
(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 i (thousands of dollars) 1986 Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $331,979 $305.091 $367,384 $323,270 i Opera ting Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,972 $ 46,897 $ 78,090 $ 43,111 i N e t income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,239 $ 63,359 $ 92,598 $ 67,688 Earnings Available for Common Stock . . . . . . . . . . . . . $ 65,580 $ 53,233 $ 83,084 $ 58,203 1985 i Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $316,357 $299.472 $341,588 $296,572 Opera ting income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,068 $ 54,304 $ 80.014 $ 57,763
' Ne t income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78,580 $ 71,972 $ 90,555 $ 69,596 Earnings Available for Common Stock . . . . . ....... $ 68,165 $ 61,550 $ 80,580 $ 58,941 I
e i
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J L [ l i l Ji i j 3 I i w 1
Auditors' R: port To the Share Owners of The Cleveland Electric illuminating Company: We have examined the consolidated balance sheet and consolidated statement of cumulative preferred and preference stock of The Cleveland Electric Illuminating ComT any (an Ohio Corporation and wholly-owned subsidiary of Centerior Energy Corporation) and its subsidiaries as of December 31,1986, and the related consolidated statements of results of operations, retained earnings and source of funds invested in plant and facilities for the year ended December 31,1986. Our examination was 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. The consolidated financial statements of The Cleveland Electric illuminating Company for the two years ended December 31,1985 were examined by other auditors whose report thereon dated February 10,1986 expressed a qualified opinion on those statements. The opinion of the other auditors is qualified with respect to the matters discussed in the two succeeding paragraphs. 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 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. As discussed further in Note 3, construction of Perry Unit I has been completed and Ileaver Valley Unit 2 is nearing completion. Recovery of the investment in 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 uncertainties associated with other aspects of the nuclear program, management can give no assurance that the full investment in these units and a return thereon will ultimately be recovered in rates charged to customers. In our opinion, subject to the elTects on the 1986 financial statements of such adjustments,if any, as might have been required had the outcome of the uncertain. ties discussed in the second and third paragraphs been known, the fmancial statements referred to above present fairly the consolidated financial position of The Cleveland Electric illuminating Company and subsidiaries as of December 31.1986, and the results of their operations and source of funds invested in plant and facihties for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. Cleveland, Ohio February 12,1987 Arthur Andersen & Co. 21
Financial cnd St:tistic:1 R; view The Cleveland Electric illumimting Company and Subsidiaries Operstmg Revenues (thousands of dollars) Total Total Total Steam Operating Year Reudential Commernal Industrial Other Retad Wholesale Electnc Heating Revenues 1986. $410153 $382 773 $461408 $60 245 $1314 579 $ 192 $1314 771 $12 953 $1327 724 1985. . 381 979 356 108 453 555 48 863 1 240 505 380 1 240 885 13 105 1 253 990 1984. 375 597 338 625 441 285 44 175 1 199 682 783 1 200 465 14 888 1 215 353 1983. 385 076 334 660 430 209 42 620 1 192 565 1597 1 194 162 16 154 1 210 316 1982. 348 757 304 801 393 794 36 563 1 083 915 7 139 1 091 054 17 517 1 108 571 1976. 160 015 129 286 197 189 44 401 530 891 1329 532 220 10 928 543 148 Operatmg Expenses (thousands of dollars) Income (thousands of (follars) Federal Income Fuel & Operat on Depreciation Taxen Federal Income Other Hefore Purchased & & Other Thar. Income Operating AFUDC- Tax- Income- Interest Year Power Maintenance Amortization FIT Taxes Income Equity Credits Net Charges 19M6. $363 518 $388 388 $103179 $143 495 $ 97 074 $232 070 $178 826 $64 544 $(6 255) $469185 1985. 351 854 310 698 96 995 133 348 101 950 259 149 162 907 48 608 (4 844) 465 820 1984. 313 412 280 888 95 274 132 313 131 355 262 111 130 421 35 099 3 680 431 311 1983. 332 977 270 468 94 196 126 883 127 430 258 362 87 052 23 291 3 805 372 510 1982. 329 279 250 591 86 588 106 804 106 382 228 927 76 896 22 254 (2 481) 325 596 1976. 234 107 102 794 35 874 51 925 16 701 101 747 24 706 612 1 028 128 093 Income (thousands of dollars) Earnings Return Preferred & Avadable on Preference for Average Interest AFUDC- Net Sta k Common Eqmty Year Charges Debt income Dividends Stock (%) 1986 $232133 $(62 832) $299 884 $39 784 $260100 14.4% 1985. 212 290 (57 173) 310 703 41 467 269 236 16.0 1984 180 864 (41 185) 291 632 43 353 248 279 16.8 1983. 153 974 (27 490) 246 026 38 426 207 600 16.1 1982. . 144 072 (27 440) 208 964 38 295 170 669 15.3 1976. 56 750 (10 337) 81 680 18 005 63 675 13.7 Capitaluation (thousands of dollars) Preferred Preferred Preference Stock Stock Common without with I.ong. Stosk Mandatory Mandatory Term Year Equit y % Redemption % Redemption % Debt % Total 19M6 $1843 974 40 % $148 021 3% $339 017 7% $2 311455 50% $4 638 467 1985. I 763 720 41 144 021 3 314 667 7 2 099 660 49 4 322 068 1934. 1 592 810 41 144 021 4 292 818 7 1 883 648 49 3 913 297 1983. 1 355 488 41 144 021 4 318 000 9 1 518 883 46 3 336 392 1932 I 227 095 40 95 071 3 322 000 10 1 441 822 47 3 085 988 1976 , 511 333 35 95 071 6 135 000 9 747 392 50 1 488 796 22
Electric Sales (rmlhons of KWH) Electnc Customers (year end) Residential Usase Average Average KWH Price Revenue Per Industrial Pet Per KWil Customer Year Residential Commercial Industrial Wholesale Other Total Residential Commercial & Other Total Customer (cents) (dollars) 1986 4 586 4 744 7 927 - 460 17 717 651 327 63 292 8 008 722 627 6 810 8.944 $611.34 1985. 4 408 4 516 7 981 1 414 17 320 647 242 63 181 8 081 718 504 6 567 8.70 571.03 1984. . 4 446 43% 7 997 3 431 17 273 644 904 61 934 7 930 714 768 6 646 8.48 563.60 1983. . 4 412 4 265 7 514 20 426 16 637 643 065 62 075 7 693 712 833 6 608 8.77 579.49 1982. . 4 336 4 194 7 082 139 414 16 165 641 705 61 861 7 656 711 222 6 490 8.08 524.63 1976 . 4 045 3 809 8 476 1 329 411 18 070 630 581 55 178 7 666 693 425 6 187 3.97 245 16 Load (megawatt ) Energy (milhons of KWil) Fuel Operable Fuel Cost Capacity Net Per Efficiency. Capacity C"mPany Generated Purchased KWil llTU Per At Tune Peak Load Year of Peak
- lead Factor (%) Margm (%) Fowl Nuclear Total Power Total (cents) KWil 1986 3 875 3 601 62.2% 7.1% 16 232 12 16 244 2863 19 107 1.784 10 468 1985. 3 244 3 257 67.5 (0.4 ) 15 866 1 012 16 878 1 881 18 759 1.81 10 387 1984. 3 694 3 371 64.5 8.7 14 749 2 212 16 %I 1 631 18 592 1.70 10 416 1981. .. 4 441 3 404 61.9 23.4 14 804 2 512 17 316 694 18 010 1.77 10 452 1932 . 4 699 3 090 65.3 34.2 15 576 1 650 17 226 218 17 444 1.83 10 475 1976. 3 797 3 140 66.5 17.3 16 992 - 16 992 2 448 19 440 1.08 10 322 Investment (thousands of dollars)
Total Unhty Accumulated Coni.truction Nut icar Property !!tihty Plant In Depreciation & Net Work in Fuel and Plant and Plant Total Year Service Amortizahon Plant Progress Othet** Equipment Additmns Asets 1986. , $3196 730 $951917 $2 284 813 $3 067 837 $3M3 542 $3 696192 $670 SAS $6 209 692 1985. 3 089 105 874 366 2 214 739 2 524 167 335 851 5 074 757 605 705 5 650 560 1984. . 2 908 893 798 979 2 109 914 2 113 650 288 677 4 512 211 582 288 5 119 842 1983. . . 2 834 135 722 492 2 115 643 1 616 653 228 153 3 960 449 490 705 4 425 436 1932. . 2 724 801 679 890 2 044 911 1 285 731 157 520 3 488 162 422 170 3 974 299 1976 .. I 365 178 396 338 968 840 590 523 12 849 1 572 212 275 524 1 842 999 f l
- Capacity was reduced because of extended generating unit outages for renovation and improvements in 1984 (635 inw),
! 1985 (1,089 mw) and 1986 (440 mw).
" 1984 and prior restated for etTects af capitalization of nuclear fuel lease and fmancing arrangements pursuant to Statement of Financial Accounting Standards R l
l l l l l l l l l l i 23
Directors Officers liilliam E. Conuny. Chairman and Chief Executive Officer of Chairman and Chief Executive Officer . .Roberf 31. Ginn Fairmount Minerals, Ild., an industrial mineral company. President and Chief Operating Officer . .RoberfJ. Farling
'arling, Pres.i dent of Cleveland Electnc and Executive Senior Vice President-Nuclear . . . . . . . 3/urray R. Edelina Robert Vice Presi /. (dent of Centerior Energy Corporation. Senior Vice President-Engineering
& Operation . . . . . . . . . . . . . . . . . . .fohn 16'. Fcnker Robert 31. Ginn, Chairman and Chief Executive Officer of Senior Vice President-Marketing . . . . . . Frank A. Kcnder Cleveland Electric Centerior Energy Corporation. Centerior Senior Vice President-Public Affairs Service Company and The Toledo Edison Company. & legal . . . . . . . . . . . . . . . . . . . . . Alan D. It'right Roy /I. /loldt, Retired Chairman and Chief Execut.ive Officer of Vice President-Finance White Consolidated Industries, Inc., manufact irer of products & Administration . . . . . . . . . . . . . . . .fohn S. lericki Vice President-Nuclear Operations for the home, principally major apphances, and machinery and equipment for industry. Division . . . . . . . . . . . . . . . . . . . . . Alrin Kaplan Vice President-Distribution George H. Kault, Chairman and Chief Executive Officer of & Services Division . . . . . . . . . . . . . Ililliam K. 3fcCluc Premix, Inc., a developer and mokler of reinforced polyester Vice President-Ibwer Production thermoset comp >unds. Division . . . . . . . . . . . . . . . . . . . . . . Richan/ A. Itterka Secretary and General Counsel . . . . . . . . . Carl E. Chancellos mg. Executive h. e Pres.i dent of The lmbru.oi C{hilipl..
orporation,A. a manufacturer of chemicals and chemical additives. Controller . . . . . . . . . . . . . . . . . . . . . . Raymond/. firouse Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . Ti trence R. Storan Richant A. Afiller. President and Chief Operating Officer of Centerior Energy Corporation and Centerior Service Company. Sister Stary 3!arthe Reinhani, President of Notre Dame College of Ohio in Cleveland. Karl H. Rudolph, Chairman of the Executive Committee and retired Chairman and Chief Exnutive Officer of Clevelud Ek etric. Craig R. Smith, Former Chairman of liendix Automation (subsidiary of Allied Corp <mition), a producer of machines and accessories for the metalworking industry,
- ribert E. Strairbri4r, Director and retired Chairman of The liigbec Company, a department store in northern Ohio.
Allanf. 7hmlinson.fr. Former Chairman, President and Chief Executive Of ficer of SDS liiotech Corpmition, a developer of new technologies and pnxlucts in the fickl of biotechnology. HamId I., Ililliams, Executive Vice President of Centerior Service Company. 2l
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