ML20084P317

Centerior Energy Annual Rept 1994

ML20084P317
Person / Time
Site:	Davis Besse, Perry
Issue date:	12/31/1994
From:	CENTERIOR ENERGY
To:
Shared Package
ML20084P268	List: ML20084P317 ML20084P338 ML20084P352 PY-CEI-NRR-1957, Forwards Perry NPP & Davis-Besse Nuclear Power Station Annual Financial Repts.Form 10-K Rept to Us Securities & Exchange Commission Encl
References
NUDOCS 9506080260
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Net Cashfrom Operating Activities bOnieniS N" " I i I-2 Letter to Share Owners 5'" e e e e e I. I-4 Finance wo o 5 Revenues j_ sw e e e 7 Customers e. e. e e o 8 Employees 5"" e e-9 Power Supply e. e e e e e e e 11 Management's Statement of_ l l l l l Responsibility for Financial y, y, y, w Statements 11 Report of Independent Debt and Preferred Stock Outstanding Public Accountants at Year End (in millions) 12 Management's Financial swo Analysis, Financial Statements and Notes 5"" e 33 Executives of Centerior e e e-e

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E.nergy Corporatmn and ,y,, Centerior Service Company .e .e uno _* 34 Financial and Statistical Review smo e 36 Hoard of Directors e y, I I I I I 37 Share Owner Information 9tl 9/ 92 93 W Operation and hiaintenance Excluding Fueland Lease Expense (in millions) sw e e wo 9-

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Financial Summary 1994 1993 7c Change Earnings (Loss) Per Share of Common Stock 5 1.38 5 (6.51) Write-Offs and Other Charges Per Share of Common Stock 7.95 l Earnings Per Share of Common Stock Excluding Write-Offs and Other Charges 5 1.38 1.44 (4) Dividends Declared Per Share of Common Stock __ 5 .80 S 1.60 (50) Ihnk Value Per Share of Common Stock at Year End $ 12.71 $ 12.14 5 Closing Common Stock Price at Year End 5 8% 5 13X (33) Common Stock Share Owners at Year End 149,237 163,602 (9) Common Stock Shares Outstanding at Year End (millions) 148 147 1 Operating Resenues (millions) 5 2,421 $ 2,474 (2) Operating Expenses (millions) $ 1.843 $ 2,161 (15) Net income (Loss) (millions) 5 204 5 (943) Retum on Average Common Stock Equity l l. ivc (40.3)9 Return on Average Common Stock Equity Excluding Write-Offs and Other Charges 11.1 9 7,19 Kilowatt-hour Sales (Millions of Kilowatt-hours) Residential 6,980 6,974 0 Commercial 7,481 7.306 2 Industrial 12,069 11.687 3 Wholesale 1.842 3,027 (39) Other 1,074 1,022 5 Total 29,446 30.016 (2) Emplo)ees at Year End 6,', 67 6,748 0 l Quarterly Range Of Common Stock Prices 1994 Iligh Low 1993 liigh Low lst Quarter 513 % 510 % lst Quarter 520 S18 % 2nd Quarter 11 % 9% 2nd Quarter 19 % 17 % 3rd Quarter 10 % 8% 3rd Quarter 18 % 17 % 4th Quarter 4% 8 4th Quarter 17 % 12 1

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Dear FelIow Share Owner:

general industry uncertainty, contributed to a 219 drop in the Dow Jones Utility Average-lhe biggest The electrie utility industry, the markets served by decline in eight years. But investors also had that industry, Centerior Energy itself-everything is specific concerns about Centerior: the decline in our changing rapidly and profoundly. stock price was 339. We are addressing such Our industry is becoming more competitise, concerns by implementing the strategic plan and more varied, and far less predictable. demonstrating its ability to augment revenues and Our customers. themselves faced with sweeping reduce costs, thereby increasing cash flow and change in an increasingly global economy, are ultimately rebuilding share owner value. becoming far more demanding where both price and 11 was in pursuit of this strategy that we cut service are concerned. our common stock dividend a year ago, and this And in response to all this Centerior is made it possible for us to retire fixed-income transforming itself, committing itself to dealing obligations of $136 million during 1994. Our goal is aggtessively with the challenges that face us. to reduce such obligations by a cumulative total of We took our first 51.3 billion by 2001. 'Ihis is essential to our future [% major steps tow ard competitiseness. It's w hy the dividend cut was not meetmp these only necessary but in the best interests of share yMSjg challenges in owners over the long term. i '- S f January 1994 One of the key s to sustained cash flow, vw cutting our nonfuel retail revenues. increased slightly m. common stock 1994 despite the fact that milder weather had a disidend in half. significantly negatise impact on residential sales, wiiting off assets Strong growth in industrial resenues made this of 51.023 billion possible, which means that if the weather factor had after taxes, and remained constant, nonfuel retail resenues would announcing a have been up substantially. Contracts hase become multi-faceted an important factor in our industrial market, helping strategic plan-us to build stronger relationships with major Though the months customers. We now base contracts with customers since then base not been free of problems-- accounting for two-thirds of our industrial sales; unexpected repair needs greatly increased the cost of among these customers are our 20 largest. More a refueling and maintenance outage at our Perry than 80% of our industrial contracts will not be up Nuclear Power Plant, for example-they base been for renewal until 1997 or later, and increasing months of propicss oserall. We met our 1994 goals numbers of our largest commercial customers also for nonfuel retail resenues and, most importanti), are signing contracts. for cash flow. We kept within our target for con-Consistent cash flow growth will require not only struction expenditures and came s ery close to our retaining present customers but increasing revenues target for operation and maintenance expenses despite year by year. This key strategic objectise will become the unexpectedly high costs of the Perry outage. especially important in 1996, when our earnings will This progress w as just a start, howeser, and it be measured almost entirely in cash terms and had little impact on the price of our common stock. delertals will no longer be a significant factor. The disappomting performance of our stock m 1994 in 1904, in pursuit of new revenues, we was largely a reflection of mdustry-wide conditions. des eloped and launched an ambitious marketing Concern about rning interest rates, along with 2 l l

I. plan. One of the purposes of this plan is to broaden for their patience in challenging times. Everytning the ways in which our present residential, commercial being done at and by Centerior is aimed at building and industrial customers use electricity. Another is to share owner value over the long term. foster economic development in our service area, It is for this reason that we have established an which after years of recession now has low incentive compensation program that rewards our unemployment along with robust activity in a variety work force when-but only when-key objectives of major industries. are achieved. For the same reason we have frozen Another source of revenue growth is the the base salaries of our top executives for the next restructuring of rates. Our rates have not changed three years, linking their opportunities for increased since 1991, but the Rate Stabilization Program compensation directly to the performance of our approved by the Public Utilities Commission of Ohio common stock. This assures that our leadership team in 1992 permits us to apply for new tariffs that will win only if our share owners win first, would become effective in 1996. New tariffs are The following pages are a brief report on justified by our current return on investment, and progress to date in the achievement of our strategic could provide us with the kind of pricing flexibility objectives, and on where we intend to go from here. needed in an increasingly competitive market. We believe we have made a good beginning, but we We're making progress in cost reduction. know it is nothing more than a beginning. The Operation and maintenance expenses exclusive of strategic plan is a guide that covers eight years, and fuel and purchased power were 13% lower in 1994 seven of those years are still ahead of us. They will than in 1990. The fact that 1994's O&M expenses bring many additional changes, some of which may were $108 million lower than those for 1990, and require adjustments of our plan. An immense amount $56 million lower than those for 1993 when one-of work, including almost all the work of achieving time charges are excluded, is especially significant our objectives, still lies ahead. In 1994 we built the in light of the costs of the Perry outage. foundation on which that work can and will be done. The improvements made to the Perry plant As we move into year two, I am grateful for during its outage have already contributed to better the support (and, yes, for the patience) of our share performance. They also constitute an important step owners. I am likewise grateful for the immense in the necessarily gradual process of turning Perry contributions of the talented and committed men and i into what our Davis-Besse Nuclear Power Station women who make up the Centerior work force. It is already is: a world-class generating facility. We the quality of our team, more than any other single expect to complete that process by 1998, when Perry thing, that makes me confident about the future, will have undergone two more scheduled outages. O&M expenses both at Davis-Hesse and at our Sincerely, fossil-fueled plants hase been reduced significantly I oser the past several years. Davis-Hesse completed q the shortest refueling and maintenance outage in its history in 1994, returning to service just 46 days after shutting down. The one scheduled outage aside, Robert J. Farling its availability rate in 1994 was 1009. Chairman, President and All these positive developments-good cash Chief Executisc Officer generation, debt and cost reduction. preparations for further change-are steps toward the achievement of February 24,1995 the strategic plan. The ultimate purpose of that plan is to rcpay our share owners for their support and 3

i -t Fin a n e o i w_ i Provide share owners a total return-diridends plus price appreciation-Keeping cash flow at satisfactory levels will f exceeding that of the Standard & Poor's require two things above all. First it will require 500 IndeX, revenue growth. This is the subject of our second - -j strategic objective, and it will become' particularly ; f " Cash is king-cash is the key to everything important when; starting'in 1996, dbferralf are j ~ we're trying to do," says Gary Le:dich, no longer a significant part of reported earnings. 'f Centerior's chief financial officer. ~ ] Second it will require firinness in controlling ~ "Our long-term goal is to rebuild the costs and aggressiveness in reducing costs wherever ) corporation's financial strength by reducing our this can be done without damaging our ability f debt, and doing that requires cash. We want to to serve and satisfy customers. With revenues ) ,t position ourselves to compete effectively, rising and costs stable, more dollars can fall to and to do that we have to reduce our fixed the bottom line and be used for the continuing: costs. Again, what it takes is cash.' reduction of debt and preferred stock { In 1994 the total return for the Standard Operation and maintenance expenses & Poor's 500 Index was 1.3%. The return for exclusive of fuel and purchased power but j Centerior share owners, by contrast, was -279. including plant leases amounted to $755 million : We're still a long way, clearly, from achieving in 1994. This total was very close to our, target - our first objective. for the year. The comparable earlier totals were~ ' We did, however, make progress toward that -$H11 million in 1993,$784 million in 1992and ' E objective. And we did so in the ways that matter $801 million in 1991. The level achieved in 1994 I most: by keeping spending under control and is especially gratifying in light of the $18 mi[ lion .j t using available cash for the gradual reduction of that unanticipated repair needs added to the debt and preferred stock, cost of the Perry plant's outage. Without these l _t additional costs, we would have been.$7 million ~i Of the $569 million in cash that Centerior ~ 't below our O&M spending target in 1994. l generated from operating activities in 1994, $118 million went for common stock dividend The target for 1995 is $760 million- [r payments. Another $205 million in cash was used slightly higher than the previous year's total I for capital expenditures. The balance-the part because of the costs of putting new marketing l that demonstrates most clearly the importance of capabilities in place and improving customer 1 t our focus on cash-wa used to retire nuclear service. From 1996 through the remaining years f fuel lease obligations of $ 10 million and fixed-of the strategic plan, we will be committed to l income obligations of $130 million. avoiding any increases in O&M spending, even h adjustments for inflation. Payroll expense for ? l M

e P i 1994 was not only far below the previous year's that can be decisive in highly competitive total-an almost inevitable result of 1993's early markets. Throughout our service area a pattern is retirement program-but also significantly below becoming apparent whenever our large industrial i ~ what we had planned. customers renew their contracts. The new ' Construction expenditures in 1994 totaled contracts often are for longer periods of time. $257 million. $2 million under target. The target and often they involve increased use of for 1995 is $260 milli (m. The annual construction electricity. gg.catherAdjusted expenditures average called for in our five-year More than NonfuelRetailRewnues (in inillions) forecast is now $250 million. The comparable ever before, ww average two years ago was $329 ;nillion. Capital Centerior j 9_ St ex, T 9 investment is being limited to projects that are is helping e e 9 e e si#,, -e o e e e necessary for system reliability or expansion. customers e e o e e _g 9 e 9 e_ to use siw e e o e o electricity sm _9 g 9 9 g-e e o e, e as a tool for gy _, Reyenues g improving l l so a productivity. l l l l l Increase revenues in an increasingly This in turn competitive market. is leading to plant expansion and increased l "What we're doing," says Al Temple, who in demand for power. 1994 became Centerior's vice president of sales in 1994 a growing list of established and marketing, "is introducing highly competitive Centerior customers decided to expand their techniques for maintaining and enhancing our operations or make new use of innovative revenues into what was until recently a traditional electrotechnologies in our service area. Each such I utility company. This is innovative, it's necessary, decision brings new jobs, new economic vitality, and it's immensely productive " and new demand for electricity in the years ahead. The pursuit of higher revenues starts with The customer base is maintained finally maintaining our current customer base. This is through a demonstrated ability to deal with com-achieved partly through objectise number ihree, petition from municipal electric systems. Partly increased customer satisfaction. as a result of our actions, proposals for the study . it is achieved also through the contracts of poss ble municipalization were turned back in discussed in the chairman's letter-contracts 1994 in the cities of Toledo and Garfield lleights. w hich enable us to build the kinds of relationships By the end of the year the espansion of the 5

. _..... - - - ~ i Cleveland Public Power system had slowed decision. Both companies considered locations in { significantly. Two of CPP's largest industrial other states, i customers, American Mational Can and Pierre's Centerior's economic development programs '

• French ice Cream, traurned to Centerior in 1994.

contributed significantly to all of these expansion j Late in the year CPP was reporting its expansion and site selection decisions. program to be Nhind schedule and oser budget. Overall, industrial and comniercial resenues The aggle over municipali7ation were higher in 1994 than in the previous year continues, of course in Toledo, advocates despite the fact that, even by year-end, dur new I continue to push for soter approval of funding for sales and marketing capabilities were still being j a municipali7ation study. Centerior is among the put into place. The increase was sufficient to f most experienced utilities in the U.S. in dealing offset both a 1.39 drop in residentiai revenues !:( with such matters, and we have a long record of caused by last summer's generally mild success in showing voters and city officials alike temperatures and lower fuel cost recovery I that municipalization is rarely if ever in the revenues. Toledo Edison, whose service area has f public interest-long been economically sluggish, experienced a i In 1994 we also launched a marketing plan 2.8G increase in industrial revenues-solid c aimed partly at deseloping new sources of evidence of improving business conditions. revenues, and before year-end this was producing We now have not only new' sales and results, in the fall, after negotiations in which marketing objectives but an organization designed Centerior played a very active role, the American to achieve them; Automation and other improve- [ Steel and Wire umt of flirmingham Steel ments have increased the time that Centerior anno mced its decision to build a $100 million bar representatives spend actively selling by upwards ( mill in the Cleseland suburb of Cuyahoga licights. of 20,000 hours per year. This translates into more f Owens Corning announced that it will build a calls on customers, better knowlEdj;e of customer I $90 million headquarters-complete with all-needs and ' increased ability to meet those needs. )! 'T electric heating and cooling-in dow ntown Toledo. In the course of making such changes we., ll In February 1995 Aluminum Corporation of broke down our long-term objective-52.87 f c billion in retail revenues in 2001-into year-by-f America announced its selection of a site in the Toledo Edison service area for a new automotise year goals. The goal for 1995 is $1.98 billion, supply manufacturing facility. and North Star weather-normalized and exclusive of fuel cost Steel announced a site served by TE for a 5450 recovery, a 29 increase oser 1994. million steel mill. North Star cited competitise Iloth the marketing plan and the new. i electrie rates as an important factor in its I organization responsible f.or implementmg it are ( 6 i f

focused on our three primary m<uict segments: Edelman, executive vice president, residential, commercial and industrial. Results- " Accomplishing that is going to take two 1 oriented research is providing valuable knowledge things: knowledge and action. We have to know of the customer subgroups that are most important enough to position ourself as the customer's j i in cach segment. This knowledge, in turn. is partner. And we have to be constantly taking i being used to deselop marketing programs aimed action in response to what the customer tells us." at those areas where opportunities for new uses When we launched our strategic plan 1 i of electricity-and therefore for increased early.m 1994, our third obj.ective was focused on sales-appear to be greatest. These programs are customer 1 producing sales. A major canned food producer, ! II'eatherAdjusted favorability. RetailK\\\\'H Sales (in billions) for example chose electricity as the heat source Since then, 3 for a new shrink-wrapping process because of its v superiority to natural gas in such applications. 5 decided that y, _e e e e e_ e e e o e As part of the implementation of the customer e o e e o y _e e e e e_ marketing plan, one new program is being satisfaction j e e e e introduced in each segment each fiscal quarter. is a more j { _l l j j l-In the industrial segment this began with electro-significant 23 = e o e o e technologies for non-ferrous metters and with measure o I I I I I infrared electric heat as a drying technology for than favor-g g g y customers in the metals and coatings business. ability (the The first programs introduced in the commercial difference is somewhat technical in addition to sector insobed exterior 'ighting and supplemental being significant), and we have changed this lighting. Each such program is aimed at a market objective as a result. niche where Centerior :an of fer a technology that Staying competitive over the long term provides new answers la customer needs. it i es. We know that, and therefore one of the aims of our strategic plan is to assure the competitiseness of Centerior's prices. CUSiOmerS 13ut customer satisfaction is crucial, too: w henes er ne:" u multiple suppliers are approximately equal m. Ras,se our customer satisfaction rating. price, the one that does the best job of satisfying "To fulfill our vision for the Centerior of the customer is likely to dominate the market. ] l the future, we have to be sure that our customers in 1994 we expsnded the means by which are happy with our sersice.' say s Murra) we gather information about our customers. their 7

opinion of our products and services and the have been formed to move forward with the potential for using electricity to meet more of implementation of these recommendations in each ~ their wants and needs. Wc also broadened the market segment. range of customers about whom we Probably the greatest potential for radical systematically collect information, including change in our ability to satisfy the people we commercial and industrial customers in our serse lies in the work of two teams created late research for the first time. The Customer Focus in 1994 to re-engineer Centerior's financial 2000 program. in which executives call on large management and customer service operations. customers sersed the crucial purpose of helping Early in 1995 these teams conserped on a single to keep management in direct contact with the shared objectise: to desclop plans for making our esolving needs of the businesses we serse and core processes-power generation, transmission, the realities of a fast-changing market-distribution, services-the responsibility of newly The > car brought new kinds of action, too. created strategic businew units each of w hich Hoth in Cleveland and in Toledo, making use of would be a distinct profit center. In the next year lessons learned i.i the aftermath of a catastrophic this study of an SBU-based structure for 1993 summer storm, we opened Emergency Centerior could open the way to unprecedented Information Centers. Actisated nearly a do/en times gains not only in customer satisfaction but in by year-end, these centers provided better informa-efficiency as well. tion about outages while freeing our dispatchers and sy stem operation personnel to work uninter-rupted on power restoration. Described by the Public Utilities Connnission of Ohio as a model m p l 0 y e e s. _aume of emergency preparedness. they will be f.urther Sfaximi:e empl0VCC CommitmCHf to improsed in 1995 with computerized mapping corporate obj,ectwes and new information links to police departments. j " Employee commitment-real commitment that 1 in 1995. with so much information now goes beyond a simple willingness to trade a day's available for use. our emphasis is shifting toward wmk for a day's pa)-doesn't happen auto-action. An estensis e stud) of Centerior's resi. madcaH) say s senior Wee preddent Fred Lange. dential, commercial and industrial customers has resulted in the deselopment of six sets of recom. "You have to make it happen. T he two most mendations basing to do with power quality, important things we're doing to make it happen service restoration. and other key tattors in at Centerior are pay for performance, with customer perception of our performance. Teams perfonnance measured in terms of our strategic ) i J l N

i { objectives, and the empowerment of our people" absenteeism, safety, and contributions to our As the chairman's letter explains on page 3. Bright Ideas cost-saving program and the Leads the base salary of Centerior's senior executives Generate Sales revenue-building program. Its safety element goes beyond accident statistics and has been frozen and their incentive compensation has been linked to the performance of our common pr vides rewards for actions taken to prevent J accidents. Half of total incentive compensation stock. This is pay for perforrnance in the most for 1995 will be keyed to these measures, and basic sense of the term, starting at the top, four of them must be achieved before any payout in 1994 the incentive compensation becomes possible. The other half will depend on f opportunities of the Centerior work force at large the achievement of each employee's group or i were made dependent upon ten performance department goals. measures, each of them directly connected to Empowerment at Centerior means giving revenues or costs or some other aspect of our employees more control over their own jobs by strategic plan. The achievement of each measure pr siding them with the means and the opportunity required superior performance, a special challenge to do those jobs better. It means enabling them to because of the 199 decrease in our work force inake decisions, to utilize the training, information since 1992. At least six had to be achieved and communications provided by the company, and before there could be any payout. Some of these ultimately to improve service to the customer, measures became even more challenging--a few, e Pay f r perform nce, because it gives employees such as production unit availability and power a bigger stake in the results of their work, is an production cost, were put out of reach-by the important part of this, protracted outage at the Perry plant. Against this background it is particularly impressive that by year-end the men and women of Centerior had achieved six of the measures and in doing so had Power Supply carned a cash award of $500 per eligible employee. ) For 1995 the performance measures have Reduce variable power supply costs to a been refined to sic revenues, customer satisfaction, inore competitire lercl. power production, cash flow, expenditures. " Performance and cost reduction are closely J and an emplosee achievement index. As in 1994 linked in the case of a power plant," says Don the goals connected with each measure are chal-Shelton, the senior vice president with lenging. But they are also completely achievable. responsibility for Centerior's nuclear generating The employee index, for example, encompasses l 9

~ _. - - _, facilities. "You work to improve performance The near-term objective for the Perry plant. l because the results show up on the bottom line. by contrast, is to improve production performance f l Performance improvement is the biggest driver in output by means of a three-year program that. l cost control.' will be completed in 1996 after the next refueling Variable power production costs, though outage. At that point the groundwork will be -{ listed fifth among our prime objectives, are far. prepared for raising performance to the level of [ L from last in importance or in priority. The goal Davis-Besse. [ for 1995 is 2.19 cents per kilowatt-hour. Over the O&M spending at Centerior's fossil-fueled long term we will be pursuing various ways of plants was $78 million in 1994, compared with f reducing these costs to the lowest possible level. $80 million.the year before. The 1995 budget -f L The job of improving output and calls for another reduction. We have initiatives ~ performance-and thereby getting better financial under way to produce continuing reductions in f results-is currently at very different stages at future years. Among our options are predictive [ t the two nuclear plants operated by Centerior. The instead of preventive maintenance, and new team-Davis-Besse facility, which completed a lengthy building efforts focused on greater productivity, and costly upgrading in 1985 and 1986, today is We achieved our 1994 fuel cost goal of f widely recognized as a world-class operation-as 1.35 cents per kilowatt-hour. Delivered fossil fuel [ being, in fact, one of the top-performing nuclear costs for the year were $1.44 per million BTU's-f facilities not only in the U.S. but the world. well below our $1.50 goal. In 1994 it met or exceeded its objectives for Cleveland Electric illuminating and Toledo p availability, fuel and operation and maintenance r Edison were two of only three Ohio utilities to cost per kilowatt-hour, and O&M and capital reduce their total delivered coal costs per million expenditures. BTU's during 1994. CEI's delivered fuel costs The challenge for Davis-Besse is to keep were the lowest in the state. f output at its current high level while shortening Our nuclear fuel costs were 1.022 cents refueling outages and improving processes so per kilowatt-hour in 1994, well below 1993's f that greater productivity can be achieved with a i 1.065 cents. i progressisely smaller work force. The most persuasive evidence that this challenge is being met is Davis-Bessc's success in meeting its 1994 objectives and the fact that its 1994 refueling I outage was, at 46 days, the shortest in its history, i ) I I i t 10

Our Board of Directors is responsible for determining = Management,s Statement of whether management and the independent public ac-Responsibility for Financial countants are carrying out their responsibilities. The Statements Board is also responsible for making changes in manage-ment or independent public accountants if needed. The management of Centerior Energy Corporation is The Board has appointed an Audit Committee, comprised . responsible for the consolidated financial statements in entirely of outside directors, which met two times m this Annual Report. The statements were prepared in 1994. The Committee recommends annually to the accordance with generally accepted accounting principles. Under these principles, some of the recorded amounts Boayd the firm of independent pubhc accountants to be retamed for the ensuing year and reviews the audit ap-are estimates which are based on an analysis of the best information available. pr ach used by the accountants plus the results of their audits. It also oversees the adequacy and effectiveness We maintain a system of internal accounting controls of our internal accounting controls and ensures that our designed to assure that the fmancial records are substan-accounting system produces financial statements which tially complete and accurate. The controls also are de-present fairly our financial position. i signed to help protect the assets and their related records. We structure our control procedures such that their costs j do not exceed their benefits. Gary. Leidich Our internal audit program monitors the internal account-ing controls. This program gives us the opportunity to ef Anandal Ofm assess the adequacy and efTectiveness of existing controls r and to identify and institute changes where needed. In addition, an examination of our financial statements is conducted by Arthur Andersen LLP, independent public E. Lyle Pepin accountants, whose report appears below. g g Chief Accounting Ofcer Report of Independent disclosures in the financial statements. An audit also I Public Accountants includes assessing the accounting principles used and a significant estimates made by management, as well as To the Share Owners and evaluating the overall financial statement presentation. Board of Directors of We believe that our audits provide a reasonable basis for Centerior Energy Corporation: our opinion. We have audited the accompanying consolidated balance In our opinion, the financial statements referred to above sheet and consolidated statement of preferred stock of present fairly, in all material respects, the financial posi-Centerior Energy Corporation (an Ohio corporation) and tion of Centerior Energy Corporation and subsidiaries as subsidiaries as of December 31,1994 and 1993, and the of December 31,1994 and 1993, and the results of their related consolidated statements of income, retained earn-operations and their cash flows for each of the three ings and cash flows for each of the three years in the years in the period ended December 31,1994, in con-period ended December 31,1994. These financial state-formity with generally accepted accounting principles, ments are the responsibility of the Company'< manage-ment. Our responsibility is to express an op. son on these As discussed further in Note 9, a change was made in the financial statements based on our audits. method of accounting for postretirement benefits other than pensions in 1993. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable gg[ assurance about whether the financial statements are free i of material misstatement. An audit includes examining, Cleveland, Ohio on a test basis, evidence supporting the amounts and February 17,1995 11 i

common stock should improve. Further improvement in Management,s Financial Analys,is several key fmancial measures should lead to a higher investor valuat on of Centerior Energy. Substantial pro-i g gress in these areas was made m 1994. Strong cash flow i Strategic Plan continued in 1994 and fixed-income obligations were reduced by $136 million. Also, total operation and main-We made significant strides in achieving the objectives of tenance expenses declined $88 million, exclusive of one-our comprehensive strategic action plan announced in time charges in 1993. January 1994. The strategic plan was created to strengthen our fmancial and competitive position through We are taking aggressive steps to increase revenues the year 2001. Its objectives are to maximize share through our enhanced marketing plan and to control owner return, achieve profitable revenue growth, become e sts. The full impact of these efTorts will take time in an industry leader in customer satisfaction, build a the meantime, to increase share owner value, we must winning employee team and attain increasingly competi-r ise revenues by restructuring rates. Accordingly, we are tive power supply costs. To achieve these objectives, we preparing to file a request with The Public Utilities will continue to control expenditures and reduce our Commission of Ohio (PUCO) for our two utility subsidi-outstanding debt and preferred stock. In addition, we aries, The Cleveland Electric illuminating Company will increase revenues by finding new uses for existing (Cleveland Electric) and The Toledo Edison Company assets and resources, implementing new marketing pro-(Toledo Edison) (collectively, the Operating Compa-grams and restructuring rates when appropriate. We will nies) to be effective in 1996. Meaningful cost control and also improve the operating performance of our generat-marketing strategies will mitigate the need for additional ing plants and take other appropriate actions. rate increases and help us meet competition. During 1994, we made progress toward most of our long-Competition term objectives. We initiated a marketing plan designed to increase our retail revenues (exclusive of fuel cost We are implementing strategies designed to create and recovery revenues and weather influences) by 2-3% annu-enhance our competitive advantages and to overcome the ally through 2001. Our new customer service activities c mpetitive disadvantages that we face due to regulatory are intended to raise our customer satisfaction rating. and tax constraints and our high retail cost structure. Our employees achieved enough of their established Currently our most pressing competition comes from objectives for the year to receive a $500 per cligible municipal electric systems in our service area. Our rates employee incentive compensation award. The work un-are generally higher than those of municipal systems due dertaken during refueling outages at the Davis-Besse largely to their exemption from taxation, the lower cost Nuclear Power Station (Davis-Besse) and Perry Nuclear financing available to them, the continued availability to Power Plant Unit I (Perry Unit 1) as well as the outage them of lower cost power through short-term power work at our fossil-fueled plants should help us achieve purchases and their access to cheaper governmental our long-term objective of reducing variable power costs power. We are seeking to address the tax disparity to a more competitive level. Another long-term objective through the legislative process. In 1994, the Ohio Gover-to be achieved over the planning period is to provide nor's Tax Commission recommended the replacement of share owners a total annual return greater than the the gross receipts and personal property taxes currently Standard & Poor's Corporation (S&P) 500 Index. While levied only on investor-owned utilities and collected there was a slight gain in the S&P 500 Index in 1994, through rates with a difTerent tax collected from custom-electric utility stocks in general, and Centerior Energy ers of all electric utilities, including municipal systems. Corporation (Centerior Energy) common stock in partic-Investor-owned utilities would reduce rates upon repeal ular, declined sharply. The climb in interest rates and of the existing taxes. We are now working to submit this increased investor concern about the competitiveness of proposal to the Ohio legislature. the electric utility industry caused the Dow Jones Utility We face the threat that municipalities in our service area Average to drop 21% in 1994. The total return on our c uld establish new systems and continue expanding common stock in 1994, including dividends, was -27%. existing systems. We are responding with aggressive mar-Investors placed a lower valuation on our stock principally Leting programs and by emphasizing the value of our because of our high retail cost structure relative to service and the nsks of a mumcipal system: substantial, certain neighboring utih.. ties and municipal electnc g g, g "I"#*' tricity; the difficulty of forecasting costs; and the uncer-As discussed below, we are taking steps to improve our tainty of market share as a result of our aggressive competitiveness. As these efTorts unfold and if interest competition. Generally, these municipalities have deter-rates decline and investor concerns about the electric mined that developing a system is not feasible or have utility industry diminish, the total annual return for our agreed with us not to pursue development of a system at 12

l this time. Although some communities continue to be tory accounting measures. See Regulatory Accounting interested in municipalization, ue believe that we ofter below and Note 7. We decided that, once the deferral of I the best value and most reliable source of electric service expenses and acceleration of benefits under the Rate in our territory. Stabilization Program are completed in 1995, we should n ger pan to un thse measures to the extent we The largest municipal system in our service area, Cleve-I land Public Power (CPP),is constructing new transmis-sion and distribution facilities extending into eastern RWM Anwig portions of Cleveland. CPP also plans to expand to western portions of Cleveland. CPP's expansion reduced As described in Notes 1(a) and 7, the Operating Compa-our annual net income by about $4 million m 1993 and nies comply with the provisions of Statement of Finan- $3 milhon m 1994. We estimate our net income will cial Accounting Standards (SFAS) 71. We continually continue to be reduced by an additional $4 million to $5 monitor changes in market and regulatory conditions and mdhon each year m the 1995-1999 period because of consider the elTects of such changes in assessing the CPP's expansion. Despite CPP's expansion efforts, we continuing applicability of SFAS 71. Criteria that could have been successful m retammg most of the large g ve rise to discontinuation of the application of SFAS 71 mdustrial and commercial customers m the expansion include: (1) increasing competition which significantly areas by providing economic incentives in exchange for restricts the Operating Companies' ability to establish sole-supplier contracts. We have similar contracts with rates to recover operating costs, return requirements and customers in other parts of our service area. More than the amortization of regulatory assets and (2) a signifi-80% of our mdustnal revenues under contract will not be cant change in the manner in which rates are set by the up for renewal until 1997 or later. As these contracts PUCO from cost-based regulations to some other form of expire, we expect to renegotiate them and retain the regulations. In the event we determine that the Operat-customers. In addition, an increasing number of CPP ing Companies no longer meet the criteria for following customers are converting back to our service. SFAS 7L we would be required to record a before-tax The Energy Policy Act of 1992 will increase competition charge to write oft the regulatory assets shown in Note 7. in the electric utility industry by allowing broader access in addition, the Operating Companies would be required to a utility's transmission system. It should not signifi. to evaluate whether the changes in the competitive and cantly increase the competitive threat to us since we have regulatory environment which led to discontinuing the been required to wheel electricity to municipal systerns application of SFAS 71 would also result in an impair-in our service area since 1977 under operating licenses ment of the net book value of their property, plant and for our nuclear generating units. Further, the government equipment. could eventually require utilities to deliver power from other utilities or generation sources to their retail custom. The write-off in 1993 of the phase-in deferred operating ers. To combat this threat, we are o!Tering incentives expenses and carrying charges (phase-in deferrals) dis-cussed in Note 7 resulted from our conclusio:, that such as energy-elliciency improvements and reductions in demand charges for increased electricity usage to our projected revenues for the 1994-1998 period would not industrial and commercial customers in return for long. provide for recovery of such deferrals as scheduled by the term commitments. PUCO orders. This short time frame for recovery of the phase-in deferrals is a requirement under the accounting st ndard f r phase-in plans of regulated enterprises, Rate Matters SFAS 92. The remaining recovery periods for all remain-Under the Rate Stabilization Program discussed in Note ing regulatory assets are between 17 and 34 years. We 7, we agreed to freeze base rates until 1996 and limit rate believe the Operating Companies' rates will provide for increases through 1998. In exchange, we are permitted recovery of these assets over the relevant periods and to defer through 1995 and subsequently recover certain SFAS 71 continues to apply, costs not currently recovered in rates and to accelerate the amortization of certain benefits. Amortization and Nuclear Operations recovery of the deferrals are expected to begin in 1996 with future rate recognition and will continue over the We have interests in three nuclear generating units-average life of the related assets. or between 17 and 30 Davis-Besse, Perry Unit I and lleaver Valley Power years. The continued use of these regulatory accounting Station Unit 2 (Beaver Valley Unit 2) - and operate the measures in 1995 will be dependent upon our continu-first two. Davis-Besse and Beaver Valley Unit 2 have ing assessment and conclusion that there will be probable been operating extremely well, with each unit having a recovery of such deferrals in future rates. Our analysis three-year availability average at year-end 1994 that ex-leading to certain year-end 1993 financial actions and our ceeded the three-year industry average of 80% for strategic plan also included an evaluation of our regula-similar reactors. Ilowever, the three-year availability av-13

i f crage of Perry Unit I was below the three-year industry high as $500 million. However, we believe that the availability average for that reactor type, actual cleanup costs will be substantially lower than $500 million, that the Operating Companies' share of any In 1994, Davis-Besse had an avadability factor of 88%. cleanup costs will be substantially less than 100% and Further Davis-Besse completed the shortes' refueling that most of the other PRPs are financially able to anj maintenance outage in its history in 1994, returning contribute their share. The Operating Companies have i to service just 46 days after shutting down. We are in the accrued a liability totaling $13 million at December 31, process of upgrading Perry Unit I to the same level. For 1994 based on estimates of the costs of cleanup and their seven months in 1994, Perry Unit I was out of service for proportionate responsibility fer such costs. We believe its fourth refueling and maintenance outage. Work was that the ultimate outcome of these matters will not have also performed in connection with the comprehensive a material adverse efTect on our financial condition or course of action developed in 1993 to improve the operat* results of operations. ing performance of Perry Unit 1. Work in connection with that course of action is ongoing. Alerger of the Operating Companies We externally fund the estimated costs for the future We continue to seek the necessary regulatory approvals to decommissioning of our nuclear units. In 1993 and 1994, complete the merger of the Operating Companies which we increased our decommissioning expense accruals be-we announced in 1994. The Operating Companies plan cause of revisions in our cost estimates. See Note 1(d). to seek preferred stock share owner approvalin mid-1995. l The merger is expected to be efTective in 1995. Our nuclear units may be impacted by activities or events beyond our control. Operating nuclear units have exper-Inflation ienced unplanned outages or extensions of scheduled outages because of equipment problems or new regula-Although the rate of inflation has cased in recent years, tory requirements. A major accident at a nuclear facility we are still afTected by even modest inflation which causes anywhere in the world could cause the Nuclear Regula-increases in the unit cost oflabor, materials and services. I tory Commission to limit or prohibit the operation or licensing of any domestic nuclear unit. If one of our Capifal Resources and Liquidity nuclear umts is taken out of service for an extended period for any reason, including an accident at such unit or any 1992-1994 Cash Requirements other nuclear facility, we cannot predict w hether regula-We need cash for normal corporate operations, the tory authorities would impose unfavorable rate treat-ment. Such treatment could include taking our affected mandatory retirement of securities and constructing and unit out of rate base, thereby not permitting us to recover difying facilities. Construction is needed to meet antic-our investment in and earn a return on it, or disallowing ipated demand for electric service, comply with govern-certain construction or maintenance costs. An extended ment regulations and protect the environment. Over the [ outage coupled with unfavorable rate treatment could three-year period 1992-1994. construction and mandatory have a material adverse efTect on our financial condition retirement needs totaled approximately $1.3 billion. In and results of operations. addition, we exercised options to redeem and purchase approximately $900 million of our securities. i I llazardous Waste Disposal Sites We raised $1.7 billion through security issues and term bank loans during the 1992-1994 period. The Operating The Comprehensive Environmental Response, Compen-Companies also utilized short-term borrowings to help i sation and Liability Act of 1980 as amended meet cash needs. Although write-offs of our Perry Nu-(Superfund) established programs addressing the cleanup clear Power Plant Unit 2 (Perry Unit 2) investment and of hazardous waste disposal sites, emergency prepared-phase-in deferrals in 1993 negatively alTected earnings, ness and other issues. The Operating Companies have they did not adversely affect cash flow. See Notes 4(b) been named as "potentially responsible parties" (PP.Ps) and' 7. for three sites listed on the Superfund National Priorities l List (Superfund List) and are aware of their potential 1995 and Beyond Cash Requirements mvolvement m the cleanup of several other sites. Allega-tions that the Operating Companies disposed of hazard-Estimated cash requirements for 1995-1999 for Cleveland ous waste at these sites, and the amounts involved, are Electric and Toledo Edison, respectively, are $802 mil-often unsubstantiated and subject to dispute. Superfund lion and $288 million for construction and $832 million provides that all PRPs for a particular site can be held and $378 million for the mandatory redemption of debt liable on a joint and several basis. If the Operating and preferred stock. Cleveland Electric expects to finance Companies were held liable for 100% of the cleanup costs externally about two-thirds ofits 1995 cash requirements of all of the sites referred to above. the cost could be as of approximately $451 million and about one-third ofits t 14

1996 cash requirements of approximately $320 million. next several years. However, the availability and cost of l Toledo Edison expects to meet nearly all ofits 1995 and capital to meet their external financing needs also depend j 1996 cash requirements of approximately $145 million upon such factors as financial market conditions and and $154 million, respectively, through internal cash gen-their credit ratings. Current credit ratings for the Operat-eration and current cash resources. The Operating Com-ing Companies are as follows: panies expect to meet nearly all of their 1997 1999 gg., y requirements through internal cash generation and cur-Investors rent cash resources. If economical, additional securities M may be redeemed under optional redemption provisions. [* "r"] Cleveland Electric B+ We expect that our continued strong cash flow will reduce Unsecured notes for Toledo Edison B+ BI borrowing requirements and outstanding debt and pre-Preferred stock B b2 ferred stock during this period. In 1994, the common stock dividend was lowered which Cash expenditures to comply with the Clean Air Act reduced our cash outflow by over $110 million annually. Amendments of 1990 (Clean Air Act) are estimated to We are using the cash to redeem debt and preferred be approximately $87 million over the 1995-1999 period. stock more quickly than would otherwise be the case. This See Note 4(a). has helped improve our capitalization structure and fixed charge coverage ratios, both of which are key measures Liquidity considered by securities rating agencies in determining credit ratings. Improved credit ratings and less outstand-Additional first mortgage bonds may be issued by the ing debt and preferred stock, in turn, will lower our Operating Companies under their respective mongages interest costs and preferred dividends. on the basis of mperty additions, cash or refundable first i mortgcge bonds. If the applicable interest coverage test is m-t, exh Operating Company may issue first mortgage Results of Operatwns beds on the basis of property additions and, under 1994gg,1993 certain circumstances, refundable bonds. At December 31,1994, Cleveland Electric and Toledo Edison would Factors contributing to the 2.1% decrease in 1994 operat-have been permitted to issue approximately $487 million ing revenues are as follows: and $525 million of additional first mortgage bonds, Millions increase (Decrease) in Operating Revenug of Dollars KWil Sales Volume and Mix $ 10 sa c Re nues The Operating Companies also are able to raise funds g , Revenues through the sale of subordinated debt and preferred and Miscellaneous Revenues __f preference stock. Under its articles of incorporation, Total g Toledo Edison cannot issue preferred stock unless certain earnings coverage requirements are met. At December Centerior Energy experienced good retail kilowatt-hour 31,1994, Toledo Edison would have been permitted to sales growth in the industrial and commercial categories issue approximately $28 million of additional preferred in 1994; the sales growth for the residential category stock at an assumed dividend rate of 12%. There are no was lessened by weather conditions, particularly during restrictions on Cleveland Electric's ability to issue pre-the summer. The revenue decrease resulted primarily ferred or preference stock or Toledo Edison's ability to from milder weather conditions in 1994 and 39% lower issue preference stock. wholesale sales. Weather reduced base rate revenues approximately $15 million from the 1993 amount. Al-Centerior Energy may raise funds through the sale of though total sales decreased by 1.9%, industrial sales common stock under various employee and share owner increased 3.3% on the strength of increased sales to large plans. In 1995, the Operating Companies plan to raise automotive manufacturers and the broad-based, smaller funds through the sale of first mortgage bonds and the industrial customer group. This growth substantiated an collateralization of accounts receivable. economic resurgence in our ser ice area, particularly in Northwestern Ohio. Residential and commercial sales We have a $205 million revolving credit facility which runs through mid-1996. See Note 12. We had $186 increased 0.1% and 2.4%, respectively. Other sales de-million of cash and temporary cash investments at the end creased by 28% because of the lower sales to wholesale of 1994. The Operating Companies are unable to issue cust mers attributable to expiration of a wholesale power commercial paper because of their below investment agreement, softer wholesale market conditions and lim-grade commercial paper ratings. ited power availability for bulk power transactions at certain times because of generating plant outages. Lower The foregoing financing resources are expected to be 1994 fuel cost recovery revenues resulted from favorable sufficient for the Operating Companies' needs over the changes in the fuel cost factors. The weighted averages 15 s

of these factors dropped by 5% and 6% for Cleveland years for Northern Ohio. Residential and commercial Electric and Toledo Edison, respectively. saks also increased as a result of colder late-winter For 1994, operating revenues were 31% residential,30% temperatures in 1993 which increased electric heating-l commercial, 31% industrial and 8% other and kilowatt-related demand. As a result, total sales increased 3.1% m hour sales were 24% residential,25% commercial,41% 1993. Residential and commercial sales increased 4.6% industrial and 10% other. The average prices per kilo-and 3.1%, respectively. Industrial sales increased 1.2% + watt-hour for residential, commercial and industrial cus-Increased sales to large automotive manufacturers, petro-I tomers were $.11, $.10 and $.06, respectively. leum refiners and the broad-based, smaller industrial Operating expenses were 15% lower in 1994. Operation customer group were partially ofTset by lower sales to and maintenance expenses for 1993 included $218 million large steel industry customers. Other sales increased 5.9% of net benefit expenses related to an early retirement because of increased sales to wholesa:e customers. Base program, called the Voluntary Transition Program rates and miscellaneous revenues decreased in 1993 (VTP), and other charges totaling $54 million. Two other primarily from lower revenues under contracts having sigmficant reasons for lower operation and maintenance expenses in 1994 were a smaller work force and ongoing reduced rates with certain large customers and a declining i cost reduction measures. More nuclear generation and rate structure tied to usage. The contracts have been less coal-fired generation accounted for a large part of the negotiated to meet competition and encourage economic lower fuel and purchased power expenses in 1994. De-growth. The decrease in 1993 fuel cost recovery revenues preciation and amortization expenses increased primarily resulted from changes in the fuel cost factors. The because of higher nuclear plant decommissioning ex-weighted average of these factors increased slightly for penses as discussed in Note 1(d). Deferred operating Toledo Edison but decreased 5% for Cleveland Electric. expenses were greater primarily because of the wnte-off of $172 million of phase-in deferred operating expenses in 1993 as discussed in Note 7. The 1993 deferrals also F r 1993, operating revenues were 31% res.dential,29% i included $84 million of postretirement benefit curtail. commercial,30% industrial and 10% other and kilowatt-ment cost deferrals related to the VTP. See Note 9(b). hour sales were 23% residential, 24% commercial,39% l Federal income taxes increased as a result of higher industrial and 14% other. The average prices per kilo-pretax operating income. watt-hour for residential, commercial and industrial cus-As discussed in Note 4(b), $583 million of our Perry Unit tomers were $.11, $.10 and $.06, respectively. The 2 investment was written olT in 1993. Also, as discussed changes from 1992 were not significant. in Note 7, phase-in deferred carrying charges of $705 million were written oli in 1993. The change in the Operating expenses increased 14% in 1993. The increase federal income tax credit amounts for nonoperating in. in total operation and maintenance expenses resulted come was attributable to these write-offs. from the $218 million of net benefit expenses related to the VTP, other charges totaling $54 million and an 1993 is. 1992 increase in other operation and maintenance expenses. j The increase in other operation and maintenance ex-3 Factors contributing to the 1.5% increase in 1993 operat-penses resulted from higher environmental expenses, ing revenues are as follows: power restoration and repair expenses following a July l oSUiars 1993 storm in the Cleveland area, and an increase in other Increase mecrease) in or.eratine ue enues p stretirement benefit expenses. See Note 9 for informa-Kwit sales volume and Mix $ 65 nec nates and Misceilaneous (18) tion on retirement benefits. Deferred operating expenses ruel Cost Recovery Revenues JLD decreased because of the write-oft of the phase-in de-Total 1.3 ferred operating expenses in 1993. Federal income taxes decreased as a result of Ir.cr pretax operating income. The revenue increase resulted primarily from the difTerent l weather conditions and the changes in the composition of As mentioned above, $583 million of our Perry Unit 2 the sales mix among customer categories. Weather ac-investment was written otr in 1993. Credits for carrying counted for approximately $47 million of higher 1993 charges recorded in nonoperating income decreased be-i base rate revenues. Ilot summer weather in 1993 boosted cause of the write-off of the phase-in deferred carrying residential, commercial and wholesale kilowatt-hour charges in 1993. The fede al income tax credit for nonop-sales. In contrast, the 1992 summer was the coolest in 56 erating income in 1993 resulted from the write-ofTs. j P l l I l 16

a $nCOm3 StatGment Centerior Energy Corporation and Subsidiaries For the years ended December 31. 1994 1993 1992 (millions of dollars, except per share amounts) Operating Revenues - $2.421 $2.474 $2.438 _ Operating Expenses 2 Fuel and purchased power 442 474 473 Other operation and maintenance 595 652 623 Generation facilities rental expense, net 160 159 161 Early retirement program expenses and other 272 Total operation and maintenance 1,197 1,557' 1,257 Depreciation and amortization 278 258 256 Taxes, other than federal income taxes 309 312 318 Deferred operating expenses, net (55) 23 (52) Federal income taxes 114 11 122 1.843 _1]Il 1.901 Operating Income 5 73 313 537 Nonoperating income (Loss) Allowance for equity funds used during construction 5 5 2 Other income and deductions, net 8 (6) 9 Write-off of Perry Unit 2 (583) Deferred carrying charges, net 40 (649) 100 i Federal income taxes - credit (expense) (6) _D1 (7) { 47 (835) 104 Income (Loss) Before Interest Charges and Preferred Disidends 625 (522) _ 64_l Interest Charges and Preferred Disidends Debt interest 361 359 365 t Allowance for borrowed funds used during construction (6) (5) (1) Preferred dividend. requirements of subsidiaries 66 67 0 421 _.421 ,_4_22 l Net income (Imss) $ 204 $ (943) $ 212 ~ Aterage Number of Common Shares Outstanding (millions) 147.R 144.9 141.7 Earnings (Loss) Per Common Share $ 1.18 $(6 51) $ l.50 Disidends Declared Per Common Share $ 80 $ 1.60 } 1.60 Retained Earnings t ~ For the years ended December 31. .1224_ 1993 1992 (millions of dollars) Retained Earnings (Deficit) at Beginning of Year $(523) $ 652 $ 669 Additions Net income (loss) 204 (943) 212 Deductions Common stock dividends (118) (231) (226) Other, primarily preferred stock redemption expenses of subsidiaries (1) (1) (3) Net increase (Decrease) 85 (1.175) (17) Retained Earnings (Deficit) at End of Year $(41R) $ (523) $ 652 The accompanying notes are an integralpart of these statements. 17

Balance Sheet L December 31. 1994 1993 (millions of dollars) ASSETS I'roperty, Plant and Equipment Utility plant in service $ 9,770 $ 9,571 Less: accumulated depreciation and amortization 2.906 2.677 6,864 6,894 Construction work in progress 129 181 6,993 7,075 Nuclear fuel, net of amortization 293 344 Other property, less accumulated depreciation 50 41 7,336 7.460 Current Assets Cash and temporary cash investments 186 225 Amounts due from customers and others, net 211 221 Unbilled revenues 93 124 Materials and supplies, at average cost 139 136 Fossil fuel inventory, at average cost 29 32 Taxes applicable to succeeding years '.52 250 Other _ _14 5 926 993 Deferred Charges and Other Assets Amounts due from customers for future federal income taxes 1,046 968 Unamortized loss from Beaver Valley Unit 2 sale 101 105 Unamortiied loss on reacquired debt 86 92 Carrying charges and operating expenses 957 862 Nuclear plant decommissioning trusts 82 56 Other 157 174 2.429 _ 2,252 Total Assets $10.691 $10 710 The accompanying notes are an integral part of this statement. I8

Centerior Energy Corporation and Subsidiaries December 31. 1994 199) (millions of dollars) CAPITALIZATION AND LIABILITIES Crpitalization Common shares, without par value (stated value of $357 million and $345 million for 1994 and 1993, respectively): 180 million authorized; 148 million (excluding 2.7 million shares in Treasury) and 147 million (excluding 2.7 million shares in Treasury) outstanding in 1994 and 1993, respectively $ 2,320 $ 2,308 i Retained earnings (deficit) (438) (523) Common stock equity 1,882 1,785 Preferred stock With mandatory redemption provisions 253 313 Without mandatory redemption provisions 451 451 Long-term debt _.J&92 4.019 _ 1 233 6,568 Current Liabilities Current portion of long-term debt and preferred stock 373 127 Current portion of nuclear fuel lease obligations 83 111 l Accounts payabic 144 188 Accrued taxes 384 378 l Accrued interest 90 87 Other 75 75 1.149 966 Deferred Credits and Other Liabilities Unamortized investment tax credits 279 329 i Accumulated deferred federal income taxes 1,778 1,579 Unamortized gain from Bruce Mansfield Plant sale 525 551 i Accumulated deferred rents for Bruce Mansfield Plant and Beaver Valley Unit 2 139 128 Nuclear fuel lease obligations 219 254 i Retirement benefits 176 160 i Other 143 175 l 1 219 3,17(i j Total Capitalization and Liabilities $10,691 $10.710 e i 19

Casn Flows c,,,,,,., s.,,,, c.,, i ..s s.>.,si.,i,, For the years ended December 31. 1994 1993 _1992 (millions of dollars) Cash Flows from Operating Actitities (1) Net Income (Loss) $ 204 $ (943) $ 212 Adjustments to Reconcile Net income (Loss) to Cash from Operating Activities: Depreciation and amortization 278 258 256 Deferred federal income taxes 95 (452) 95 investment tax credits, net (14) Unbilled revenues 31 (10) (6) Deferred fuel (17) 5 1 Deferred carrying charges, net (40) 649 (100) Leased nuclear fuel amortization 98 86 126 Deferred operating expenses, net (55) 23 (52) Allowance for equity funds used during construction (5) (5) (2) Noncash early retirement program expenses, net, 208 Write-off of Perry Unit 2 583 Changes in amounts due from customers and others, net 10 1 7 Changes in inventories 26 (10) Changes in accounts payable (44) 45 (5) Changes in working capital affecting operations 25 8 Other noncash items 14 18 3 Total Adjustments 365 1.460 307 Net Cash from Operating Activities 569 517 519 Cash Flows from Financing Actisities (2) Bank loans, commercial paper and other short-term debt (50) 50 First mortgage bond issues 77 300 600 Secured rnedium-term note issues 128 138 Term bank loans and other long-term debt issues 40 135 Preferred stock issues 100 74 Common stock issues 12 71 53 Reacquired common stock 1 (3) Maturities, redemptions and sinking funds (214) (434) (1,013) Nuclear fuel lease obligations (110) (106) (117) Common stock dividends paid (118) (231) (226) Premiums, discounts and expenses (1) (13) (14) Net Cash from Financing Activities (354) (194) (323) Cash Flows from Intesting Actitities (2) Cash applied to construction (205) (209) (200) Interest capitalized as allowance for borrowed funds used during construction (6) (5) (1) Sale and leaseback restructuring fees (43) Contributions to nuclear plant decommissioning trusts (26) (9) (8) Other cash received (applied) (17) 32 (28) Net Cash from Investing Activities _(214) (191) (260) Net Change in Cash and Temporary Cash Imestments (39) . 132 (84) Cash and Temporary Cash Insestments at fleginning of Year _ _ 225 93 177 Cash and Temporary Cash Iniestments at End of Year $ 186 $ 225 93 (1) Interest paid (net of amounts rapitali:ed) was $300 million $295 million and $299 million in 1994,1993 and 1992, respectively. Income taxes paid were $6 million, $50 million and $32 million in 1994,1993 and 1992, respectively. (2) Increases in Nuclear Fuel and Nuclear Fuel Lease Obligations in the Balance Sheet resultingfrom the noncash capitali:ations under nuclearfuel agreements are excludedfrom this statement. The accompanying notes are an integralpart of this statement. 20

Stat: ment oi ereierrcd stack c..,,,,., e.,,,, c.,,.,.,, ..s s.s,,si.,i,, k Current i 1994 Shares Call Price December 31. Outstandine Per Share 1994 .L9_91 9 CLEVELAND ELECTRIC (milliom of dollari) Without par value,4,000,000 preferred shares authorized Subject to mandatory redemption: ) $ 7.35 Series C 140,000 $ 101.00 $ 14 $ 15 88.00 Series E 18,000 1,019.13 18 21 Adjustable Series M 100,000 100.00 10 20 9.125 Series N 410,766 102.03 41 59 91.50 Series Q 75,000 75 75 88.00 Series R 50,000 50 50 90.00 Series S 75,000 74 74 282 314 Less: Current maturities _.16 _.29 246 18.1 i Not subject to mandatory redemption: $ 7.40 Series A 500,000 101.00 50 50 7.56 Series B 450,000 102.26 45 45 Adjustable Series L 500,000 100.00 49 49 42.40 Series T 200,000 97 97 _241 _.141 TOLEDO EDISON $100 par value, 3,000,000 preferred shares authorized and $25 par value, 12,000,000 preferred shares authorized Subject to mandatory redemption: $100 par $9.375 83,500 101.98 8 10 25 par 2.81 400,000 25.62 10 _lQ 18 40 Less: Current maturities 11 _ 12 7 _ 28 Not subject to mandatory redemption: $100 par $ 4.25 160,000 104.625 16 16 4.56 50,000 101.00 5 5 4.25 100,000 102.00 10 10 8.32 100,000 102.46 10 10 i 7.76 150,000 102.437 15 15 l 7.80 150,000 101.65 15 15 10.00 190,000 101.00 19 19 25 par 2.21 1,000,000 25.25 25 25 2.365 1,400,000 27.75 35 35 Series A Adjustable _ 1,200,000 25.75 30 30 Series B Adjustable __ 1,200,000 25.75 30 10 21.0 _210 CENTERIOR ENERGY Without par value, 5,000,000 preferred shares authorized, none outstanding Total Preferred Stock, with Mandatory Redemption Provisions }]713 $313 Total Preferred Stock, without Mandatory Redemption Proiisions M $451 The accompanying notes are an integralpart of this statement. 21

month to record the estimated amount of unbilled reve-Notes to the Financial Statements L nues for kilowatt-hours sold in the current month but not billed by the end of that month. (1) Summary ofSignificant A fuel factor is added to the base rates for electric service. Accounting Policies This factor is designed to recover from customers the (a) General c sts of fuel and most purchased power. It is reviewed and adjusted semiannually in a PUCO proceeding. Centerior Energy is a holding company with two electric utility subsidiaries, Cleveland Electric and Toledo (c) Fuel Expense Edison. The consolidated financial statements also in-The cost of foss. fuel:.s charged to fuel expense based on d clude the accounts of Centenor E.nergy's wholly owned subsidiary, Centerior Service Company (Service Com-inventory usage. The cost of nuclear fuel,, eluding an m pany), and Centerior Energy's four other wholly owned interest c mp nent, is charged to fuel expense based on subsids. anes, which.m the aggregate are not matenal. the rate of consumption. Estimated future nuclear fuel i disposal costs are be.mg recovered through base rates. During 1994, Cleveland Electric transferred its common stock investments in three wholly owned subsidiaries to The Operating Companies defer the differences between Centerior Energy via property dividends and Centerior actual fuel costs and epimated fuel costs currently being Energy formed the fourth wholly owned subsidiary. The recovered from customers through the fuel factor. This Service Company provides management, financial, ad-matches fuel expenses wim fuel-related revenues, j ministrative, engineering, legal and other services at cost to Centerior Energy, the Operating Companies and the Owners of nuclear generating plants are assessed by the other subsidiaries. The Operating Companies operate as federal government for the cost of decontammation and separate companies, each serving the customers in its decommissionmg of nuclear enrichment facilities oper-i service area. The preferred stock, first mortgage bonds ated by the United States Department of Energy. The and other debt obligations of the Operating Companies assessments are based upon the amount of ennchment are outstanding securities of the issuing utility. All signifi-services used in prior years and cannot be imposed for cant intercompany items have been eliminated in m re than 15 years (to 2007). The Operatmg Compames consolidation. have accrued the liability for their share of the total assessments. These costs have been recorded in a de-Centerior Energy and the Operating Companies follow ferred charge account since the PUCO is allowing the l the Uniform System of Accounts prescribed by the Fed-Operating Companies to recover the assessments through j eral Energy Regulatory Commission and adopted by the their fuel cost factors. l PUCO. Rate-regulated utilities are subject to SFAS 71 which governs accounting for the effects of certain (d) Depreciation and Amortization types of rate regulation. Pursuant to SFAS 71, certain .rhe cost of property, plant and equipment is depreciated incurred costs are deferred for recovery m future rates. over their estimated useful lives on a straight-line basis. See Note 7. The Service Company follows the Uniform The annual straight-line depreciation provision for non-l System of Accounts for Mutual Service Companies nuclear property expressed as a percent of average depre-prescribed by the Secunties and Exchange Commissmn ciable utility plant in service was 3.4% in 1994,3.5% in (SEC) under the Public Utility Holding Company Act 1993 and 3.4% in 1992. The annual straight-line depreci-of 1935. ation rate for nuclear property is 2.5E The Operating Companies are members of the Central The Operating Companies accrue the estimated costs of Area Power Coordination Group (CAPCO). Other ~ decommissioning their three nuclear generating units. members are Duquesne Light Company, Ohio Edison The accruals are required to be funded in an external Company and its wholly owned subsidiary, Pennsylvania trust. The PUCO requires that the expense and payments Power Company. The members have constructed and to the external trusts be determined on a levelized basis operate generation and transmission facilities for their by dividing the unrecovered decommissioning costs in current dollars by the remaining years in the licensing g period of each unit. This methodology requires that the { net earnings on the trusts be reinvested therem with the Customers are billed on a monthly cycle basis for their intent of allowing net earnings to offset inflation. The energy consumption based on rate schedules or contracts PUCO requires that the estimated costs of decommis-I authorized by the PUCO or on ordinances ofindividual sioning and the funding level be reviewed at least every municipalities. An accrual is made at the end of each five years. D** l 1

In 1994, the Operating Companies increased their annual (e) Property, Pirnt end Equipment decommissioning expense accruals to $24 million from l mPuty. P ant and equipment are stated at on..gmal cost the $8 million level in 1992. The accruals are reflected in less am unts ordered by the PUCO to be wntten off. current rates. The increased accruals were derived from Construction costs include related payroll taxes, retire-recently updated, site-specific studies for each of the ment benefits, fringe benefits, management and general units. The revised estimates reficct the DECON method verheads and allowance for funds used during construc-of decommissioning (prompt decontamination), and the tion (AFUDCh AFUDC represents the estimated com-locations and cost characteristics specific to the units, p site debt and equity cost of funds used to finance and include costs associated with decontamination, dis-c nstruction. Tlus noncash allowance is credited to m- ) mantlement and site restoration. come. The AFUDC rates averaged 9.8% in 1994,9.9% in The revised estimates for the units in 1993 and 1992 1993 and 10.8% in 1992. dollars and in dollars at the time of license expiration, Maintenance and repairs for plant and equipment are assuming a 4% annual inflation rate, are as follows: charged to expense as incurred. The cost of replacing E ration Future plant and equipment is charged to the utility plant ac- {!cnerating Un.il car Amunt Am unt counts. The cost of property retired plus removal costs, ' i dollars) after deducting any salvage value, is charged to the Davis Desse 2017 $346(l) $ 862 accumulated provision for depreciation. Perry Unit i 2026 256(1) 908 Heaver Valley Unit 2 2027 ,_ljl4(2) 423 Total $7 M $? 101 Sales of Utility Plant ""j" ja ; The sale and leaseback transactions discussed in Note 2 ( a n resulted in a net gain for the sale of the Bruce Mansfield The updated estimates reflect substantial increases from Generating Plant (Mansfield Plant) and a net loss for the the prior PUCO-recognized aggregate estimates of $257 sale of Beaver Valley Unit 2. The net gain and net loss f million in 1987 and 1986 dollars. were deferred and are being amortized over the terms of leases. See Note 7. These amortizations and the lease The classification, Accumulated Depreciation and Amor-expense amounts are reported in the Income Statement as tization, in the Balance Sheet at December 31,1994 Generation Facilities Rental Expense, Net. includes $98 million of decommissioning costs previously expensed and the earnings on the external trust funding. (g) Interest Charges This amount exceeds the Balance Sheet amount of the external Nuclear Plant Decommissioning Trusts because Debt interest reported in the income Statement does not the reserve began prior to the external trust funding. The include interest on obligations for nuclear fuel under trust earnings are recorded as an increase to the trust c nstruction. That interest is capitalized. See Note 6. assets and the related component of the decommissioning Losses and gains realized upon the reacquisition or re-reserve (included in Accumulated Depreciation and demption of long-term debt are deferred, consistent with Amortization). the regulatory rate treatment. See Note 7. Such losres and gains are either amortized over the remainder of the The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry, in-riginal life of the debt issue retired or amortized over cluding those of the Operating Companies, regarding the the life of the new debt issue uhen the proceeds of a new recognition, measurement and classification of decom-issue are used for the debt redemption. The amortiza-missioning costs for nuclear generating stations in the tions are included in debt interest expense. financial statements. In resp <mse to these questions, the (h) Federal Income Taxes Financial Accounting Standards Board is reviewmg the accounting for removal costs, including decommission-We use the liability method of accounting for income ing. If such current accounting practices are changed, taxes in accordance with SFAS 109. See Note 8. This the annual provision for decommissioning could increase; method requires that deferred taxes be recorded for all the estimated cost for decommissioning could be re-temporary difTerences between the book and tax bases of corded as a liability rather than as accumulated deprecia-assets and liabilities. The majority of these temporary tion; and trust fund income from the external differences are attributable to property-related basis dif-decommissioning trusts could be reported as investment ferences. Included in these basis differences is the equity income rather than as a reduction to decommissioning component of AFUDC, which will increase future tax

expense, expense when it is recovered through rates. Since this 23

component is not recognized for tax purposes, we must In April 1992, nearly all of the outstanding Secured Lease record a liability for our tax obligation. The PUCO Obligation Bonds (SLOBS) issued by a special purpose permits recovery of such taxes from customers when corporation in connection with financing the sale and they become payable. Therefore, the net amount due leaseback of Beaver Valley Unit 2 were refinanced from customers through rates has been recorded as a through a tender ofter and the sale of new bonds having a deferred charge and will be recovered over the lives of the lower interest rate. As part of the refinancing transac-related assets. See Note 7. tion, Toledo Edison paid $43 million as supplemental rent to fund transaction expenses and part of the tender Investment tax credits are deferred and amortized over premium. This amount has been deferred and is being the lives of the applicable property as a reduction of amortized over the remaining lease term. The refinanc-depreciation expense. See Note 7 for a discussion of the ing transaction reduced the annual rental expense for amortization of certain unrestricted excess deferred taxes the Beaver Valley Unit 2 lease by $9 million. and unrestricted investment tax credits under the Rate Stabilization Program. Future minimum lease payments under the operating leases at December 31,1994 are summarized as follows: (2) Utility Plant Sale and Ycar ^ mc" * (milhons of Leaseback Transactions aoxnars> 1995 $ 166 The Operating Companies are co-lessees of 18.26% (150 1996 188 megawatts) of Beaver Valley Unit 2 and 6.5% (51 1997 165 megawatts), 45.9% (358 megawatts) and 44.38% (355 1998 M5 megawatts) of Units 1,2 and 3 of the Mansfield Plant, i999 37g respectively, all for terms of about 29h years. These t.ater Years 3.239 leases are the result of sale and leaseback transactions Total Future Minimum Lease Payments $4 Int completed in 1987. Under these leases, the Operating Companies are respon-Rental expense is accrued on a straight-line basis over the sible for paying all taxes, insurance premiums, operation terms of the leases. The amount recorded in 1994,1993 and maintenance expenses and all other similar costs for and 1992 as annual rental expense for the Mansfield their interests in the units sold and leased back. They Plant leases was $115 million. The amounts recorded in may incur additional costs in connection with capital 1994,1993 and 1992 as annual rental expense for the improseroents to the units. The Operating Companies Beaver Valley Unit 2 lease were $64 million, $63 million have options to buy the interests back at the end of the and $66 million, respectively. Amounts charged to ex-leases for the fair market value at that time or renew the pense in excess of the lease payments are classified as leases. Additional lease provisions provide other Accumulated Deferred Rents in the Balance Sheet. purchase options along with conditions for mandatory termination of the leases (and possible repurchase of the' Toledo Edison is selling 150 megawatts of its Beaver leaschold interests) for events of default. These events Valley Unit 2 leased capacity entitlement to Cleveland include noncompliance with several financial covenants Electric. We anticipate that this sale will continue discussed in Note ll(d). indefinitely. 24 i l r l

(3) Property Owned with Other Utilities and Investors The Operating Companies own, as tenants in common with other utilities and those investors who are owner-participants in various sale and leaseback transactions (Lessors), certain generating units as listed below. Each owner owns an undivided share in the entire unit. Each owner has the right to a percentage of the generating capability of each unit equal to its ownership share. Each utility owner is obligated to pay for only its respective share of the construction costs and operating expenses. Each Lessor has leased its capacity rights to a utility w hich is obligated to pay for such Lessor's share of the construction costs and operating expenses. The Operating Companies' share of the operating expenses of these generating units is included in the income Statement. The Balance Sheet classification of Property, Plant and Equipment at December 31,1994 includes the following facilities owaed by the Operating Companies as tenants in common with other utilities and Lessors: In-Plant Construction Service Ownership Ow nership Pow er in Work in Accumulated Generatine Unit _Datt. Share hiegawatts Source Senicy Proeress peoreciation (millions of dollars) Seneca Pumped Storage 1970 80.00% 351 Hydro $ 66 5- $ 22 U.astlake Unit 5 1972 68.80 411 Coal 156 1 Perry Unit 1 1987 51.02 609 Nuclear 2,817 9 511 Beaver Valley Unit 2 and Common Facilities tNote 2) 1987 26.12 214 Nuclear I A80 J E Total $4 49 g g Depreciation for Eastlake Unit 5 has been accumulated with all other nonnuclear depreciable property rather than by specific units of depreciable property. (4) Construction and Contingencies in Perry unit 2 at December 31,1993 after we deter-mined that it would not be completed or sold. The write-(a) Construction Program oft totaled $583 million ($425 million after taxes) for our The estimated cost of our construction program for the 64.76% ownership share of the unit. See Note 14. 1995-1999 period is $1.154 billion, including AFUDC of $64 million and excluding nuclear fuel. (c) IIazardous Waste Disposal Sites The Clean Air Act requires, among other things, signifi-The Operating Companies are aware of their potential cant reductions in the emission of sulfur dioxide and involvement in the cleanup of three sites listed on the nitrogen oxides by fossil-fueled generating units. Our Soperfund List and several other waste sites not on such strategy provides for compliance primarily through list. The Operating Companies have accrued a liability greater use oflow-sulfur coal at some of our units and the totaling $13 million at December 31,1994 based on use of emission allowances. Total capital expenditures estimates of the costs of cleanup and their proportionate from 1991 through 1994 in connection with Clean Air responsibility for such costs. We believe that the ulti-Act compliance amounted to $35 million. The plan will mate outcome of these matters will not have a material require additional capital expenditures over the 1995-adverse efTect on our financial condition or results of 2004 period of approximately $157 million for nitrogen operations. See Management's Financia! Analysis-oxide control equipment and plant modifications. In addi-Outlook-Hazardous Waste Disposal Sites. tion, higher fuel and other operation and maintenance expenses will be incurred. The anticipated rate increase associated with the capital expenditures and higher ex. (5) Nuclear Operations and penses would be about 1-2% in the late 1990s. Cleve-Contingencies land Electric may need to install sulfur emission control technology at one ofits generating plants after 2005 which (a) Operating Nuclear Units could require additional expenditures at that time. Our three nuclear units may be impacted by activities or (b) Perry Unit 2 events beyond our control. An extended outage of one of our nuclear units for any reason, coupled with any Perry Unit 2, including its share of the facilities common unfavorable rate treatment, could have a material ad-with Perry Unit I, was approximately 50% complete verse etTect on our financial condition and results of when construction was suspended in 1985 pending con-operations. See discussion of these risks in Management's sideration of various options. We wrote ofTour investment Financial Analysis - Outlook-Nuclear Operations. 25 ~

(b) Nuclezr Insurance with remaining lease payments of $128 million, $91 The Price-Anderson Act limits the public liability of the milli n and $24 million, respectively, at December 31, owners of a nuclear power plant to the amant provided 1994. The nuclear fuel amounts financed and capitalized als included interest charges incurred by the lessors by private insurance and an industry assessment phin. In amounting to $11 million in 1994,$14 million in 1993 the event of a nuclear incident at any unit in the United and $15 million in 1992. The estimated future lease States resulting in losses in excess of the level of private insurance (currently $200 million), our maximum poten-am rtization payments based on projected consumption re $99 milli n in 1995,$91 million in 1996, $80 million tial assessment under that plan would be $155 million in 1997, $73 milli n in 1998 and $62 million in 1999. (plus any inflation adjustment) per incident. The assess-ment is limited to $20 million per year for each nuclear incident. These assessment limits assume the other (7) Regulatory Matters CAPCO companies contribute their proportionate share of any assessment. The Operating Companies are subject to the provisions of SFAS 71. Regulatory assets represent probable future The utility owners and lessees of Davis-Besse, Perry and revenues to the Operating Companies associated with Beaver Valley also have insurance coverage for damage certain incurred costs, which they will recover from to property at these sites (including leased fuel and customers through the ratemaking process. Regulatory cleanup costs). Coverage amounted to $2.75 billion for assets in the Balance Sheet are as follows: each site as of January 1,1995. Damage to property could Aecember 31. exceed the insurance coverage by a substantial amount. 1994 1993 If it does, our share of such excess amount could have a ( *$"s') d material sdverse elTect on our fmancial condition and Amounts due from customers for future federal results of operations. Under these policies, we can be income taxes $1.o46 $ 968 assessed a maximum of $22 million during a policy year if Unamortized loss from Beaver Valley Unit 2 sale,_ 101 105 the reserves available to the insurer are inadequate to pay Unamortized loss on reacquired debt 86 92 claims arising out of an accident at any nuclear facility Pre-phase-in deferrals' 570 587 Rate Stabilization Program deferrals 387 _27J covered by the insurer. Total $2190 $2 n?7 We also have extra expense insurance coverage. It in-

• Represent deferrals of operating expenses and carrying charges for cludes the incremental cost of any replacement power Perry Unit I and Beaver valley Unit 2 in 1987 and 1988 which are purchased (over the costs uhich would have been in-being amortized over the lives of the related property.

curred had the units been operating) and other incidental As f Decem'oer 31,1994, customer rates provide for expenses after the occurrence of certain types of acci-dents at our nuclear units. The amounts of the coverage rec my f all the above regulatory assets, except those are 100% of the estimated extra expense per week during related to the Rate Stabilization Program discussed be-the 52-week period starting 21 weeks after an accident hv. The remaining recovery periods for all of the and 807o of such estimate per week for the next 104 regul tory assets listed above range from 17 to 34 years. weeks. The amount and duration of extra expense could The Operating Companies continually assess the efTects substantially exceed the insurance coverage. f competition and the changing industry and regulatory environment on operations and their ability to recover the regulatory assets. In the event that the Operating (6) Nuclear I,ncl Companies determine that future revenues would not be pr vided for recovery of any regulatory asset, such asset Nuclear fuel is financed for the Operating Companies through leases with a special-purpose corporation. At "[. uld be required to be written oft. See Management's f m nei 1 Analysis-Outlook-Regulatory Accounting. December 31,1994, $307 million of nuclear fuel was fmanced ($157 million from intermediate-term notes and The Operating Companies will fde a request with the $150 million from bank credit arrangements). The inter-PUCO to restructure rates to increase revenues to be mediate-term notes mature in 1996 and 1997. The effective in 1996 which will include provision for recovery Operating Companies severally lease their respective por-of the Rate Stabilization Program deferrals. We believe lions of the nuclear fuel and are obligated to pay for the that rates will be set at a level consistent with cost-based fue; as it is consumed in a reactor. The lease rates are regulations and will provide revenues to recover the then-based on various intermediate-term note rates, bank rates current operating costs, return requirements and amor-and commercial paper rates. tization of all regulatory assets listed above. i The amounts financed include nuclear fuel in the Davis-The Rate Stabilization Program that the PUCO approved Besse, Perry Unit 1 and Beaver Valley Unit 2 reactors in October 19 22 was designed to encourage economic 26

growth in our service area by freezing base rates until pleted in 1995, we should no longer plan to use regulatory 1996 and limiting subsequent rate increases to specified accounting measures to the extent we have in the past. annual amounts not to exceed $216 million for Cleveland Electric and $89 million for Toledo Edison over the (8) FederalIncome Tax 1996-1998 period. As part of the Rate Stabilization Program, during the The components of federal income tax expense (credit) ~ 1992-1995 period the Operating Companies are allowed recorded in the Income Statement were as follows: to defer and subsequently recover certain costs not cur-H94 1993 L992 rently recovered in rates and to accelerate amortization (m,igns or ,) of certain benefits. The continued use of these regula-Operating Expenser i tory accounting measures will be dependent upon our Current $ 70 $ 99 $ 71 continuing ossessment and conclusion that there will be Dererred a _Lu) _it probable recovery of such deferrals in future rates. Total Charged to Operating Expenses JL4 11 J22 Nonoperating income: ] The regulatory accounting measures we are eligible to Current (45) (34) (38) record through December 31,1995 include the deferral of Deferred _il (364) J post-in-service interest carrying charges, depreciation ex-Total Expense (Credit) to Nonoperating pense and property taxes on assets placed in service after 3 "*me -i JL9!D - I February 29,1988 and the deferral of Toledo Edison T tai rederal Income Tax Expense (Credit) _ M $("7) M operating expenses equivalent to an accumulated excess rent reserve for lleaver Valley Unit 2 (which resulted The deferred federal income tax expense results from the from the April 1992 refmancing of SLOBS as discussed temporary difTerences that arise from the difTerent years in Note 2). The cost deferrals recorded in 1994,1993 and certain expenses are recognized for tax purposes as 1992 pursuant to these provisions were $106 million, opposed to financial reporting purposes. Such temporary j $95 million and $84 million, respectively. The regulatory ditTerences afTecting operating expenses relate principally accounting measures also provide for the accelerated to depreciation and deferred operating expenses whereas amortization of certain unrestricted excess deferred tax those afTecting nonoperating income principally relate to and unrestricted investment tax credit balances and in. deferred carrying charges and the 1993 write-offs. l I terim spent fuel storage accrual balances for Davis-Besse. The total amount of such regulatory benefits recognized Federal income tax, computed by multiplying the income pursuant to these provisions was $46 million in both before taxes and preferred dividend requirements of sub-1994 and 1993 and $12 million in 1992. sidi ries by the statutory rate (35% in 1994 and 1993 and 34% in 1992), is reconciled to the amount of federal The Rate Stabilization Program also authorized the Op-neome tax recorded on the books as follows: erating Companies to defer and subsequently recover the

y_99, j993 g9; incremental expenses associated with the adoption of (millions or dollars) the accounting standard for postretirement benefits other Bak Income (Loss) Before rederal Income Tax M p)3 than pensions (SFAS 106). In 1994 and 1993, we Tax (Credit) on Book Income (Loss) at deferred $6 million and $96 million, respectively, pursu-Statutory Rate

$137 $ (442) $138 ant to this provision. Amortization and recovery of these increase (Decrease) in Tat deferrals are expected to commence in 1996 and to be write-off or Perry Unit 2 46 completed by no later than 2012. See Note 9(b). write-oti or phase-in deferrals 28 Depreciation 3 (6) (9) In 1993, upon completing a comprehensive study which Rate stabilization Program (27) (30) (7) led to our current strategic plan, we concluded that Other items __I 17 _.2 projected revenues would not provide for recovery of Total rederat income Tax Expense (Credit) _ M5 (u7) M deferrals recorded pursuant to phase-in plans approved by the PUCO in 1989. Such deferrals were scheduled to be For tax reporting purposes, the Perry Unit 2 abandonment recovered over the 1994 through 1998 period. The total was recognized in 1994 and resulted in a $307 million i phase-in deferred operating expenses and carrying loss with a corresponding $107 million reduction in fed-l charges written off at December 31,1993 were $172 eral income tax liability. Because of the alternative million and $705 mdlion, respectively (totaling $598 minimum tax (AMT), $62 million of the $107 million ( million after taxes). See Note 14. Additionally, based on was reali7ed in 1994. The remaining $45 million will not our assessment of business conditions, we concluded be realized until 1999. Additionally, a repayment of that, once the deferral of expenses and acceleration of approdmately $32 million of previously allowed invest-benefits under our Rate Stabilization Program are com-ment tax credits was recognized in 1994. l l 27

In August 1993, the Revenue Reconciliation Act of 1993 Pension and VTP costs (credits) for 1992 through 1994 was enacted. Retroactive to January 1,1993, the top were comprised of the following components: marginal corporate income tax rate increased to 355 m g93 g The change in tax rate did not materially impact the (millions of dollars) Pe results of operations for 1993, but increased Accumulated e c tfr efits earned darir.g the Deferred Federal Income Taxes for the future tax obliga-period $ 13 $ is $ is tion by approximately $90 million. Since the PUCO has interest cost on projected benefit obligation. 26 37 38 historically permitted recovery of such taxes from cus-Actual retum m plan assets (2) (65) (24) Net amortization and deferral E) _,,,,,4 E) tomers when they become payable, the deferred charge, Net pension costs (credits) 3 (9) (16) Amounts Due from Customers for Future Federal In-VTP con 205 come Taxes, also was increased by $90 million. settlement sain _- ; m) Under SFAS 109, temporary differences and carryfor-Net costs (credits) y M g) wards resulted in deferred tax assets of $596 million and The following table presents a reconciliation of the funded deferred tax liabilities of $2.374 billion at December 31, status of the plaru 1994 and deferred tax assets of $619 million and de-mbe ferred tax liabilities of $2.198 billion at December 31, 1993. These are summarized as follows: (millions of Decemb_eLJh. dollars) lML 1993 Actuarial present value of benefit obligations: (millions of Vested benefits $278 $333 dollars) Nonvested benefits _2 _)] Property, plant and equipment $2,035 $1,845 Accumulated benefit obligation 280 370 Deferred carrying charges and operating expenses _ _ 215 206 Effect of future compensation levels )] j] Net operating loss carryforwards (144) (108) Total projected benefit obligation 317 423 Investment tax credits (156) (183) Plan assets at fair market value _26.2 E Sale and leaseback transactions.__ (128) (127) I'unded status 45 (37) Other (44) _.E4) Unrecognized net loss (gain) from variance between assumptions and experience (79) 11 Net deferred tax liabihty $1.77R 51370 Unrecognized prior service cost 10 10 For tax purposes, net operating loss (NOL) carryforwards Transition asset at January 1,1987 being amortized of approximately $412 million are available to reduce ver 19 years R) _L42) Net a y n uded n future taxable income and will expire in 2003 through med pen; n 2009. The 35% tax c!Tect of the NOLs is $144 million. Additionally, AMT credits of $168 million that may be A September 30,1994 measurement date was used for carried forward indefinitely are available to reduce future 1994 reporting. At December 31,1994, the settlement regular tax. (discount) rate and long-term rate of return on plan assets assumptions were 8.5% and 10%, respectively. The (9) Retirement Benefits long-term rate <f annual compensation increase assump-tion was 3.5% for 1995 and 1996 and 4% thereafter. At (a) Retirement income Plan December 31, 1993, the settlement rate and long-term We sponsor a noncontributing pension plan which covers rate of return on plan assets assumptions were 7.25% all employee groups. The amount of retirement benefits and 8.75%, respectively. The long-term rate of annual generally depends upon the length of service. Under compensation increase assumption was 4.255 certain circumstances, benefits can begin as early as age Plan assets consist primarily of investments in common

55. Our funding policy is to comply with the Employee stock, bonds, guaranteed investment contracts, cash Retirement income Security Act of 1974 guidelines.

equivalent securities and real estate, in 1993, we offered the VTP, an early retirement pro-(b) Other Postretirement Benefits gram. Operating expenses for 1993 included $205 million of pension plan accruals to cover enhanced VTP benefits We sponsor a postretirement benefit plan which provides and an additional $10 million of pension costs for VTP all employee groups certain health care, death and other benefits paid to retirees from corporate funds. The $10 postretirement benefits other than pensions. The plan is million is not included in the pension data reported in the contributory, with retiree contributions adjusted annu-i following table. A credit of $81 million resulting from a ally. The plan is not funded. We adopted SFAS 106, the settlement of pension obligations through lump sum accounting standard for postretirement benefits other payments to almost all the VTP retirees partially ofTset than pensions, effective January 1,1993. The standard the VTP expenses. requires the accrual of the expected costs of such benefits 1 28 l

during the employees

• years of senice. Prior to 1993, the (10) Guarantees costs of these benefits were expensed as paid, which was consistent with ratemaking practices.

Cleveland Electric has guaranteed certain loan and lease obligations of two coal suppliers under two long-term The components of the total postretirement benefit costs coal supply contracts. Toledo Edison is a party to one of for 1994 and 1993 were as follows: these contracts. At December 31, 1994, the principal 1994 L911 (millions of amount of the loan and lease obligations guaranteed by dollars' the Operating Companies under both contracts was $67 Service cost for benefits carned during the period $2 $ 3 million. In addition, under the contract to which Toledo Interest cost on accumulated postretirement benefit i oohgation 18 16 Edison is not a party, Cleveland Electric may be 1 Amortization of transition oblication at January 1,1993 responsible for mine closing costs when the contract is terminated. At December 31,1994, the unfunded costs of VT curtain nt c ( nc ud s 516 million transition obligation adjustment) -: _jl4 closing this mine as estimated by the supplier were $54 Total cost' E 11.!1 million. In 1994 and 1993, we deferred incremental SFAS 106 The prices under both contracts which include certain expenses (in excess of the amounts paid) of $6 million minimum payments are suflicient to satisfy the loan and and $96 million, respectively, pursuant to a provision of lease obligations and mine closing costs over the lives of the Rate Stabilization Program. See Note 7. the contracts. If either contract is terminated early for any reason, the Operating Companies would attempt to The accumulated postretirement benefit obligation and reduce the termination charges and would ask the accrued postretirement benetit cost are as follows: PUCO to allow recovery of such charges from customers December 31. through the fuel factor of the respective Operating. 1994 '993 Company. (millions of dollars) Accumulated postretirement benefit obligation (//) Cap [fal/Z#flon attributable to: i Retired participants $(203) $(229) (a) Capital Stock Transactions and Common l Fully eligible active plan participants (1) (1) Shares Resened for Issue Other active ptan participants _.G1) _.[R) Shares sold, retired and purchased for treasury during the Accumulated postretirement benefit obligation ' (225) (258) i Unrecognized net loss (gain) from variance betwee three years ended December 31,1994 are listed in the assumptior.s and expenence (23) 14 following table. Unamortized transition obligation _1)J 143 1994 1993 f31 Accrued postretirement benefit cost included in (thousands of shares) i Retirement Benefits in the Balance Sheet.__ g,12)$O01) Centerior Energy Common Stock: Dividend Reinvestment and Stock i Purchase Plan 683 3,542 2,570 A September 30,1994 measurement date was used for Employee savings Plan 259 544 322 1994 reporting. At December 31,1994 and 1993, the Employee Purchase Plan 46 _ jlg n St k Sales %8 4 settlement rate and the long-term rate of annual compen-Trbs*u* j Sh sation increase assumptions were the same as those Net increase ORR 4 164 2 72n discussed for pension reporting in Note 9(a). At Decem-Preferred stock of subsidiaries subject her 31,1994, the assumed annual health care cost trend to$andat e d E cc es rates (applicable to gross eligible charges) are 8.5% for $90.00 series s 75 medical and 8% for dental in 1995. Iloth rates reduce Cl["{lyd[*;h' Ri**" g g g graduaily to a fixed rate of 4.75% by 2003. Elements of 88.00 Series E (3) (3) (3) thi; obligation affected by contribution caps are signifi-Add",5'Ne N" Ikh } 2 cantly less sensitive to the heahh care cost trend rate than Toledo Edison Retirements i other elements. If the assumed health care cost trend P"'5N3 (B) gg) SlUU rates were increased by one percentage point in each 25 par 2.81 (800) (800) future year, the accumulated postretirement benefit obli-Pg'gSjf,f Sub d aje f dt gation as of December 31,1994 would increase by $7 cleveland Eleeicie sales million and the aggregate of the senice and interest cost Cl veland etne Retirements components of the annual postretirement benefit cost Remarketed Series P 0) would increase by $0.5 million. Net (Decrease) O M 'O ,13 ,,,$) 29

Shares of common stock required for our stock plans in (c) Preferred end Preference Stock 1994 were either acquired in the open market or issued as Am unts to be paid for preferred stock which must bc ) new shares. redeemed during the next five years are $47 million in The Board of Directors has authorized the purchase in the 1995,$31 mi!! ion in both 1996 and 1997, $16 million in open market of up to 1,500,000 shares of our common 1998 and $35 million in 1999, stock until June 30,1996. As of December 31,1994, The annual mandatory redemption provisions are as l 225,500 shares had been purchased at a total cost of $4 follows-million. Such shares are being held as treasury stock. Shares To Price f Be Beginning Per BE "*'d i" E h^ d The number of common stock shares reserved for issue Cleveland Electric Preferred: under the Employee Savings Plan and the Employee I Purchase Plan was 1,702,849 and 423,797, respectively, at s December 31, 1994.. Adjustable series M 100.000 1991 100 Under an Equity Compensation Plan (Plan) adopted in i 9 1994, options to purchase shares of common stock and 88 00 Series R 50.000 200l* 1,000 restricted common stock awards were granted to manage' 90.00 series S __ 18,750 1999 1.000 ment employees. Options were issued for 264,900 shares Toledo Edison Preferred; at an exercise price of $13.20. The options expire 10 sion par 59.375 16.650 1985 100 years from the date of the grant and vest over four years. 25 par 2.81 400,000 1993 25 The number of shares available for issuance under the

• All outstanding shares to be redeemed on December 1,2001.

r Plan each year is determined by formula, generally 0.5% of outstanding shares. The options and stock grants for in 1993, Cleveland Electric issued $100 million principal 1994 are conditioned upon the approval of the Plan by amount of Serial Preferred Stock, $42.40 Series T. The Centerior Energy common stock share owners at their Series T stock was deposited with an agent which issued April 1995 annual meeting. Shares of common stock Depositary Receipts, each representing b of a share of required for the Plan may be either issued as new shares, the Series T stock. issued from treasury stock or acquired in the open market specifically for distribution under the Plan. The annualized preferred dividend requirement for the Operating Companies at December 31,1994 was $63 (b) Equity Distribution Restrictions millior,, I The Operating Companies rnake cash available for the The preferred dividend rates on Cleveland Electric's Se-funding of Centerior Energy s common stock dividends by ries L and M and Toledo Edison's Series A and B j paying dividends on their respective common stock, fluctuate based on prevailing interest rates and market which are held solely by Centerior Energy. Federal law g g g prohibits the Operating Companies from paying divi-7.17%,7.01%,7.66% and 8.44%, respectively, in 1994. dends out of capital accounts.110 wever, the Operatmg Companies may pay preferred and common stock divi-Preference stock authorized for the Operating Companies dends out of appropriated retained earnings and current are 3,000,000 shares without par value for Cleveland earnings. At December 31,1994, Cleveland Electric and Electric and 5,000,000 shares with a $25 par value for Toledo Edison had $144 million and $104 million. Toledo Edison. No preference shares are currently out-respectively, of appropriated retained earnings for the standing for either company. payment of dividends. Ilowever, Toledo Edison is prohib-ited from paying a common stock dividend by a provision With respect to dividend and liquidation rights, each in its mortgage that essentially requires such dividends Operating Company's preferred stock is prior to its prefer-to be paid out of the total balance of retained earnings, ence stock and common stock, and each Operating which currently is a deficit. Company's preference stock is prior to its common stock. 30 I i

-(d) Lc:g-Term Debt end Other ratios, fixed charge coverage ratios and limitations on Horrowing Arrangements secured financing other than through first mortgage bonds t Long-term debt, less current maturities, for the Operating r certain other transactions. Two reimbursement agree-Companies was as follows: ments relaung to separate letters of credit issued m connection with the sale and leaseback of Beaver Valley gg or Average Unit 2 contain several financial covenants affecting 'dj{e'*li Centerior Energy and the Operating Companies. Among December 31, Esssmber 31. these are covenants relating to fixed charge coverage Yg.gr of Maturity 1994 1994 1993 (millions or ratios and capitalization ratios. The write-offs recorded at dollars) December 31,1993 caused Centerior Energy and the 9 -19 13.75 % $ 17 $ 21 tained in a Cleveland Electric loan agreement and the two 1996-1999 7.00 3 4 1997-1999 10.88 18 18 reimbursement agreements. The affected creditors i 1997 6.125 31 31 waived those violations in exchange for a subordinate 1998 10 00 I I mortgage security interest on the Operating Companies' 1999 6.20 2 2 properties. We provided the same security interest to fgf f certain other creditors because their agreements require gg4 200s-2009 8.33 202 202 equal treatment. At December 31,1994, the Operating 2010-2014 8.13 396 396 Companies provided subordinate mortgage collateral for 2015-2019 8.00 526 526 $197 million of unsecured debt, $228 million of bank 2020-2023 8.53 666 666 letters of credit and a $205 million revolving credit Secured medium term notes du: 1996-2021 8.60 766 963 Term bank loans due 1996 9.07 63 154 2 Short-Term Borrowing Notes duc 1996-1997 9.49 25 43 i Areangernents i Dchentures duc 2002 8.70 135 135 Pollution control notes duc 1996-Centerior Energy has a $205 million revolving credit Other net ) ) facility through May 1996. Centerior Energy and the Tota Long-Term Debt st at $4 nio Service Company may borrow under the facility, with all Long-term debt matures during the next five years as borrowings jointly and severally guaranteed by the Oper-follows: $326 million in 1995,$243 million in 1996,$95 ating Companies. Centerior Energy plans to transfer any million in 1997, $117 million in 1998 and $277 million in f its borrowed funds to the Operating Companies. The

999, facility agreement as amended provides the participating banks with a subordinate mortgage security interest on The Operating Companies issued $266 million aggregate the Operating Companies' properties. The banks' fee is principal amount of secured medium-term notes in 1992 0.625% per annum payable quarterly in addition to inter-and 1993. The notes are secured by first mortgage est on any borrowings. There were no borrowings under bonds.

the facility at December 31,1994. The facility agree-The mortgages of the Operating Companies constitute ment contains covenants relating to capitalization and direct first liens on substantially all property owned and fixed charge coverage ratios. franchises held by them. Excluded from the liens, among Short-term borrowing capacity authorized by the PUCO other things, are cash, securities, anounts ruivable, annually is $300 million for Cleveland Electric and $150 fuel, supplies and, in the case of Toledo Edson, automo-mi!! ion for Toledo Edison. The Operating Companies tive equipment. are authorized by the PUCO to borrow from each other n a short-term basis. Certain unsecured loan agreements of the Operating Companies contain covenants relating to capitalization 31

(13) FinancialInstruments (14) Quarterly Results of Operations Except for the Nuclear Plant Decommissioning Trusts at (Unauditea; December 31 1994, as discussed below, the estimated fair values at December 31,1994 and 1993 of financial The following is a tabulation of the unaudited quarterly instruments that do not approximate their carrying results of operations for the two years ended December amounts in the Balance Sheet are as follows: 3I' 1994-Ouarters Ended De_qcmber 31. March 31.,Iune 30, Sert, 30. Dec. 31. g994 9993 I *IIII "' "I d II" Carrying FaiI Carrying Fair except per share amou'nts) A mount Valut A_m_v.g Yph (millions of dollars) 1994 Assets: Operating Revenues $588 $596 $667 $ 570 Nuclear Plant Decommissioning Operating Income $129 $134 $186 $ 129 Trusts $ 82 $ 82 $ 56 $ 59 Net Income $ 35 $ 42 $ 92 $ 35 Capitalization and liabilities: Average Common Shares Preferred Stock, with Mandatory (millions) 147.4 147.9 148.0 148.0 Redemption Provisions Earnings Per Common (including current portion) _ 300 264 354 349 Share $.24 $.28 $ 62 $ 24 Long-Term Debt (including Dividends Paid Per current portion) 4.031 3.628 4,113 4.260 Common Share 5.20 5.20 $.20 .20 3993 The Nuclear Plant Decommissioning Trusts at Decem-Operating Revenues $598 $589 $709 $ 578 ber 31,1994 included $46 million of federal governmental Operating income (Loss)- $122 5126 $106 $ (42) securities and $31 m.lh.on of municipal securit.ies.The i g $ 35 $ 34 $n mom securities had the following maturities: $19 million due Average Common Shares within one year; $16 million due in one to five years; $17 (millionsi 143.4 144.4 145.3 146.4 million due in six to 10 years; and $25 million due after Earnings (Loss) Per 10 years. The fair value of these trusts is estimated Common Sha;c $.25 5.23 $.12 $ (7.02) Dividends Paid ler based on the quoted market prices for the investment Common Share $.40 $.40 $.40 .40 securities. As a result of adopting the new accountmg standard for certain investments in debt and equity securi-Earnings for the quarter ended September 30,1993 were ties, SFAS 115, in 1994, the carrying amount of these decreased by $81 million, or $.56 per share, as a result of trusts is equal to the fair value. The fair value of the the recording of $125 million of VTP pension-related Operating Companies' preferred stock, with mandatory benefits. redemption provisions, and long-term debt is estimated Earnings for the quarter ended December 31,1993 were based on the quoted market prices for the respective or decreased as a result of year-end adjustments for the similar issues or on the basis of the discounted value of $583 million write-off of Perry Unit 2 (see Note 4(b)), future cash flows. The discounted value used current the $877 million write-oft of the phase-in deferrals (see dividend or interest rates (or other appropriate rates) for Note 7) and $58 million of other charges. These adjust-similar issues and loans with the same rematmng ments decreased quarterly earnings by $1.06 billion, or maturities. $73 The estimated fair values of all other financial instru-ments approximate their carrying amounts in the Balance Sheet at December 31,1994 and 1993 because of their short-term nature. l l 32

Executives of C e n t e rio r energy Corporation Chairman, President and Chief Executive officer Robert J. Farling (58) Vice President Terrence G. Linnert (48) Executive Vice President Afurray R. Edelman (55) Controller E. Lyle Pepin (53) Senior Vice President Fred J. Lange, Jr. (45) Treasurer David Af. Blank (46) Vice President Gary R. Leidich (44) Secretary Janis T. Percio (42) Executives Of C e n t e rio r Service Company Chairman, President and Vice President-Chief Executive Officer Customer Support Jacquita K. Hauscrman (52) (and Chairman Vice President-Finance & CEO of i & Administration Gary R. Leidich (44) Cleveland Electric and Toledo Edison) Robert J. Farling (58) Vice President-Legal & Executive Vice Pres. dent-i Governmental Affairs Operations & E,ngineering (and Vice Chairman of Toledo Edison Vice President-and President of Transmission & Distribution ) Cleveland Electric) Afurray R. Edelman (55) Operations David L. Afonscau (54) l Senior Vice President-Vice President-Fossil & Transmission and Nuclear-Davis-Besse John P. Ster: (49) Distribution Operations V ce President-(and President Sales & Marketing Al R. Temple (49) of Toledo Edison) Fred J. Lange, Jr. (45) Controller E. Lyle Pepin (53) Senior Vice President-Treawa Daud,E BlanA (M Nuclear (and Vice President-Secretary Janis T. Percio (42) Nuclear-Perry) Donald C. Shelton (6/) i Number on puentheses indicates age 33

Financial and Statistical Review Operating Retenues (millions of dollars) Steam Total Total Total lleatmg Operatmg Year Reddenual Commercial industnal Other Retail Whoicsale Electric & Gas Revenues s 1994 $758 722 758 137 2 375 46 2 421 $2 421 1993 768 716 754 143 2 381 93 2 474 2 474 1992 732 706 766 143 2 347 91 2 438 2 438 1991 777 723 783 188 2 471 59 2 560 2 560 1990 719 669 779 190 2 357 70 2 427 2 427 198J 548 454 636 88 1726 24 1750 24 1 774 Operating Expenses (millions of dollars) Other Generatmn Deferred f uel & Operation f acihues Depreciatwn Taxes. Operating Federal Total Purchased Rental Other Than Expenses. Income Operstmg Year Power Maintennnte r.spense. Net Amoriimion l'IT Net Taurs f:xpenses 199J $442 595 160 278 309 ($$) 114 $1843 1993 474 924/a) 159 258 312 23(b) 11 2 161 1992 473 623 161 256 318 (52) 122 1 901 1991 500 633 168 243(c) 305 (6) 138 1981 1990 472 698 165 242 283 (34) 96 1922 19#4 463 404 145 179 198 1 389 Income (las) (millions of dollars) l ederal Income Other Deferred income ( Loss) Income & Carrying Tases-liefore Operatmg Al UDC-Dcduction.. C harges. Credit Interest Dcht Year income I gmty Nel Net iI spense) Charges interent 1994 $578 5 8 40 (6) 625 361 1993 313 5 (589)(d) (649)(b) 398 (522) 359 1992 537 2 9 100 (7) 641 365 1991 579 9 6 110 (30) 674 381 1990 505 8 (1) 205 (l3) 704 384 1984 385 213 12 69 679 310 Income (less) (millions of dollars) Common Stock (dollars per share & %) Return on Preferred & A verage Average Preference Net Shares Common Al l'l >C-Stock Income Outstandmg Earnings Stm k Dindends Book Ycar Debt Dmdends alon) ( milhens) (l oss) I qmty Declared Value 1994 $ (6) 66 $ 204 147.8 $ 1.38 11.1 % $.80 $12.71 1993 _ ___._ (5) 67 (943) 144.9 (6.51) (40.3) 1.60 12.14

992 (1) 65 212 141.7 1.50 7.4 1.60 20.22 1991 s5) 61 237 139.1 1.71 8.4 1.60 20.37 1990 (6) 62 264 138.9 1.90 9.4 1.60 20.30 1984 (76) 78 367 107.6 (r) 3.41 (c) 16.4 2.29 (c) 20.64 (c) l\\0ft iM4 Jata is the remh of combining and restating data for the Operating Companies.

Ia) includes earir retirement program enpenses and other charges of $27: milhon in IV9L th) includes u rite-op ofphase-in deferrals of $877 milhon in I 99.t. consiaing of $172 million ofdeferred operating etpenses and $705 million ofdeferred carrying i harges (ci in iv91. the 0;wrating Companies adopted a dange irt accounting for nmlear plant depreciation, changingfrom the units-ofpmfuction method to the straight. fine method at a 5% rate 34

L Centerior Energy Corporation and subsidiaries Electric Sales (millions of KWII) Electric Customers (year end) Hesidential Usage Average Average Avera c Pnce Rctenue Industrial KWil [rcr Per Per year Residential Commerciaf indusinal Wholesale Other Total Residential Commercial & Other Total Customer KWil Customer 1994 _ 6 980 7 481 12 069 1 842 1 074 29 446 925 344 97 530 ti360 1 034 234 7 556 10.86c $820.89 1993 _ 6 974 7 306 II 687 3 027 1022 30 016 924 ?27 96 491 12 219 1 032 937 7 546 11.01 830.99 1993 _,, 6 666 7 086 11 551 2 814 1 011 29 128 925 099 96 813 12 74: 1 034 653 7 227 10.98 793.68 1991 _ 6 981 7 176 11 559 2 690 1 048 29 454 921 995 96 449 12 843 1 031 287 7 410 11.16 827.10 1990 _ 6 666 6 848 12 168 2 487 959 29 128 918 965 94 522 12 906 1 026 393 7 079 10.82 765.93 1984 _ 6 404 5 794 11 441 578 871 25 088 888 816 85 825 11 850 986 491 7 035 8.56 603.92 Imad (MW & %) Energy (millions of KWil) Fuel Nct Efficiency-Scawnal Peak Capacity Imad Company Generated Purcharcd i uel Cost BTU Per Year Capa%fy I ond Margin factor I ossil Nuclear htal Pa er Total Per KWil KWil 1994 6 226 5 291 15 0% 63.9 % 18 146 II824 29 970 922 30 892 1.35c 10 454 1993 6 226 5 397 13.3 61.6 21 105 10 435 31 540 273 31 813 1.39 10 276 1992 6 463 5 091 21.2 63.4 17 371 13 814 31 185 (122) 31 063 1.45 10 395 1991 6 460 5 361 17.0 62.9 18 041 13 454 31 495 40 31 535 1.48 10 442 1990 6 437 5 261 18.3 63.6 21 114 9 481 30 595 413 31 008 1.52 10 354 19#4 5384 4 659 13.5 66.1 19 930 4 303 24 233 2 621 26 854 1.71 10 349 l Imestment (millions of dollars) Construcuan Work in Total i Unty Accurnulated Progress Nuclear Property. Utihty Plant In Depreciation & Net & Perry I'ueland Plant and Plant Total i Year Service Amortuaimn Plant Unit 2 Ot her E quipment Additions Anets 1994 $9 770 2 906 6 864 129 343 $7 336 $197 $10 691 1993 9 571 2 677 6 894 181 385 7 460 218 10 710 1992 9 449 2 488 6 961 781 424 8 166 200 12 071 1991 8 888 2 274 6 614 853 503 7 970 204 11 829 1990 8 636 2 039 6 597 921 568 8 086 251 11 681 1984 4 282 1 164 3 118 3 527 485(f) 7 130 939 8 050 Capitalization (millions of dollars & %) Preferred & Preference Preferred Stock. uithout Stock, math Mandatory Mandatory Redempuun Year Common Simk fouity Redemption Provisions Provisions I ong-Term Debi Total 1994 $1882 30% 253 4% 451 7% 3 697 59% $6 283 1993 1785 27 313 5 451 7 4 019 61 6 568 s1992 2 889 39 364 5 354 5 3 694 51 7 301 1991 2 855 38 332 4 427 6 3 841 52 7 455 1990 2 810 39 237 3 427 6 3 729 52 7 203 01984 2 403 39 451 7 344 6 2 994 48 6 192 (d) includes write-of of Perry Unit 2 of UU million in i993. (e) herage shares outstandung and related per share computations reflect she Cleveland Electric !.11-Jar one exchange ratio and the Toleda Edison one-for-one nchange ratiofor Centersar Enerte shares at the date of afiliation. April 29. ]9% (f) Restatedfor efects of capitali:atum cf nusicarfuellease andfinancing arrangements pursuant to Statement of Financial Accounting Standards 71. l 35

Board of oirectors Richard P. Anderson (65) President and Chief Executive Robert J. Farling (58) Chairman, President and Chief Officer of The Andersons Management Corporation, a Executive Officer of the Company and Centerior Service l grain, fann supply and retailing finn 1986 Company.1988 l Albert C. HersticAer (60) President and Chief Executise George H. Kault (63) Retired Chairman of Premix, Inc., Officer of Ferro Corporation, a pnxtucer of specialty a developer, manufacturer and fabricator of thermoset f chemical materials for manufactured products.1990 reinforced composite materials.1987 i i Leigh Carter (69) Retired President and Chief Operating Richard A. AfiRer (68) Retired Chairman and Chief Officer of The BFGoodrich Company, a producer of Executive Officer of the Company and Centerior Service chemicals, plastics and aerospace products. Retired Company.1986 j Chairman of Tremco, incorporated, a manufacturer of Frank E. Afosier (64) Retired Vice Chaimian of t e h specialty chemical products and a wholly owned Advisory Board of BP America Inc., a producer and subsidiary of The BFGoodrich Company.1986 refmer of petroleum products.1986 Thomas A. Commes (52) President and Chief Operating Sister 31ary Afarthe Reinhard, SND (65) i Officer of The Sherwin-Williams Company, a Director of Development for the Sisters of Notre i manufacturer of paints and painting supplies.1987 Dame of Cleveland. Ohio. Fonner President of Notre llilliam F. Conway (64) President of William E Conway Dame College of Ohio.1986 [ & Associates. Inc., a management consulting finn. Robert C. Sarage (57) President and Chief Executive Retired Executive Vice President-Nuclear of Arizona Officer of Savage & Associates, Inc., an insurance, Public Service Company, an electric utility.199-1 financial planning and estate planning firm.1990 f H'ayne R. Embry (57) President and Chief Operating g. 7 g.illiams (66) Retired Chairman of i Officer of the Cleveland Cavaliers, a professional I iluntincton National Bank.1986 basketball team. Chainnan of M.A.L Co., a fabricator of hardboard, fiberglass and carpeting materials for l Robert 31. Ginn Chairman Emeritus the automotive industry.1991 John P. H7/liamson Chainnan Emeritus .%mber m parcntheses indicatcs age l Date indicates first, scar in whu h elected to Board. i Committees Of The Board l r Environmental Capital and Community Eaecutise Human Audit Espenditures Responsibility and Nominating Finance Resources Nuclear [ i l T.A. Commes. G.ll. Kault. Sr. M.M. Reinhard. R.J. Farling. R.A. Miller. EE. Mosier, R.P. Anderson, Chainnan Chainnan Chainnan Chairman Chairman Chainnan Chairman R.P. Anderson A.C. Dersticker W.R. Embry L Caner L. Carter W.R. Embry A.C. Bersticker j L Carter W.E Conway R.A. Miller T.A. Commes T.A. Commes G.ll. Kaull W.E Conway W.R. Embry R.A. Miller FE. Mosier R.A. Miller R.J. Earling R.C. Savage R.J. Farling Sr. M.M. Reinhard EE. Mosier R.C. Sas age W.J. Williams EE. Mosier W.J. Wi!!iams Sr. M.M. Reinhard R.C. Savage W.J. Williams 1 i i b t

Share Owner Information [ Dividend Reinvestment and Stock Purchase Executive Offices l Plan and Individual Retirement A ccount Centerior Energy Corporation (CX IRA) 6200 Oak Tree Boulevard The Company has a Dividend Reinvestment and Stock Independence, OH Purchase Plan which provides share owners of record and Telephone: (216) 447-3100 FAX: (216) 447-3240 customers of the Company's subsidiaries a convenient means of purchasing shares of Company commor stock by investing AfailAddress all or a part of their quarterly dividends as well as making Centerior Energy Corporation cash investments. In addition, individuals may establish an P.O. Box 94661 individual retirement account (IR A) w hich invests in Company Cleveland, OH 44101-4661 common stock through the Plan. Information relating to the Plan and the CXalRA may be obtained from Share Owner Independent Accountants 4 Services at the Company. Arthur Andersen LLP . CX IRA Custodian 1717 East Ninth Street Cleveland, OH 44114 I All communications about an existing CX lRA should be directed to the Custodian at the address or telephone numbers Cominan Stock listed below: Listed on the New York, Chicago and Pacific Stock Society National Bank Exchanges. Options are traded on The Pacific Stock Custodian, CX lRA Exchange. New York Stock Exchange symbol--CX. P.O. Box 6477 Newspaper abbreviation-CentEn or CentrEngy. Cleveland, Oil 44101 Annual Alceting in Cleveland area 737-5745 The 1995 annual meeting of the share owners of the Company will be held on April 25,1995. Owners of Elsewhere in Ohio 1-800-362-0697, Extension 5745 common stock as of February 24,1995, the record date ] Outside Ohio I-800-321-1355, Extension 5745 for the meeting, will be eligible to vote on matters brought j up for share owners' consideration. l Share Owner Services g,7;,,,,,,,,y g,po,, Communications regarding stock transfer requirements, lost g g g g certificates, dividends and changes of address should be i directed to Share Owner Services at the Company. To reach C"PY "I" '# port on its emimnmemal peyfonmnce. Requests should be directed to Share Owner Services. Share Owner Services by phone. call: I orm 10-K In Cleveland area 642-6900 or 447-2400 The Company will fumish to share owners, without charge, Outside Cleveland area 1-800-433-7794 a copy of its most recent annual report to the Secunties and Please base your account number ready when calling. Exchange Commission. Requests should be directed to Share

• "ner Services.

Investor Relations Inquiries from security analysts and institutional insestors Audio Cassettes should be directed to Terrence R. Moran. Manager-Insestor Sbare owners with impaired vision may obtain audio Relations, at the Company's mail address or by telephone cassettes of the Company's Quarterly Reports and Annual at (216) 447-2882. Report. To obtain a cassette, simply write or call Share Owner Services. There is no charge for this service. T,ransferAgent Centerior Energy Corporation C'"'"#"' ""#' C"'r"d"" Share Owner Services u as formed in April 1%6 up<m P.O. Um 94661 Q$. the amhanan of The clewland 4 Yhc Electric luuminaring company Cleveland, Ol( 44101-466l The %c4 and The Toledo Edison Company. Stock transfers may be presented at [g S'l/Ly < werk a33ers of about $n bunoni Society Trust Company of New YorL cmuran canran> Cemnior Enugy is one of the targea &ciric uribry systems in 5 Hanoser Square, loth Fhwr 'h' """"n. The Centerior operanng New YorL, NY 100nt wmpanies serve 2b mdlian r'"r '" " "*""" '"ri" "' '" Registrar of 4.:00 square mdes in Norther n Society Nattonal Bank Ohio Centerior Energy is an j~ Corporate Trust Division Ohio evuat ovvorrunity emplo>u. P.O. Box 6477 Clescland, OH 44101 37

- Centerior Energy Corporation P.O. Box 94661 .. Cleveland,01144101-4661 ? r e. ,T I 1 i r t [ f i e i f i i c l 4 1 l l-l l j i i w I}}