ML20140B897

Centerior Energy 1996 Annual Rept

ML20140B897
Person / Time
Site:	Beaver Valley
Issue date:	12/31/1996
From:	Farling R, Linnert T, Pepin E CENTERIOR ENERGY
To:
Shared Package
ML20140B855	List: ML20140B850 ML20140B865 ML20140B878 ML20140B886 ML20140B897 ML20140B903 ML20140B908
References
NUDOCS 9706060377
Download: ML20140B897 (51)

Text

GNTERIOR ENERGY a

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l)), k),.,, , Li 1996 Annual Report 9706060377 970530 PDR ADOCK 05000334 I PM a

4 ompan Profi e Basic earnings per common Centerior Energy Corporation is a full-service share from operations

• supplier of electricity and energy-related services.

51.00 .

Its strategic business groups generate, transmit and distribute electricity through two operating subsidiaries, The Cleveland Electric Illuminating Company and The Toledo Edison Company, t so

,.'i1, 4 Centerior serves more than 1 million customers s 23 -

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across a 4.200-square-mile service area in Northeast and Northwest Ohio. The Company's common stock is traded on the New York Stock

,, :M 4 Exchange under the symbol "CX" 1994 1995 1996 wa.o mey .caio=, p= .m. . . .., .o .

With 6.200 employees, Centerior is one of the largest employers in northern Ohio. The Con 4pany is the single largest taxpayer in the State of Ohio, 1994 1995 1996 contributing 2 percent of all taxes administered by Total earnings $1.38 $1.49 S.82 the State.

Regulatory account.ng (.70) (.70) .19 Price increase - -

(.32) On September 16,1996, the Company announced One-time charges - -

.15 its intent to merge with Ohio Edison Company, a Basic earnings per neighboring electric utility, to form a new company common share $.68 $.79 $.84 named FirstEnergy Corp.

rn .=n. .. p., comn a .n.,.5 Table of contents 2 Letter to Share Owners 26 Management's Statement of Responsibility for 7 What is New Power? Financial Statements

1. Distribution 26 Report of Independent Public Accountants 11 Generation 27 Financial Statements and Notes 14 Transmission 45 Executives of Centerior Energy Corporation and 15 Enterprises Centerior Service Company 16 Business Services 46 Financial and Statistical Review 17 Administration 48 Board of Directors 19 Management's Financial Analysis 49 Share Owner Information l l l

the cmer: 1howerau,s urnm, uur -new swer asvernuna <amtwen 1 rmucs am er,>< tras,,ai,rr

Financial Summary 1996 1995 Earnings Per Share of Conunon Stock _  % Change

._ _$ .82 $ 1.49 (45)

Dividends Declared Per Share of Common .80 Stock

$ .80 thiok Value Per Share of Common Stock __ $ at Year End 13,42

$ 13.40 Closing Common Stock Price at Year End __ -

_ _$ 10 4: $ 87/8 21 Common Stock Share Owners at Year End_ 122,820 137,396 Common Stock Shares Outstanding at Year End (millions)_ (tI) 148 148 -

Operating Revenues (millions) _

$ 2,553 $ 2,516 Operating Expenses (millionsk 1

$ 2,037 $ 1,927 Net income (millionst 6

$ 121 $ 220 Return on Aserage Common Stock Equity _ (45) 6.19 11.4 9 (46)

Kilowatt-hour Sales (Millions)

Residential _

_ _ _ 7,103 7,227 Commercial -- (2) 7,698 7,694 Industrial __ -

12,278 12,168 Wholesale __ i 2,804 Other_

2,626 7

1,011 1,050 Total _ (4)

_ 30,894 30,765 Employees at Year End __ -

6.204 6.82I (9)

Quarterly Range of Common Stock Prices 1996 ,

liigh law 1995 Ist Quaner _

__$ 95/8 liigh l>w

$ 75/8 Ist Quarter _ _$10 2nJ Quaner ___ 8

$ 8 lint, 61/4 2nd Quarter __

3rd Quarter _____ _ ___ ___ 97/x 85/8 96 63/4 3rd Quarter _ _ 11 4th Quarter _ 9W

_ _ _ 101/4 9lx i

4th Quarter. __ l11/4 8W I

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L Across the country,

Dear fellow share owner:

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• 1 - )# , i It's been an exciting, eventful year. I am pleased to to California, 0 .;

report to you the successful completion of our rate E"#**#" '#E" "' i f case and our proposed merger with Ohio Edison """ "I""'" #

Company to form FirstEnergy Corp. More importantly, " *P#Ii""""*""E 'g .

good operating performance, the successful rate case, utihties are changing. a. ,

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the accelerated paydown of debt and the proposedAlready in limited merger resulted m. a sigmficant stock price gain, which in odwr expedmenu produced a total return for our common stock share P""" " """D' owners of 33 percent during 1996.The stock price ntaa mstone ,

rose from $8 7/8 to $10 3/4 at year end, while the " # ' ## #" " # # " '"*

dividend was maintained at an annual rate ofelectricity providers.

80 cents per share. In the future, the 1995 - $121 experiments will be expanded and retail competition Our earnings were lower in 1996 than in will becorne a reality in Ohio, giving retail consumers milhon, or 82 cents per share, this year, compared with a variety of electricity providers from uhich to choose.

$220 million, ot $1.49 per share,in 1995 - because of the impact of regulatory accounting measures and in short, there will be deregulation of the industry one-time charges. Ilowever, we continue to make and " retail wheeling" of power - all resulting in progress in improving our overall financial posinon.,mtene compennon.

Basic earnings from operations - results excluding We cannot predict when these changes will occur nor the impact of ceasing certain regulatory accounting the impact they will have on our ability to recover measures, the one-time charges, and higher revenues our investments, lloweve,r, your Company's Board from the $119 million price increase - were up 5 cents of Directors and top management have spent the last per share in 1996. (Sce table at thefnmi of this semal report.) years pmparing for this competitive vision A changing Centerior Energy of the future. The merger with Ohio Edison to form F rstEnergy is perhaps the most dramatic and impor-As you might expect, given the events of 1996 and their influence on our future, this annual report is tant action we've taken. The benefits to our share own-ers from this merger are significant. But equally about change - a changing industry and a changing important, the merger would help ensure our enterprise Centerior Energy. Change is making Centerior will move strongly and purposefully into this new stronger for its share owners, customers and competitive environment, with more resources and employees, more opportunities for our Company and our employees to succeed than if we remained an independent entity.

2- ,

Two paths of strategic change FirstEnergy, the best choice Our newly launched adsertising campaign talks about "New Power to You." The slogan is directed towardSimply put, FirstEnergy represents the best opportunity our retail customers, but it also applies to our we have to accelerate our success in achieving compet-Company. There's a "New Power" at Centerior itheness and enhanced share ou ner salue. It will a Energy - the power to compete. provide our customers with reliable service at more stable and competithe prices and our employees in 1994, we adopted our Strategic Plan to serve as a with more opportunities than if we and Ohio Edison road map to enhanced competitiveness. Each year we separate companies.

remained establish measurable objectives that continue us on our path of successfully executing the Strategic Plan The combination of Centerior and Ohio Edison is and becomint a stronger, more competitive utility, a natural alliance of two companies with adjoining Achieving this ultimate objective is the single greatest service areas who already share many major generating challenge this Company has faced. It is an objective units, including two nuclear power plants. The new that has been carefully considered in light of ourcompany share will be the Ilth largest investor-owned ownets, customers. the communities we serve and electric utility in the United States, with combined our employees. assets of more than $18 billion, a customer base of We made meaningful progress m.

2.1 million, annual revenues of roughly $5 billion and 1996 toward our overall Plan obj.ectives. On some measures - such annual electric sales of 64 billion kilowatt-hours. Our service territory will stretch across all of northern Ohio as debt reduction - we are now ahead of schedule. and a portion of western Pennsylvania, In other areas - revenue growth, for example - our efforts lag behind our interim objectives. The merger is anticipated to produce substantial savings for the combined companies, estimated at The year 1996 brought us to this important juncture.

One course, the preferred choice, leads to the The benefits expected to be achiesed from the combination with Ohio Edison. The other calls merger include:

for us to stay the course of independence-

• competithe rates for our customers that uill provide us with new sales opportunities; Monthly price performance sn oo -

• improved coordination, control and operation of major generating plants and transmission facilities;

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• enhanced cash flow;

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• accelerated debt reduction;

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= climination of duplicative activities:

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• reduced operating expenses and cosi of capital:

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. elimination or deferral of certain capital 7.00 - bl-$

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u J b Jan Feb Mar Apr May Jun l w.dL Jul Aug Sep Oct Nov Dec Jan 1996 1997 Rettects closu'g pnce of Centenorcommon stock at end of Anst day of tradmg of each montit 3

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Dercloping innre compe titive and efficient

= development of opportunities for sales of operations. Our core operations - those that relate energy-related pmducts and services; and to die gennation, trawniwion and distribution of

. enhanced purchasing capabilities for goods electricity - are the areas of our Leenest focus in and services. preparing for change. This focus led to the creation In addition to approval by share owners, the merger m late 1995 of separate Strategic Business Groups remains subject to a number of regulatory reviews. (SBGs) directly responsible 1or these core operations, We cleared a sery important hurdle in January 1997 as well as f.or the corporate sersices that support them and f.or the identih. canon of new business opportuni-when The Public Utilities Commission of Ohio is (PUCO) approved FirstEnergy's rate reduction and ties. The year 1996 was our h.rst full year under th.

economic development plan for customers of our structure, and the results are helping to move the two operating i.ubsidiaries The Cleveland Electric Company toward .its goals and produce value for the Illuminating Company and The Toledo Edison new FirstEnergy enterprise.

Company. The plan, which becomes effective only if For example, our Generation Group's aggressive the merger is comummated, will result in significant business plan is designed to enhance the competitive-savings for our cus-ness of our fouil-Dred and nuclear power plants. The i

tomets and enhance plan establishes clear performance goals for every A our position as the generation facility in the areas of safety and regula-energy supplier of

f. lion, production and plant performance, and cost choice as we enter a reduction. As a result, our generating units are more competitise era.

performing well. while the total cost of operating

. s  %,c expect the our plants declined in 1996 by $74 million.

merger to be Our Distribution Group, rneanw hile, is focusing on completed by the

, delivering better service to our customers, achieving end of 1997, operational excellence, and retaining and growing our core electric business, among other initiatives.

Our Transmission Group is mming aggressively to 1996 progress seH bulk pown on the wholesale power market as a As enthusiastic as we are about our future as part resuh of new federal rules that make such transactions of FirstEnergy, we are also pleased with continuing eas n, w e our F.nterprises Group entered into a actions taken within Centerior in 1996 to prepare for tekconununicadons aWance with one of the largest the future and enhance share ow ner value. It's becom- and most respected corporations in the world AT&T.

ing increasingly clear that our Company brings tremendous value to the new FirstEnergy.

As outlined in our 1994 Strategic Plan, enhancing share owner s alue is driven by four imperatives:

developing more competitise and efficient operations.

building profitable revenues and reducing 0xed costs, while improving customer service.

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We renewed and extended for as long as 10 years contracts with many of our large industrial customers,

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7y more than half our industrial base revenues was under) j l . f. long-term contracts. While this strategy has resulted in low er prices f or these customers, in the long rtm it is

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expected to maximite share owner value by retaining

1. our customer base in a changing industry.

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Reducefixed costs. To become more competitive.

~ ' - we have ab.o been focusing on reducing fixed costs.

The year 1996 was our third consecutive year of I The Business Senices Group is helping the Company significant reduction of debt, lease and preferred reduce costs uhile improving the internal services it stock obligations. The Company reduced these provides to the other SBGs.

obligations by a net of $227 million in 1996.

Our Administration Group insures that while each of Interest expense and preferred dividends were lowei the SBGs pursues its respective vision we maintain our $26 dlion, or 13 cents per share. Since our S

corporate perspective of creating value for our share ic Plan was adopted, we have reduced our owners. The Group brought our price increase request fixed obligations by $523 million. By continuing on to a successful conclusion in 1996 and etmtinues to E tM. we eyect m achieve our stand-alone goal help improse the Company's financial condition of a total reduction of $1.3 billion by the year 2(XXL j through tax and debt reduction. The Group also The merger may allow us to exceed that amount represents the Company in proactively shaping the industry' Cumulative total interest and l

preferred dividend reductions l

Build rcrennes, in April, the PUCO granted

• Cleveland Electric and Toledo Edison the full $119 l million price increase for which we filed in 1995. This {]

was the first price increase for either of our operating 33

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g units since 1991. The rate order represents a crucial y.yp i

• • 20 EI step in helping the Company prepare for a more com-y;<c j petitive future because it is helping generate cash to ,

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l retire debt, allowing for recovery of deferred costs N H and improving the quality of earnings. And it puts the d p"""Tg -

c Company in a position to reduce prices in the future. O 4 Centerior's marketing and economic development ef forts secure major new customers for our electricity.

create jobs and help ensure a vibrant economic outlook Importantly,1996 marked our first full fiscal year for our service area. During 1996, we also made sitrides since we stopped deferring certain costs and began i in our ongoing effort to secure multi-year contracts for amortizing the accumulated balance. Although this service with the Company's major industrial customers, results in lower earnings, the quality of earninp is 4

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Poised for success better because they are more cash-based. It is cash that allows us to retire debt, to improve service and Centerior continues to face powerful and complex to invest prudently in growing our business. And it ischallenges. As we said to you m last year's report, cash that makes us more competitive. The Company's it is not going to be easy. Ilowever, we are very enthusiastic about the opportunity presented by the I

I performance on this measure is strong and will improve even further. Free cash flow - cash after inter- FirstEnergy merger, and we are also encouraged est expense, preferred dividends, capital expenditures,by developments within Centerior; by continuing I

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operation and maintenance expenses, and taxes - has progress; by the attainment of steps, both small and grown moderately large, along the path to competitiveness; and by since 1993. But in the spirit of change that is evident throughout our 1997 it is expected

,, org nization.

to increase substan-

! . . .[v tially due to a full Many other examples of change follow in the pages of year of the price this annual report. As we assertively address the future and move the Company forward, we are continually increase and addi-tional operating and grateful for the hard work of all of our employees, the

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J interest cost savings. privilege of serving our customers and, as always, the support of you, our share owners.

During 1996, we reduced our work This was a watershed year for share owner value.

We ncreased your stock price.We maintained your

(. force by 9 percent, from 6.821 to 6,204. dividend. And either as part of the FirstEnergy family We met and exceeded our reduction target of 500 for of companies or as a stand-alone company, we face the future poised for success, the year. Separation expenses associated with the cmployment reduction had a negative effect on Sincerely, earnings in 1996, but our smaller work force will ,

significantly reduce future costs. Ehminating jobs is never easy or pleasant. Ilowever, it is vital if we are to continue as a viable enterprise and provide diverse Robert J. Farlmg uture. Chairman, President and Chief Executive Officer employment opportunities in the f.

February 24,1997 Improving customer scrrice. We advanced a number of initiatives in 1996 to enhance our delivery of service to customers and improve their perception of the Company. For instance, we're clearing more tree branches from our lines and improving the speed and effectiseness of our responses to customer telephone inquiries. We're also automating part of our distribution system to reduce the length of service interruptions. As a result of our pending merger with Ohio Edison, we have formed a joint action team to further improve storm restoration activities. 1 n u

What is New

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lt is success.

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\:g,. A. . . .,.,f. y k New Power is Centerior Energy Corporation.

" f, Our Company is ernbracing the changes in our industry, D(.%#% perfonning the hant tasks necessary to pn> pare usfor this new reality. We air growing revenues thmugh rnarketing initiatives R$5$b \r,.

and a price increase. We are securing our largest custorners thumgh long-tenn agirements that give us revenue stability, e d %. We air cutting operating costs thnmghfiscal discipline and

.m# ""w w a a d h employment reductions.

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(;p We are rethinking and knpmving the ways we operate our

\ mq%Qr generating plants, deliver service to our customers and Na v.

manage the supply ofgoods and services internally. We are

$spv i using our core skills and assets to develop new opportunities QmR  % )f in teleconununications. We an establishingfertile working p"%

n>lationships with top companies in other industries.

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(J We air pivparingfor thefuture.

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And we are making realprogress.

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y]kv That's the New Power of Centerior Energy Corporation.

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in the f ounh quaner of 1996, we Achieving operational launched a major reengineering initia-work management effort. This initiative examm is a iey tive to improse our customer service.

is continuing as part of the transition to c mponent of the The program aims to sase the Company ..

Distnbufon Groups up to $20 million a , sear w hile greatly 8"^'*d'C b"8'"*88 P"-

enhancing our abihty to meet and Our new INFORM computer system exceed customers' expectations. We allows our customer sersice phone have targeted seseral specific areas for representatives to respond faster and improvement, such as streamlining the more effectively to customer orders and customer billing and payment process, requests for information. Instead of has-expediting the new-service installation ing to access several dif ferent computer process and redesigning our entire field screens during a typical customer call.

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customer sersice representatives now Retention and growth and almost 7,(xx) new and retained jobs can process many customer calls with of our core business for northern Ohio. We helped convince just one screen. Our storm restoration We are seeking to grow our core Delafoil/Phillips to build a 250,(K)0 efforts improved during 1996, as did business through economic develop- square-foot plant to produce television the level of satisfaction our customers ment, winning customers from components near Toledo. In September, have with our service. We have competitors. aggressive sales and we saw the benefit of an earlier effort established a goal for 1997 of raising marketing and a proactive contracting when Birmingham Steel's American customer satisfaction ratings by 35 strategy aimed at our largest customers. Steel & Wire division unveiled its new percent over 1996 levels. Customer $109 neon precision rod and har mitt Economic dcrclopment. We continue satisfaction is absolutely essential e:. expansion in the Cleveland suburb of we attempt to retam and expand our Cuyahoga Heights. At the opening cere-important means of achieving etained customer base in an increasingly mony, Ohio Governor George Voinos ich revenue growth. In 1996, we gained competitne environment. publicly complimented Centerior for its ommitments on 47 economic develop-vital role in economic development.

Operational excellence ment projects, representing almost si!

Excellent operations means working million in new and retained annual base Competition The Distribution Group i rate revenues. These projects represent is facing competitive challenges from safely to keep the lights on. The

$407 million in new capital investment a number of municipal systeins - and Distribution Group intends to be among the industry's leaders in service reliability, w hile maintaining a safe work ,,,,,,_. , _ , , ,

emironment for our employees. In 1996, j,. , ,,

we greatly expanded our commitment ,

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Cuyahoga-CCounty posernment renewing and euending contracts. Prior yys % <M = + x &,- c.;;&y/

i , n buildings in t!,e city - 10 of which to these renewals,69 percent of our i"

y I .Nd u ere CPP customers. industrial base rate revenues under con-W Ay ;4$

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tract was scheduled for renewal before O a Sales and marActing. During 1996, a .q a J 1999. Through our contract renewal N

1. • : our sales and marketing efforts closed i, . activity, now only 19 percent of those sales w hich w ill provide approximately o ,y 1- contracted revenues .is up for renewal e

515 million annually m. base rate

[ before 1999 and 54 percent is secured J ;44E '

, resenues.These sales den.te from a

. ., under longer-term contracts.

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vanety of. . . .mitiatives, such as Night mA L .s ,. t;; .

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, . " .: Vision (outdoor lighting); Recipe for

" By delivering better service, achieving 3 Success (food service); process heating; 4

• p 't;, operational excellence and retaining i '

sales of parage and other supplemental c%

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,P clectric heaters; sales of carbon monos-and growing our core business, our e ~-4 .

tr Distnbution Group is playing a ide detectors; a renewed focus on . .

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sigmficant role in our strategy to t ,

marketing electne heating apph,ances become more competitive.

we're more than holding our ow n. Our and technologies in new home construc-sales and marketing efforts proved tion; and sales of electric devices and successfulin the retention of approxi. technology to individual, commercial mately $25 million in base rate revenue, and industrial customers.

threatened by competition from Contracts, in 1996, we continued to alternate energy sources and pursue a proactive contract strategy municipal expansion.

aimed at retaining and expanding sales The Cleveland Public Power (CPP) expansion program is falling far short of its goals for suitching customers Flevenue retention and expansion:

I. rom C,leveland Electne. We have been Major contract expirations advanced to beyond 2004 successful in winning sescial new large ,

Status in 1995 Status in 1996 customers. including a new federal f { 30 g I{30 office building in dow ntow n Cleveland IE E s 2 es hak y 2 es "3 y

and the new Regional Transit Authority E  ;$ - El

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$ 20 -yy" l 20 - in -

water-front rail line in Clescland. 2 f 2 4 3 ; 1s I-q@ ] ,, is j-r L r }a-- r 4:q -g 5'ii3_' ~L Ys_Y D~~ $ ;\ '  ; 7 d T [

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)har of Dpiration )har of bpiration 10 l

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(03/5 The Generation Group continued to

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! l E gy e*yl k ryy y g/i'i pursue strategies to safely improve

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'N(, s-!. gQ y p-yg}g. fj, , plant performance while reducing f; Ow <

operating costs.

r i' _ Since 1994, our cost to produce a

,; j kilowatt-hour of electricity has fallen tU ~ i 's

>M s , 4 Q nearly 14 percent, to 2.23 cents in 1996.

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Meanwhile, production remained essen-7 tially unchanged from 1995 - at approx-1

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imately 32 million megawatt-hours of electricity - even though planned refuel-J W

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nuclear units in 1996.

.* i Nuclear 1<

, i; -

y4 lg ,

- Our nuclear generating units had 3

g .n excellent year, in terms of safety, e j regulation and performance. The Davis-1 4

7 "

(._

q. q Besse Nuclear Power Station continued

< ff; ,

to achieve the high marks that have A[ j]

4 kslig '

\ made it a "world-class" nuclear per.

l A Luj former, producing more than 6.4 Proper maintenance is important in million megawatt-hours in 1996, the improving plant performance.

most ever for the plant in a refueling outage year. Its scheduled refueling shutdown in the second quarter came after 509 days of continuous operation, the longest run in the plant's history.

The refueling period lasted 55 days, which was the second shortest in the plant's history. Excluding the refueling period, Davis-Besse had an availability rate of 96 percent (85 percent including the refueling shutdown).

The Perry Nuclear Power Plant, mean-w hile, continued its focus on impmving 1

11

Availability rate The plant and employees performed operational and regulatory performance.

extremely well in the experiment, Perry pnxluced nearly 7.5 million wo demonstrating that the use of Western megawatt-hours of electricity, the most m m p g.g coas coal may provide future power market-w g fg ever by the plant m a refueh.ng outage year. Its first-quarter scheduled refueling g]

h,f ,$ ing opportunities for Lake Shore.

NN M N Reducing our costs remains critical outage of 74 days was the shortest in

• m M j -Q "

W@m Q- .f i we intend to be competitive in a i

plant history. At year-end, Perry had run -

es 204 consecutive days, .its third longest a-y__

y/

gl . gg;g deregulated environment. During the nf n - '3 i t

run ever. Excluding the scheduled l i . .? year, the Generation Group reduced its j @M e m 04 refueling shutdown, Perry had an 20 - i F))

pg 04 total expenditures, including everythin*a availability rate of 95 percent (79 ;N from operation and maintenance to percent including the refueh.ng penod).

o W

~4 ~ - e>

capital and overhead, by $74 million.

Fossr Nuclear

• Total In the fourth quarter, the Nuclear The group reduced its work force by Regulatory Comm.ission charactenred . , _ , , , , , , , , 438 during the year.

to w op.,

Perry operations as goal overall and continuing to imprme. 1997 in 1997 and beyond, the Generation While the performance of Beaver Valley Gmup will continue to implement its Power Station Unit 2 - of which we Fossil strategic business plan focusing on:

The Generation Group began own and lease a portion but do not operate-was below expectations, man- implementation of its Fossil Operations . Ma ntaining world-class performance Performance improvement Prograrn at Davis-Besse.

agement of the plant is taking positise (FOPIP) in 1996. Key initiatives includ-steps to improve operations.The unit . Continuing improvement of operations produced 2.13 million megawatt-hours ed the shutdown of the Acme Power an reg aton pedonnana at Perg.

Station and two high-production cost of electricity as Centerior's share and

• Continuing implementation of FOPIP.

was available 70 percent of the time units at the Ashtabula Plant, and modi-overall. Beaver Valley Unit 2's 1996 fied operations at other units. Unit 9 at . Working closely with our power our Avon Lake Plant, one of our largest marketing unit to sell more electricity refueling outage lasted 107 days.

fossil-fired units, had its best year n the wholesale market.

ever with a 95 percent availability + Continuing creative fuel supply rate and the lowest pnxtuction costs options.

m its history. Eastlake Unit 1, a smaller

• Supporting and executing options and unit, produced at an availability rate of initiatives to reduce costs.

98 percent. At the Lake Shore Plant in Cleveland, placed in cold storage in Among its goals for 1997 are to reduce 1993, we experimented with low-cost, production costs - operation and main-low-sulfur coal from the western U.S. tenance and fuel- by 11 percent and and a plant operation redesign. to lower total costs by 9 percent. The goals are aggressive, but significant progress is necessary if the Generation Group is to continue on its path toward enhanced competitiseness.

12

. . , . - . _ , . ' ~ " ~ F' Nuclear plants

~-

- e , ;-

i receive honors y

+

. n. ,

, , w 7,. , Tj Davis-Besse was honored as

, , .m P le1J

, , " Outstanding Organization of

]'

' 3 :'

. , m

'~ w t ~4 #. ,

4, the Year" by the Pacific Institute in

+ -

.] Seattle. The institute, an educational c  ;

p } corporation that seeks to improve

{C

' #~'

the effectiveness of individuals and

,j- organizations, works with more

,~

k

• than 60 percent of the Fortune 500 4

j p ,

, 4 E

', ( k } companies and many international l l t> f ,p 1l ['

5 ,

j .,

's organizations.

, - 5

,, , 1 E -= A ""*,*? y.,"

".f t f Both Perry and Davis-Besse received y-

g. positive recognition in 1996 from Y #

+ ' Nucleonics Week, a respected 3 .

r .

p ..

, t i .

c g - 4 L - $ $- independent trade publication.

' }

V T. \

,; s. 7 . . The magazine ranked Davis-Besse di. '

second in the U.S. and sixth in the

.. o '

. .: .  : world in efficiency for producing 100 fva $ 1.; 3 percent of its capacity in 1995. Perry, n .

s - - h-i  ; ..  ;.. .

j meanwhile, ranked 10th in the U.S.

Our nuclear plants performed nellin 1996-and 23rd in the world in production, generating a gross of 9.6 million megawatt-hours of electricity in 1995.

While we're pleased with the recognition, we're aware that the most difficult part -- maintaining and exceeding that high level of performance we have come to expect - has just begun.

I 13

l a

1

)

i

! The Power of uovement j

i' I a [ k i jf?Aso R._ %

-Q "'~,.,

.~

ffG IMi\

.~n The Transmission Group moved

~cf%LW,:

WA @l g.% g, y,v

p.  ;- aggressively .m 1996 to take advantage t e

...e #" pea , .g94m; .p o e""%$fQ p#**""",,,#

1. of new opportunities to actively buy

!ug. - y,.cc7]i[ d[ and sell wholesale power on the open

1. 1. 1. lp - ..- 6 o a n', market. Under new orders from the p, .. -

DQ p, Federal Energy Regulatory Commission

w. ,-- _'t g g, gpg p .

(FERC). utih. . ties must open their v s.- p.,- . . .

jm transmission systems to competitors s .u ns.

fu - - g# 9..g under the same terms as their own L.

n 4 y%,' nt- gg@ g ,% internal transactions. Plus, the utilities

~ ; ,_a,,ngm .z y9

' f.ae: M L! < ~ must establish an Internet-based system 1 s M, Ma sa to share m, format. ion about transmission

( M :;ssas g^

.AgM , t capacity and pricing with competitors.

% umsg cua., n,c; Ek[$$2Eg U-(;; In July, we filed an open-access tariff

m. r with the FERC so we can fully pursue a

,K j 'o"T~N power marketing transactions. We I , _, li U moved quickly to establish a separate, 1 .

8

/,.4*.n- - n ..nff. - g me fully functioning power, marketing

,~<w : .

~p' '

entity that is already producing results.

• Wholesale power sales grew 7 percent g,

, p' .

e+ -1 in 1996.

C. g 4 q:

!- 'a %Cd-4 ,

j y'

' 'x,,y. ' * ,

Q ., * ,

gfjuk Em - *y y ,-N g&y . ;a The Transmission Group's more aggressive power marketing program helpedincrease wholesale sales 7 percent.

I 11 __ _ . _ _ ._ - _ _ _ _ _ -

The Powerof Opportunity 7 , ,. , ,

_,,,.,,.m..

[. T . g .

. )T , "

lgl :

] ,

]

f:, [6 > ;jl } ggpf K g : -lJ,/

wly.,

1; Q

>, , ys<.h G

% y'>sy y & ;[ :p a y p-

7 --

l;;9 j J}

g .'.- , 3 s

f j'

p .j j .  :, ; 9

?.y '

n

.. a .

Our Enterprises Group is putting our ... b

'f core competencies and assets to work <

!.. [ -

in non-traditional areas of business. In i -

1996, the Enterprises Group established i i

p an important alliance with telecommuni-

[ h.

cations giant AT&T to build a highly ' Y

' / ,

['h sophisticated wireless telecommunica- 3 3 r.

.d.

tions network in Northeast Ohio and f -

[  !. 3.

western Penn91vania. l}

Centerior owns a 25-percent equity I -' ~ i[= ~

stake in AT&T PCS Cleveland. The A partnership has access to a license to wireless retocommunications represents an supply personal communications ser- to the Cleveland area. The Hrst commer. enormous opportunity for the Company cial offering of the service is expected sices (PCS). PCS is the next wave of in the first half of 1997, and the partner-portable telecommunications. offering ship expects to be profitable by 1998.

voice and data transmission that is more flexible, feature-filled and economical than cellular service.

The network will improve our internal communications and sene as a spring-board for Centerior to enter into the wholesale or retail telecommunications business. In 1996, the partnership began erecting telecommunications towers necessary to begin offering its services

- 15

The Power of Support r,

mm

_ ,~.

-w; r . sw - -

ec y n s uhu ,. :  :!R n V H V; s _

f 'L.x

[,f , pdO JN h @y l',d/iQf(';/ (j ; &n e T$9 mm 2 9 ',-ih[U w eO j,;?. q t[%k

- e' /R!,;

~ $

The Business Services Group worked g L / p /g.)*- yl),gj@M.

,#es ,,,

. p jl

.ff t;d. .p'-

4 g

~ ,

J.g-,dw-y.4,q 3 ;: ' 1 actively to improve operating efheten-

. , g', ,a; e

_ . . "U y'*] -

pg(g h)

1. j4<N

, j!

cies and reshape public perceptions of l

the Company, n %44.h b- i $ 2I[ -

@;-e,kMg:b r J

,' '.gdf)

ng; r ,11 -- {

3 .g 4, 1 , , +

w". j --

s

1. e'l' s -

"  ! M ifs @p ' D l ' ' ~,

In 1996. our supply chain management h: [ *

, 2 N k ..[k program to reengineer the way the rF ,_ J 'j. I  !

Company buys, delivers and stores

,tn f? - ..>

v ;9 f>q^

b51$ * '

g_ g; goods and services made great strides in inventory management. The effort - % %g.. .

4 ,g i

id i

reduced our owned inventory balance p D~. ,[

1 E

I r  : -

g" Ej i by $66 million, and will provide m' ,

i V*  ? tm l

j $7 million in annual property tax P" ,

.J. > rP"%-

-) 4

(

j

, savings in 1997 and beyond. L: . 4 -

.. f. ,W e j y, D" 1

The Group also initiated a vibrant,  ;, !- .' 6 t

% ,b, #

f_

energetic new advertising campaign [N- ~,. .

{ "a '

for the Company, "New Power to You,"  ![ '

' 9j.T' ' +

'N "

4 'S ,f that seeks to cement our position as hN,# N t

f. f"!

the electricity supplier of choice in the N ,  ; /

m ,k. _ ., ,.

9

'. 'i . i' Toledo and Cleveland markets. The

$N, : su-,

}-

"( #c  %.'

.' a;.

a ( j,

[ ,

adsertising has been well received v.

f >- ..

by consumers. -. .. tr )

3; ,

d' 5 i ]

J j]

~

h g W-% .

Our supply chain management program reengineered the way the Company buys, l

dehvers and stores goods and services, i saving the Company milhons of dollars I

in the process.

16

1 The Power of uanagement

• g g .. .n . y , .., .,.._ym.-.,

r ;i% PT(- W# + MMU #

Y l'D '

( 1,. T < ., J >l C

• 1' .. ..

7 m y.

lk ,

l! f ,, "

• wl l Q:: 1 ys The Administration Group guided our p, H ;iJ;;(g?  : -

\ , 9 fr.

(;. .,g: ,p,.,e,

+

){ gj . 7f,7b

^r -

-y;

price increase request to a successful I.

o -

,c ] .] ,

j y >

g p s ,.

completion in 1996, helping form a -

M j}gg; ' ,

9 m e , wh g . ( ;1Q j' ,t  ? )e 7 y strong h.nancial foundation for the

[ j me e > "y b ~

f-g

• {i -4 t t - ,

Company.  ; - a #

l p gs

, J ,

d-

<, 1 u , ;

t w Through its financial activities, the b' "

Group also helped reduce costs. Tax

y

?

-w, p- /

3 Q, , , ,., , ,~ , , ~

-[ -.

- an 4 ..

r~rg p:

j .,

.n L

g

. ,Ia reduction ideas saved the Company g  ?.:: e *

$4 million annually starting in 1997. #

ss  ;

f /-

[ a; u . _

. . . a , ,_

d

, j> , f %,e/-  ;

' ~

~ ':

[..

d.

s In .luly, we raised $150 million to '

m y [e y retire debt through the sale of securities j" M /GA

, , ,4

']

[

' *e

', 3 L $- E, Y $.N backed by the monthly electric bills

. " .s.' 1 f

owed to us by our customers. Most of ."

./ ,

~

'7:4 the net proceeds were used to retire #

a

, J,

.d a

higher-cost debt. The action, unusual p. 7 C p -

a a

for our industry but used regularly in 3

-h c. .

others, should save us more than $3 , qh .

D(y. <

..y .

~9'

-.- m~~

v

- t: -

~n_

million in annual interest payments. !w .T )

s {i i- '" .

w g;, :)

9

}  ;

g.4) (3 The Group is actively participating in ;g .m egyg., ; . 9 - .. . see.n cfforts in the state and national capitals l

~ '

2..

]'~

l[ l to reshape the electric utility industry. "- I ' -

In August, the Administration Group '

h7 } . . ,7 1

]

shared our vision of the future of the # '

2,3 /I

]

electric utility industry m Ohio t>y V .?

o.& nn

g.4 introducing "EnergyC/ mice" to the q

h ,

% ** j PUCO-sponsored Ohio Roundtable on l

5

.7.- . -

e q Competition in the Electric Industry.

"EnergyC/ mice" advocates that, as part b

ya. ', '~ .

l n

j- ..

}

1 F

,)

.A The Administration Group is playing an .] '

A achve role in reshaping the laws and r *

- f a

. , -f regulations governing our industry c.  ;

~ :w:--J I

l 17

l l

1 of the introduction of retail wheeling, Stranded costs and tax we need to achieve fair resolutions to reform: A closer look two key issues: stranded investment recovery and tax reform. (See Stranded costs. Currently, investor-owned accompanying story for more details.) electric utilities are essigned designated The Group is committed to providing service areas in Ohio and are required to l

a fair and equitable opportunity for all provide electric power for customers' current J employees to grow and contribute to and future energy needs. To raeet this the Company's future. It continued the , g g,, j implementation of a performance-based  !

blillons of dollars in generation, transmission management program to facilitate employee development. and distribution facilities.

wq g: r As the industry is deregulated and multiple "4.

{g 7

. .e . . ,

%e 9 uti!ity and non-utility power sources are made available, customers could choose n C : . 3

, , 1, yx '

l l' '

different suppliers, leaving behind - or

[] 4 ef, l,; ,,

p[' s-

.l., 7t

.g

- stranding -investments made by share

,. n ==  ?"

owners in order for the utilities to serve their L gg(q Ec p 7=a -g *. A _ a, T;'J .

customers' needs. Investor-owned electric utilities have met their obligation to serve, as

a. < %f 1 ,

Qy; required under the regulatory compact. That

., h- e

$h q >

p, w

compact is crumbling now, and retail compe-k, 1g . tition is coming. We accept that. But share

~

owners are entitled to a fair return on the 4 ;J; ,

t

. t investments they made under the old rules, q .n ,1 f ~'... ., Tax reform. Investor-owned electric utilities

, y in Ohio are charged higher tax rates than

,' T.,

~ n ..c

'r. similar companies in surrounding states and

• '4 municipally-owned electric utilities in the

'L m .. g . . state. Taxes take away money from utilities that would go to other uses, such as invest-

.__ u d . .

• " 9

• Utinties have spent bilhons of dollars to provide electric power for customers' current and future needs. investments that could be stranded situation seriousiy impedes the ability of unless the transition to a competitwe industry includes provisions for investor-owned utilities in Ohio to compete fair and equitable cost recovery in an open market and acts as a drag on economic growth in the State.

18

A M:ntg m:nt's Finrncini An lysis renewal before 1999. Following the renewals, the compa-Outlook rable percentage is 19% At > car-end 1996, 54% of our Strategic Plan industrial base rate revenues was under long-term contracts.

In early 1994, we created a strategic plan to achieve the Narthuest Ohio is recognized as one of the nation's twin goals of strengthening our financial condition and leading areas in job creation and economic growth. New improving our competitive position. To meet these goak, and expanded operations at businesses such as we seek to maximize share owner return, achieve profita.

l Delafoil/Phillips and Alcoa, as well as the development ble revenue growth, become a leader in customer satisfac.

I surrounding a new, major North Star BilP Steel facility, tion, build a winning employee team and attain are adding to our opportunities for revenue growth. In increasingly competitive supply costs. During 1996, the 1996, we gained commitments on 47 economic develop-third year of the eight-year plan, we made strong gains ment projects, representing almost $1i million in new and toward reaching some plan objectives but need significant retained annual base rate revenues and nearly 7,000 new improvement on others.

and retained jobs for Northern Ohio.

l A major step taken to reach the twin goals was our 1 Under the strategic plan, we are structured in six strategic agreement to merge with Ohio Edison Company (Ohio business groups to better focus on our competitiveness.

Edison) to form a new holding company called During 1996, we reduced employment from about 6,800 FirstEnergy Corp. (FirstEnergy). The proposed merger, to 6,200, below our goal of 6.300. Further reduction in our I

combined with good operating performance, our success-work force to about 5,800 is planned by year-end 1997.

ful price increase and the accelerated paydown of debt, We also plan to reduce expenditures for operation and resulted in a significant stock price gain, such that the maintenance activities (exclusive of fuel and purchased total return to our common stock share owners during power expenses) and capital projects from $954 million in 1996 was 33%. The merger is expected to better position i 1996 to approximately $900 million in 1997 by continuing  !

both companies to meet coming competitive challenges. to streamline operations. We will continue to reduce our Revenue growth is a key objective of r plan, from unit cost of fuel used for generating electricity, while pricing actions as well as market expansion. safely improving the operating performance of our genera-tion facilities.

In April 1996, The Public Utilities Commission of Ohio (PUCO) approved in full the $119 million price increases yeducing fixed financing costs is another primary objec- )

requested by our subsidiaries The Cleveland Electric tiv m strengthening our financial and competitive post-Illuminating Company (Cleveland Electric) and The t n. In 1996, we reduced our fixed obligations for debt, Toledo Edison Company (Toledo Edison) (collectively, pr:ferred stock and generation facilities leases (partially the Operatmg (.,.ompanies). The primary purpose of the otTset by the new accounts receivable secuntization) by increases was to provide additmnal revenues to recover all $227 million. See Notes 1(i) and 2. Interest expense and the costs of providing electne service, including deferred preferred dividends dropped $26 million. In the last three costs, and provide a fair retuin to our common stock share years, fixed obligations were reduced by $523 million owners. The additional revenues also provided cash t which is ahead of the schedule in our strategic plan to accelerate the redemption of debt and preferred stock. reduce these obligations by $1.3 billion by 2001, Kilowatt-hour sales to retail customers were virtually in 1996, we reported earnings per common share of $.82 unchanged ccmpared to 1995 results, while wholesale e mpared to $1.49 in 1995. The reported decrease masks sales increased by 6.8% from 1995 as a result of the good 5.05 per share increase in basic earnings from operations availability of our generating units and a more aggressive and a significant improvement in the quality of reported bulk power marketing effort. Adjusted for weather, how- earnings. The decline in reported earnings is primarily ever, kilowatt-hour sales to residential and commercial attributable to the delay in implementing our price customers increased by 1% and 1.7% respectively, from increase until late April, while we began at the end of 1995. 1995 to charge earnings for operating expenses and amor-tization of deferrals u hich the price increase was designed Another key element of our revenue strategy is to offer to recover. The price increase contributed approximately long-term contracts to large industrial customers who $47 million after tat or 5.32 per share, more cash to our l might otherwise consider changing power suppliers. Dur- earnings in 1996. In addition,1996 results included non-l ing 1996, we renewed and extended for as long as ten cash charges against earnings of $22 million after tax, or l years contracts with many of our large industrial custom- $.15 per share, for the disposition of inventory and write-ers, including the six largest. While this strategy has down of inactive production facilities. The full benefit of

! resulted in lower prices for these customers, in the long our $119 million price increase, substantia! reductions in L run, it is expected to maximize share owner value by operation and maintenance expenses and a continuing retaining our customer base in a changing industry. Prior decline in interest charges are expected to result in i to these renewals, 69% of our industrial base rate improvement in earnings and cash flow from operations in l (nonfuel) revenues under contract was scheduled for 1997.

l 19

Centerior Energy prior to the merFer and dividend action P;nding M:rg:r with Ohls Edis:n by FirstEnergy after such time will be determined by their On September 16, 1996, ue announced the merger with respective lloards of Directors. The merger agreement Ohio Edison in a stock-for-stock transaction. Our share limits the indicated annual dividends prior to the merger owners will receive 0.525 of a share of FirstEnergy com- to 5.80 per share of Centerior Energy common stock and mon stock for each share of Centerior Energy common $1.60 per share of Ohio Edison common stock. See stock owned, while Ohio Edison share owners will receive Capital Resources and 1.iquidity-Liquidity below.

one share of FirstEnergy common stock for each share of Vari us aspects of the merger are subject to the approval Ohio Edison common stock owned. FirstEnergy plans to f the Federal Energy Regulatory Comm,ssioni (FERC) account for the merger as a purchase in accordance with and other regulatory authorities. Common stock share generally accepted accounting principles. owners of Centerior Energy and Ohio Edison are expected We believe that the merger will create a company that is to vote on approval of the merger agreement on better positioned to compele in the electric utility industry March 27,1997. The merger must be approved by the than either we or Ohio Edison could on a stand-alone allirmative sotes of the share owners of at least two-thirds basis, enhancing long-term share owner value and provid- of the outstanding shares of Ohio Edison common stock ing customers with reliable service at more stable and and a majority of the outstanding shares of Centerior competitive prices. Energy common stock. The merger is expected to be ef-l fective in late 1997.

The combination of Centerior Energy and Ohio Edison is a natural alliance of two companies with adjoining service ,

areas who already share many major generating units. FirstEnergy Rate Plan FirstEnergy expects to reduce costs, maximize efliciencies On January 30,1997, the PUCO approved a Rate Reduc-and increase management flexibihty m order to enhance tion and Economic Development Plan (Plan) for the revenues, cash flows and earnings and be a more efTective Operating Companies to be efTective upon the consum-competitor in the increasingly competitive electric utility mation of the merger. The Plan would be null and void if industry. the merger is not consummated. The rate order granting FirstEnergy anticipates the merger will result in net the April 1996 price increase will remain in full force and I savings for the combined companies of approximately effect during the pendency of the merger or if the merger l

$1 billion over ten years,in addition to the impact of cost is not consummated.

reduction programs underway at both companies. The The Plan calls for a base rate freeze through 2005 (except additional savings, which we believe could not be to comply with any significant changes in environmental, ach,eved i without the merger, wilI result primarily from regulatory or tax laws), followed by an immediate the reduction of duplicative functions and positions, pmt $310 million (which represents a decrease of approxi-dispatch of generating facihties and procurement etheien- mately 15% from current levels) base rate reduction in cies. % c expect reductions m labor costs to comprise _ 2006; interim reductions beginning seven months after slightly over half the estimated savings. In addition' consummation of the merger of $3 per month increasing FirstEnergy expects to reduce system-wide debt by at to $5 per month per residential customer by July 1,2001; least $2.5 billion through the year 2000, yielding addi- $105 m.lh.on i for economic development and energy effi-tional long-term savings in the form of lower interest ciency programs: carnings caps for regulatory purposes for

• E* "* ' the Operating Companies; a commitment by FirstEnergy The Operating Companies' share of the $1 billion of for a reduction, for regulatory accounting purposes, in savings will permit them to reduce prices to their custom- nuclear and regulatory assets by the end of 2005 of at ers as discussed below under FirstEnergy Rate Plan. least $2 billion more than it otherwise would be, through Absent the merger, the Operating Companies plan to revaluing facilities or accelerating depreciation and amor-achieve savings as well, but at a lower level, which is tization; and a freeze in fuel cost factors until Decem-expected to allow prices to be frozen at current levels until ber 31,2005, subject to PUCO review at year-end 2002 at least 2002 despite inflationary pressures. and annual inflation adjustments. The Plan permits the Operating Companies to dispose of generating assets Ohio Edison currentiv has an indicated annual common

~

su ect to notice and possible PUCO approval, and to stock dividend of $1.50 per share and Centerior Energy enter into associated power purchase arrangements.

currently has an indicated annual common stock dividend of $.80 per share. FirstEnergy expects that its dividend at Total price savings for the Operating Companies' custom-the time of consummation of the merger will be at least ers of about $391 million are anticipated over the term of equivalent to an indicated annual dividend of $1.50 per the Plan, as summarized below, excluding potential eco-share of Ohio Edison common stock and $.7875 per share nomic development benefits and assuming that the of Centerior Energy common stock. Dividend action by merger takes place on December 31,1997.

20

[

_ Year

^""'

,993 ("$"[ remainder of their business, they would be required to write ofTtheir remaining regulatory assets and measure all 1999f $3 2000_ n other assets for impairment. For a discussion of the y 43 y

criteria for complying with SFAS 71, see Note 7(a).

2003 April 1996 Rate Order f

~y 59 y In its April 1996 order, the PUCO granted price increases rw totaling $119 million in annualized revenues to the Oper-m ating Companies. The Operating Companies intend to Under the Plan's earnings cap. the Operating Companies freeze rates at existing levels until at least 2002, although will be permitted to carn up to an 11.5% return on they are not precluded from requesting further price common stock equity for regulatory purposes during cal- increases. In the order, the PUCO provided for recovery endar years prior to 2000,12% during calendar years 2000 of all regulatory assets in the approved rates, and the and 2001, and 12.59% during calendar years 2001Operating through Companies continue to comply with the provi-2005. The regulatory return on equity is generallysions of SFAS 71.

expected to be lower than the return on equity calculated in connection with its order, the PUCO recommended for financial reporting purposes due to the calculation that the Operating Companies write down certain assets methodology defined by the Plan and, as discussed in the for regulatory purposes by an aggregate of $1.25 billion next paragraph, anticipated dilTerences in accounting forthrough 2001. If the merger is consummated, we believe the Plan for financial reporting versus regulatory purposes.

if for any calendar year the regulatory return on equity acceleration of $2 billion of costs under the Plan would fully satisfy this recommendation. We agree with the exceeds the specified level, the excess will be credited t concept of accelerating the recognition of costs and the customers, first through a reduction in Percentage of recovery of assets as such concept is consistent with our Income Payment Plan (PIPP) arrearages and then as a strategic objective to become more competitive. However, credit to base rates. PIPP is a deferred payment program for low-m, come residentral customers. we believe that such acceleration must also be consistent with the reduction of debt and the opportunity for Center-The Plan requires, for regulatory purposes, a revaluation ior Energy common stock share owners to receive a fair of or an accelerated reduction in the Operating Compa. return on their investment. Consideration of whether to nies' investment in nuclear plant and certain regulatory implement a plan responsive to the PUCO's recommen-assets (excluding amounts due from customers for future dation to revalue assets by $1.25 billion is pending the merger with Ohio Edison.

federal income taxes) by at least $2 billion by the end of 2005. Only a portion of the $2 billion of accelerated costs Notwithstanding the pending merger with Ohio Edison is expected to be charged against earnings for financial and discussions with regulators concerning the etTect of reporting purposes by 2005.

the Plan on our nuclear generating assets, we believe it is FirstEnergy believes that the Plan will not provide for the reasonable to expect that rates will be set at levels that full recovery of costs and a fair return on investment wp rec ver all current and anticipated costs associated associated with the Operating Companies' nuclear opera- with our nuclear operations, including all associated regu-tions. Pursuant latory assets, and such rates can be charged to and to the PUCO's order, FirstEncrg~y is required to submit to the PUCO staff the regulatoryevaluati c llected from customers. If there is a change in our n

accounting and cost recovery details for implementing the f the competitive environment, regulatory framcwork or other factors, or if the PUCO sigmficantly Plan. After approval of such details by the PUCO staff, FirstEnergy expects that the Operating Companies willreturn reduces the value of our assets or reduces the approved discontinue the application of Statement of Financial n c mm n stock equity of 12.59% and overall rate Accounting Standards (SFAS) 71 for their nuclear oper- f retum of 10.06% or both, for future regulatory pur-ations if and when consummation of the merger becomes p ses, the Operating Compames may be required to record material charges to earnings.

probable. The remainder of their business is expected to continue to comply with the provisions of SFAS 71. At Merger of the Operating Companies the time the merger is probable, the Operating Compa.

nies would be required to write olicertain of their regula. In October 1996, the FERC authorized the merger of tory assets for financial reporting purposes. The write-otT Toledo Edison into Cleveland Electric. The merger agree-amounts uould be determined at that time. FirstEnergy ment between Centerior Energy and Ohio Edison requires estimates the write-oft will be approximately $750 mil. the approval of Ohio Edison prior to consummation of the lion. Under the Plan, some or all of this write-oft cannot proposed merger of the Operating Companies. Ohio Edison has not yet made a decision.

be applied toward the $2 billion regulatory commitment discussed above. For financial reporting purposes, nuclear Competition generating units are not expected to be impaired. If events

) cause one or both Operating Companies to conclude they Structural changes in the electric utility industry from no longer meet the criteria for applying SFAS 71 for theactions by both federal and state regulatory bodies are continuing to place downward pressure on prices and

- 21

~ --- ~ _ - _

business. Through aggressive door-to-door campaigns, we increase competition for customers. Our nuclear plant have been successful in limiting the number of conver-licenses have required open-access transmission for our sions of Cleveland Electric customers to Cleveland Public wholesale customers for 20 years. More recently, the Power (CPP) under its ongoing expansion plan. CPP is Federal Energy Policy Act of 1992 initiated broader the largest municipal supplier in our service areas. In access to utility transmission systems and, in 1996, the 1996, we reached agreements to serve a number of large FERC adopted rules relating to open-access transmission Cleveland commercial customers, including some previ-services. The open-access rules require utilities to deliver ously served by CPP.

power from other utilities or generation sources to their wholesale customers at nondiscriminatory prices. In the Toledo Edison service area, all existing customers in the City of Clyde now have the right to choose between A number of states have enacted transition legislation the municipal supplier and Toledo Edison, as a result of a which provides for introduction of competition for retail November 1996 referendum overturning a Clyde ordi-f electric business and recovery of stranded investment.

I nance limiting such choice. In Toledo, City Council Several groups in Ohio are studying the possible introduc- funded a consultant's study of alternatives to Toledo tion of retail wheeling and stranded investment recovery. Edison service. Municipal expansion activity continues in I etail wheeling occurs when a customer obtains power areas surrounding several towns serviced by municipal from a utility company other than its local utility. The systems in the Toledo Edison service area. We continue to term " stranded investment" generally refers to fixed costs pursue legal remedies to halt illegal municipal expansion approved for recovery under traditional regulatory meth- in both service areas.

ods that would become unrecoverable, or " stranded", as a result of legislative changes which allow for widespread Our merger with Ohio Edison and the beneh.ts of the Plan competition. The PUCO is sponsoring discussions among to our customers are expected to better position us to deal a group of business, utility and consumer interests to with the structural changes taking place in the mdustry explore ways of promoting competitive options without and to improve our competitive position with respect to unduly harming the interests of utility company share mumcip lization.

owners or customers. The PUCO also has introduced two pilot projects, both intended as initial steps to introduce Nuclear Operations competitive elements into the Ohio electric utility We have interests in three nuclear generating units-business. Davis-Besse Nuclear Power Station (Davis-Besse), Perry Nuclear Power Plant Unit 1 (Perry Unit 1) and Beaver io A bill to restructure the electnc utih.ty mdustry m Oh.

has been mtroduced m the Ohio llouse of Representa- Valley Power Station Unit 2 (Beaver Valley Unit 2)-

tives. A bipartisan committee from both legislative houses and operate the first two.

has been formed to study the issue. We presented our All three units were out of service temporarily for refuel-model for customer choice, called Energy Choice, to the ing during 1996; thus, plant availability factors for Davis-PUCO discussion group in August 1996. Under our Besse, Perry Unit I and Beaver Valley Unit 2 were 85%

model, full retail competition should be introduced by 79% and 70% respectively, for 1996. The 1994-1996 2002, but two essential elements, recovery of stranded availability factors for the units were 91% 73% and 85%

investment an 1levelization of tax burdens among energy for Davis-Besse, Perry Unit I and Beaver Valley Unit 2, suppliers, must be resolved in the interim to assure share respectively. The comparable industry averages for a ouners' recovery of and a fair return on their investments. three-year period (as of August 31,1996) are 82% for Although competitive pressures are increasing, the trad.,-

i pressurized water reactors such as Davis-Besse and Bea-tional regulatory framework remains in place and is ver Valley Unit 2 and 78% for boiling water reactors such expected to continue for the foreseeable future. We can- as Perry Unit 1. Davis-Besse established a plant record with its 509-day continuous run at or near full capacity not predict when and to what extent retail whccling or other forms of cotnpetition will be allowed. We believe before shutting'down for its scheduled refueling outage in that pure competition (unrestricted retail wheeling for all April 1996.

customer classifications) is at least several years away and A significant part of our strategic plan involves ongoing that any transition to pure competition will be in phases. efTorts to increase the availability and lower the cost of The FERC and the PUCO have acknowledged the need production of our nuclear units. In 1996, we continued our to provide at least partial recovery of stranded investment progress toward increasing long-term unit availability as greater competition is permitted and, therefore, we while continuing to lower production costs. The goal of believe that there will be a mechanism deseloped for the our nuclear improvement program is to replicate Davis-recovery of at least some stranded investment. Ilowever, Besse's operational excellence and cost reduction gains at due to the uncertainty involved, there is a risk in connee- Perry Unit 1, while improving performance ratings.

tion with the introduction of retail wheeling t . wme of .

our assets may not be fully recovered Our nuclear units may be impacted by activities or events beyond our control. Operating nuclear units have exper-Competition from municipal d .tric suppliers for retail ienced unplanned outages or extensions of scheduled business in both Operating Companies' service areas is outages because of equipment problems or new regulatory producing both favorable and unfavorable results in our 22

requirements. A major accident at a nuclear facility ing facilities to meet demand for electric service and to anywhere in the world could cause the Nuclear Regula- comply with government regulations. Our cash construc-tory Commission to limit or prohibit the operation or tion expenditures totaled $205 million in 1994, $201 mil-licensing of any domestic nuclear unit. If one of out lion in 1995 and $151 million in 1996. Our debt and nuclear units is taken out of ser ice for an extended period preferred stock maturities and sinking fund requirements for any reason, including an accident at such unit or any totaled $119 million in 1994,$374 million in 1995 and other nuclear facility, we cannot predict whether regula- $235 million in 1996. In addition, we optionally redeemed tory authoritics would impose unfavorable ' rate treatment. $525 million of securities in the 1994-1996 period, includ-Such treatment could include taking our affected unit out ing $237 million of tax-exempt issues refunded in 1995.

of rate base, thereby not permitting us to recover our investment in and earn a return on it, or disallowing In July 1996, Centerior Funding Corporation (Centerior certain construction or maintenance costs. An extended Funding), a wholly owned subsidiary of Cleveland Elec-outage coupled with unfavorable rate treatment could tric, issued $i50 million in AAA-rated accounts receiva-have a material adverse elTect on our financial condition, ble-backed investor certificates due in 2001 with an cash flows and results of operations. Premature plant interest rate of 7.2%. Net proceeds from the accounts closings could also have a material adverse effect on our receivable securitization were used to redeem higher-cost financial condition, cash flows and results of operations securities and for general corporate purposes.

because the estimated cost to decommission a plant As a result of these activities, the embedded cost of the exceeds the current fundmg m the decommissioning trust. .

Operatmg Compam.es debt at the end of 1996 deci.med to H zardous Waste Disposal Sites 8.92% versus 8.98% in 1995 and 9.12% in 1994.

The Operating Companies have been named as "poten. We renewed a $125 million revolving credit facility in tially responsible parties" (PRPs) for three sites listed on May 1996 for a one-year term. In 1996, portions of our the Superfund National Priorities List (Superfund List) nuclear fuel lease financing vehicles matured: $84 million and are aware of their potential involvement in the ofintermediate-term notes in September and a $150 mil-cleanup of several other sites. Allegations that the Oper- lion letter of credit supporting short-term borrowing in ating Companies disposed of hazardous waste at these October. These facilities were replaced by $100 million of sites, and the amount involved, are often unsubstantiated intermediate-term notes and a $100 million two-year and subject to dispute. Federal law provides that all PRPs letter of credit. The net reduction in the facility size for a particular site be held liable on a joint and several results from lower nuclear fuel financing requirements.

basis. If the Operating Companies were held liable for 100% of the cleanup costs of all the sites referred t above, the cost could be as high as $415 million. Ilow-1997 and Beyond Cash Requirements ever, we believe that the actual cleanup costs will be Our anticipated 1997 cash requirements for construction substantially lower than $415 million, that the Operating are $110 million for Cleveland Electric and $61 million Companies' share of any cleanup costs will be substan- for Toledo Edison. Debt and preferred stock maturities tially less than 100% and that most of the other PRPs are and sinking fund requirements are $145 million for Cleve-financially able to contribute their share. The Operating land Electric and $51 million for Toledo Edison. Of these Companies have accrued a liability totaling $10 million at amounts, $70 million for Cleveland Electric and $10 mil-December 31, 1996 based on estimates of the costs of lion for Toledo Edison are tax-exempt issues secured by cleanup and their proportionate responsibility for such first mortgage bonds and subject to optional tender by the j costs. We believe that the ultimate outcome of these owners on November 1,1997, which we expect to replace i matters will not have a material adverse efTect on our with similar issues at substantially lower interest rates.

financial condition, cash flows or results of operations. We expect to meet remaining requirements with internal A new Statement of Position issued by the Accounting cash generation and cash resenes. We also expect to be Standards Executive Committee of the American Insti- able to optionally redeem more debt and preferred stock tute of Certified Public Accountants, Inc. elTective Janu- in 1997 than we did m, 1996.

ary 1,1997 provides guidance on the recognition and We expect to meet all of our 1998-200i cash require-disclosure of environmental remedi n liabilities. Adop-ments with internal cash generation. Estimated cash tion of the statement in 1997 is not material adverse effect on our finan(pected to have requirements for our construction program during this ual condition or a period total $496 million for Cleveland Electric and results of operations.

$213 million for Toledo Edison. Debt and preferred stock maturities and sinking fund requirements total $445 mil-Crpffal Resources and Liquidity lion and $207 million for Cleveland Electric and Toledo 1994-1996 Cash Requirements Edison, respectively, for the same period. If economical, additional securities may be redeemed with funding We need cash for normal corporate operations (including expected to be provided through internal cash generation.

the payment of dividends), retirement of maturing securi- External funding may be required to support investments ties, and an ongoing program of constructing and improv- in nonregulated business opportunities.

23

Consummation of the merger with Ohio Edison is The Operating Companies can make cash available to expected to reduce the Operating Companies' cash con- fund Centerior Energy's common stock dividends by struction requirements and improve their ability to paying dividends on their respective common stock, w hich redeem fixed obligations. is held solely by Centerior Energy. Federal law prohibits the Operating Companies from paying dividends out of Liquidity capital accounts. Each Operating Company has since 1993 declared and paid preferred stock dividends, and Net cash flow from operating activities in 1996 was Cleveland Electric has also declared and paid common significantly increased from 1995 by implementation of stock dividends, out of appropriated current net income the price increases efTective in April 1996. Most of the net included in retained earnings. At the times of such decla-proceeds from our accounts receivable securitization of rations and payments, each Operating Company had a

$143 million were used to redeem other higher-cost deficit in its retained earnings. At December 31, 1996, securities, producing net savings in our overall cost of Cleveland Electric and Toledo Edison had $130 million borrowing. In 1996, we reduced our fixed obligations for and $223 million, respectively, of appropriated retained debt, preferred stock and generation facilities leases (par- earnings for the payment of dividends. Toledo Edison also tially olTset by the new accounts receivable securitization) has a provision in its mortgage upplicable to approxi-by $227 million. At year-end 1996, we had $138 million in mately $94 million of outstanding first mortgage bonds cash and temporary cash investments, down from $179 ($31 million of which mature in August 1997) that million at year-end 1995. requires common stock dividends to be paid out of its Additional first mortgage bonds may be issued by the ~

total balance of retained earnings, which had been a Operating Companies under their respective mortgages deficit from 1993 through November 1996.

on the basis of property additions, cash or refundable first As part of a routine audit, the FERC is considering a mortgage bonds. If the applicable interest coverage test is statement which it requested and received from Cleveland met, each Operating Company may issue first mortgage Electric supporting the payment of dividends out of bonds on the basis of property additions and, under appropriated current net income included in retained certain circumstances, refundable bonds. At Decem-earnings while total retained earnings were a deficit. A ber 31,1996, Cleveland Electric and Toledo Edison would s milar request has been made of Toledo Edison. At have been permitted to issue approximately $666 million December 31, 1996, Cleveland Electric's retained earn-and $148 milhon of additional first mongage bonds, ings deficit was $276 million and Toledo Edison's total respectively. FirstEnergy has not decided whether t retained earnings were $5 million. The final disposition of apply purchase accountmg to the Operating Companies if this issue is a factor expected to be considered by the merger with Ohio Edison is completed.1f such

, FirstEnergy in deciding whether to apply purchase accounting is applied to the Operatmg Compam,es, their accounting to the Operating Companies, one efTect of first mortgage bond capacities would be adversely which would be to reset delicit retained earnings to zero.

alTected.

If the merger is not consummated or if FirstEnergy Cleveland Electric is able to issue preferred and prefer. determines not to apply purchase accounting to the Oper-ence stock and Toledo Edison is able to issue preference ating Companies, the Operating Companies intend to stock. Centerior Energy may raise funds through the sale continue to support their position and pursue all available of common stock under various employee and share alternatives to allow them to continue the declaration and owner plans. payment of dividends.

The Operating Companies have $273 million in financing vehicles to support their nuclear fuel leases, $83 million of Results of Operations uhich mature in 1997. Replacement financing for the 1996 vs.1995 maturing issues may not be needed in 1997. We plan to renew the $125 million revolving credit facility which ~

Factors contributing to the 1.5% increase in 1996 operat-matures in May 1997. ing revenues are as follows:

Millions Current credit ratings for the Operating Companies are as Increase (Deercasci in oneratine Resenues or Donars follows: Base Rates 5 62 f{dar.,

KWil Sales Volurne and Mit (30)

Corporation Ser ice. Inc. Wholesale Revenues iI Fuel Cost Recovery Revenues (8) l'irst mortgage bonds HH Ha2 Miscellaneous Revenues J Subordmate debt for Clescland Liectric_ H+ Ba3 Total M Subordmate debt for Toledo Edison H& HI Preferred stock H b~'

rily from the April 1996 rate order issued by the PUCO Following the FirstEnergy merger announcement, both for the Operating Companies as discussed under Outlook-rating agencies placed the Operating Companies'securi- April 1996 Rate Order and in Note 7(b). Renegotiated ties on credit watch with positive implications. contracts for certain large industrial customers resulted in N

a decrease in base revenues which partially offset the Interest charges and preferred dividend requirements etTect of the general price increase. For the fourth year in decreased in 1996 because of the redemption of securities a row, industrial kilowatt-hour sales increased. The and refundings at favorable terms in 1996 and 1995.

increase in 1996 was 0.9%, as increased sales to petroleum refineries, large chemical industry customers and the 1995 vs.1994 broad-based, smaller mdustrial customer group were par-tially ofTset by fewer sales to large automotive manufac- Factors contributing to the 3.9% increase in 1995 operat-turing and steel industry customers. Commercial ing revenues are as follows:

kilowatt-hour sales increased only 0.1% and residential Mihns kilowatt-hour sales decreased 1.7% primarily because of increase < Decrease) in oneratine Revenues or Dotiars the cooler summer weather in 1996. On a weather- Kwil sales volume and Mix s81 normalized basis, residential and commercial sales Wholesale Revenues 13 increased 1% and 1.7%, respectively. Other sales f uel Cost Recmery Revenues 9 increased 3.8% as a 6.8% increase in wholesale sales was * """ " ' " " " '" $

partially ofTset by a 5.2% decrease in sales to pubh. c Total E authorities. Good availability of our generating units and a Industrial kilowatt-hour sales increased 0.8% in 1995, but more aggressive bulk power marketing efTort helped sales grew 2.2% excluding reductions at two low-margin increase wholesale sales. Lower 1996 fuel cost recovery steel producers (representing 5% of industrial revenues).

revenues resulted from a decrease in the fuel cost factors Residential and commercial kilowatt-hour sales increased for Cleveland Electric. The weighted average of these fuel 3.5% and 2.8%, respectively, primarily because of the hot cost factors decreased 3% for Cleveland Electric but summer w eather, although there was about 1%

increased 1% for Toledo Edison. nonweather-related growth in commercial kilowatt-hour For 1996, operating revenues were 32% residential,30%

sales. Other sales increased 26% because of a 43%

increase in wholesale sales due principally to the hot commercial, 30% industrial and 8% other, and kilowatt-summer and good availability of our generating units.

hour sales were 23% residential, 25% commercial, 40%

Weather accounted for approximately $38 million of the industrial and 12% other. The average prices per kilowatt-hour for residential, commercial and industrial customers $61 million increase in 1995 base rate revenues. Higher 1995 fuel cost recovery revenues resulted from an increase were i1.38,9.94 and 6.33 cents, respectively.

in the fuel cost factors for Cleveland Electric. The weighted average of these fuel cost factors increased 7%

Operatmg expenses mereased 5.8% m. 1996. The cessation of the Rate Stabihzation Program deferrals and the com ' for Cleveland Electric but decreased 6% for Toledo Edison

• mencement of their amortization in December 1995 resuhed in the decrease in deferred operating expenses. For 1995, operating revenues were 32% residential, 30%

See Note 7(d). Depreciation and amortization expenses commercial, 31% industrial and 7% other, and kilowatt-increased primarily because of a $12 million net increase hour sales were 23% residential, 25% commercial, 40%

in depreciation related to changes in depreciation rates, as industrial and 12% other. The average prices per kilowatt-discussed in Note 1(d), and the cessation of the acceler- hour for residential, commercial and industrial customers ated amortization of unrestricted investment tax credits uere i1.02,9.70 and 6.39 cents, respectively. The changes under the Rate Stabilization Program, which was from 1994 were not significant.

reported in 1995 as a $10 million reduction of deprecia-tion. Other operation and maintenance expenses in 1996 Operating expenses increased 4.5% in 1995. Fuel and included a $23 million one-time charge for the disposition purchased power expenses increased as higher fuel ofinventory as part of a reengineering of the supply chain expense was partially ofTset by lower purchased power process. Reengineering the supply chain process increases expense. The higher fuel expense was attributable to the use of technology, conso:idates warehousing and uses increased generation and more amortization of previously just-in-time purchase and delivery. Federal income taxes deferred fuel costs than the amount amortized in 1994.

decreased as a result of lower pretax operating income. The higher other operation and maintenance expenses resulted primarily from charges for an ongoing inventory A nonoperating loss resulted in 1996 primarily from reduction program and the recognition of costs associated Toledo Edison's $11 million write-down of two inactive with preliminary engineering studies. Federal income production facilities, as discussed in Note 14, and merger- taxes increased as a result of higher pretax operating related expenses. The deferral of carrying charges related income. Taxes, other than federal income taxes, increased to the Rate Stabilization Program ended in November primarily due to property tax increases resulting from 1995. The federal income tax credit for nonoperating plant additions, real estate valuation increases and a income increased in 1996 accordingly. nonrecurring tax credit recorded in 1994.

25

Managsmont's Statomont Board is also responsible for making changes in manage-of Rosponsibility for ment or independent public accountants if needed.

Financial Statements The Board has appointed an Audit Committee, comprised The management of Centerior Energy Corporation is entirely of outside directors, which met two times in 1996.

responsible for the consolidated financial statements in The Committee recommends annually to the Board the this Annual Report. The statements were prepared in firm of independent public accountants to be retained for accordance with generally accepted accounting principles. the ensuing year and reviews the audit approach used by Under these principles, some of the recorded amounts are the accountants and the results of their audits. It also estimates which are based on an analysis of the best oversees the adequacy and efTectiveness of our internal information available, accounting controls and ensures that our accounting sys-We maintain a system of internal accounting controls tem pr duces financial statements which fairly present designed to assure that the financial records are substan- ur fin ncial position.

tially complete and accurate. The controls also are designed to help protect the assets and their related records. We structure our control procedures such that their costs do not exceed their benefits.

Terrence G. Linnert Our internal audit program monitors the internal account. Senior Vice President, ing contrels. This program gives us the opportunity to Chief financial Oficer assess the adequacy and effectiveness of existing controls and General Counsel and to identify and institute changes where needed. In .

addition, an audit of our financial statements is conducted by Arthur Andersen LLP, independent public account-

[-

ants, whose report appears below.

E. Lyle Pep.m Our Board of Directors is responsible for determining Controller and whether management and the independent public Chief Accounting Oficer accountants are carrying out their responsibilities. The Report of Independent or material misstatement. An audit includes examining, Public Accountants on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also To the Share Owners and .

meludes assessing the accounting principles used and Board of Directors of signif cant estimates made by management, as well as Centerior Energy Corporation:

evaluating the overall financial ste uent presentation.

We have audited the accompanying consolidated balance We believe that our audits provide a reasonable basis for sheet and consolidated statement of capitalization of our opinion.

Centerior Energy Corporation (an Ohio corporation) and in our opinion, the financial statements referred to above subsidiaries as of December 31,1996 and 1995, and the present fairly, in all material respects, the financial posi-related consolidated statements of income, retained earn-tion of Centerior Energy Corporation and subsidiaries as ings and cash flows for each of the three years in the of December 31,1996 and 1995, and the results of their period ended December 31,1996. These financial state-operations and their cash flows for each of the three years ments are the responsibility of the Company's manage-in the period ended December 31, 1996, in conformity ment. Our responsibility is to express an opinion on these with generally accepted accounting principles.

financial statements based on our audits.

We conducted our audits in accordance with generally &dedN/ 2 accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable Cleveland, Ohio assurance about whether the financial statements are free February 14,1997 l 26

income Statement ccnicrive encra core >razian ans sussistarics For the years ended December 31.

1996 1995 1994 (millions of dollars, except per share amounts)

Operating Retenues $2,DJ $2.516 L2MJ)_

Operating Espenses Fuel and purchased power 465 465 442 Other operation and maintenance 635 617 595 Generation facilities rental expense, net 159 160 160 Total operation and maintenance 1,259 1,242 1,197 Depreciation and amortization 304 281 278 Taxes, other than federal income taxes 320 322 309 Amortization of deferred operating expenses, net 43 (53) (55)

Federal income taxes 111 135 114

_2 031 _L922 1.843 Operating income

__fl6 589 578 Nonoperating income (Loss)

Allowance for equity funds used during construction 3 3 5 Other income and deductions, net (17) 6 8 Deferred carrying charges 43 40 Federal income taxes-credit (expense) 9 (5) (6)

(5) 47 47 income Before Interest Charges and l' referred Disidends 511 636 625 .-

Interest Charges and I' referred Diiidends Debt interest 337 358 361 Allowance for borrowed funds used during construction (3) (3) (6)

Preferred dividend requirements of subsidiaries 56 61 66 390 416 421 Net income $ 121 $ 220 $ 204 Aicrage Number of Common Shares Outstanding (millions) 14R 0 14R.0 147.8 Earnings l'er Common Share

$ .R2 $ l.49 $ 1.3R Diiidends Declared Per Common Share $ R0 $ 80 $ .R0 Retained Earnings For the years ended December 31.

1996 1995 1994 (millions of dollars)

Retained Earnings (Deficit) at Beginning of Year $(336) $(438) $(523)

Additions Net income 121 220 204 Deductions Common stock dividends (118) (l18) (118)

Other, including preferred stock redemption expenses of subsidiaries (1) -

(1)

Net increase 2 102 85 Retained Earnings (Deficit) at End of Year

$(134) $(336) $(438)

The accompanying notes are an integralpart of these statentents.

l 27

Balance Sheet December 31.

1996 1995 (millions of dollars)

ASSETS l'roperty, I'lant and Equipment Utility plant in service $ 9,867 $ 9,768 Less: accumulated depreciation and amortization 3.272 3.016 6,595 6,732 Construction work in progress 79 101 l 6,674 6,833 Nuclear fuel, net of amortization 189 200 Other property, less accumulated depreciation 89 102 6.952 7,135 Current Assets Cash and temporary cash investments 138 179 Amounts due from customers and others, net 201 223 Unbilled revenues 12 100 Materials and supplies, at average cost Owned 85 151 Under consignment 34 -

Taxes applicable to succeeding years 250 255 Other 24 18 744 926 Regulatory and Other Assets Regulatory assets 2,278 2,375 Nuclear plant decommissioning trusts 140 114 investment in partnership 23 -

Other 73 93 2,514 2.582 Total Assets $10.210 $10.643 The accompanying notes are an integral part of this statement.

28 l

Centerior Energy Corporation andSubsidiaries December 31.

1996 1995 l (millions of dollars)

CAPITALIZATION AND LIABILITIES Capitalization Common stock equity Preferred stock

$ 1,987 $ 1,984 With mandatory redemption provisions 189 220 Without mandatory redemption provisions -

Long-term debt 448 451 3.444 3 734

__L0_68 6.389 Current Liabilities current portion oflong-term debt and preferred stock 196 235 Current portion of nuclear fuel lease obligations Accounts payable 88 95 Accrued taxes 138 153 Accrued interest 389 374 Other 75 83 86 87 972 1,027 Deferred Credits and Other Liabilities Unamortized investment tax credits 252 263 Accumulated deferred federal income taxes 1,877 1,875 Unamortized gain from Bruce Mansfield Plant sale 475 499 Accumulated deferred rents for Bruce Mansfield Plant and Beaver Valley Unit 2 138 Nuclear fuel lease obligations 145 123 137 Retirement benefits Other 184 179 121 129 Total Capitalization and Liabilities ),170 3 227

$ 10.210 $10.643 29

1 cc,anivr u n o curiwraav,, a,a s+uiarics Cash Flows For the years ended December 31.

1996 1995 1994 (millions of dollars)

Cash Flows from Operating Actisities (I) $ 204

$ 121 $ 220 Net income Adjustments to Reconcile Net income to Cash from Operating Activities: 278 304 281 Depreciation and amortization 72 95 42 Deferred federal income taxes (3) (7) 31 ,

Unbilled revenues 6 17 (17)

Deferred fuel (40)

Deferred carrying charges (43) 79 125 98 Leased nuclear fuel amortization (55)

Amortization of deferred operating expenses, net 43 (53)

(3) (3) (5)

Allowance for equity funds used during construction 10 Changes in amounts due from customers and others, net (10) (12) 143 - -

Net proceeds from accounts receivable securitization 17 32 -

Changes in materials and supplies (15) 9 (44)

Changes in accounts payable Changes in working capital affecting operations 6 (10) -

(18) 4 14 Other noncash items 365 617 39)

Total Adjustments 738 61i 569 Net Cash from Operating Activities Cash Flows from Financing Actiiities (2) 77

- 542 First mortgage bond issues - - 12 Common stock issues (214)

Maturities, redemptions and sinking funds (363) (683)

(90) (102) (110)

Nuclear fuel lease obligations (118) (118) (118)

Common stock dividends paid Premiums, discounts and expenses (l) (17) (l)

Net Cash from Financing Activities (572) (378) (354)

Cash Flows from Imesting Actisities (2)

(151) (201) (205)

Cash applied to construction (3) (3) (6)

Interest capitalized as allowance for borrowed funds used during construction Contributions to nuclear plant decommissioning trusts (22) (24) (26)

Investment in partnership (23) - -

(8) (12) (17)

Other cash applied Net Cash from Investing Activities (207) _G40) (254)

._L4_l) (7) (39)

Net Change in Cash and Temporary Cash Imestments 179 186 225 Cash and Temporary Cash Imestments at Ileginning of Year

$ 138 $ 179 $ IR6 Cash and Temporary Cash Imestments at End of Year

$ 328 $ 3nn 5 Mn (I) Interest paid (net of amounts capitali:ed)

Federal i.scome taxes paid S 46 $ R9 $ 6 (2) Increases in Nuclear Fuel and Nuclear Fuel Lease Obligations in the Balance Sheet resulting from the noneash capitali:ations under nuclearfuel agreements are excludedfrom this statement.

The accompanying notes are an integral part of this statement.

30

Statement of Capitaiization concriur tnc,cy curmrazio,, ans sussisiaries December 31.

1996 1995 (millions of dollars)

COMMON STOCK EQUITY:

Common shares, without par value (stated value of $357 million for both 1996 and 1995):

180 million authorized; 148 million (excluding 2.7 million shares in Treasury) outstanding in both 1995 and I994 - $2,321 $2,320 Retained earnings (deficit)

(334) (336)

Total Common Stock Equity 1.9R7 1.984 Current 1996 Shares Call Price

_putstanding Per Sharc PREFERRED STOCK:

Cle$ eland Elcetric Without par value, 4,000,000 preferred shares authorized Subject to mandatory redemption:

$ 7,35 Series C 120,000 $ 101.00 12 13 88.00 Series E 12,000 1,011.48 12 15 9.125 Series N 150,000 100.00 15 30 91.50 Series Q 53,572 1,000.00 54 64 88.00 Series R 50,000 50 50 90.00 Series S 74,000 73 73 216 245 Less: Current maturities 30 30 186 21$

Not sub.;o:t to mandatory redemption:

$ 7.40 Series A 500.(XX) 101.00 50 50 7.56 Series B 450,000 102.26 45 45 Adjustable Series L 474,000 100.00 46 49 42.40 Series T 200,000 -

97 97 238 241 Toledo Edison

$100 par value, 3,000,000 preferred shares authorized;

$25 par value, 12,000,0u) preferred shares authorized Subject to mandatory redemption:

$100 par $9.375 50,200 100.99 5 7 5 7 Less: Current maturities 2 2 3 5 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 7.76 150,000 l02.437 15 15 7.80 150,000 101.65 15 15 l 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 25.00 30 30 Series B Adjustable 1,200,000 25.00 30 30

__2.10 110 Centerior Energy Without par value, 5,000.000 preferred shares authorized, none outstanding - -

Total Preferred Stock, with Mandatory Redemption Provisions 189 ... 220 Total Preferred Stock, without Mandatory Redemption Provisions 448 451 The accompanying notes are an integralpart of this statement.

31

Statement of Capitalization (conuno.ol December 31, December 31, December 31, 1996 1995 1996 1995 1996 1995 (millions of dollars) (millions of dollars) (millions of dollars)

LONG-TERM DEllT:

Cle, eland Electric Toledo Edison First mortgage bonds:

7.625% due 2002 $ 195 $ 245 6.125% due 1997 $ 31 $ 31 7.375% due 2003 100 100 7.250% due 1999 85 100 9.500% due 2005 300 300 7.5(XM due 2002 26 26 8.750% duc 2005 75 75 8.(XXM due 2003 36 36 10.880% due 2006 -

50 7.875% due 2004 145 145 9.250% due 2009 50 50 8.375% due 2011 125 125 8.375% due 2012 75 75 9.375% duc 2017 300 300 10.000% due 2020 100 100 9.00(YE due 2023 159 150

_L4lg 1.570 323 338 1,793 1,908 Tavexempt issues secured by first mortgage bonds:

7.000% duc 2006-09_ 64 64 10.000% due 1998 I I 6.000% doe 201I" 6 6 3.700% duc 2011" 31 31 6.0(Xyk due 2011" 2 2 8.000% due 2019 67 67 6.200% due 2013. 48 48 7.625% duc 2020 45 45 8.000% due 2013 79 79 7.750% duc 2020 $4 54 3.500% due 2015" 40 40 7.400% due 2022 31 31 6.(XXYL duc 2017" 1 I 9.875% due 2022*" ___ 10 10 3.500% duc 2018" 73 73 7.550% due 2023 37 37 6.000% duc 2020" 41 41 6.875% due 2023 20 20 6.000% due 2020" 9 9 8.000% due 2023 50 50 9.750% due 2022"* _ 70 70 6.850% due 2023 30 30 8.0(XM due 2023 73 73 7.625% due 2025 54 54 7.750% due 2025 45 45 7.700% duc 2025 44 44 679 679 __ 246 346 1,025 1,025 Medium-term notes sceured by first mortgage bonds:

8.700% duc 1996 'O 9.050% due 1996 -

10 9.100% due 1996 -

32 9.000% duc 1996 -

3 9.110% due 1996 -

13 9.300% due 1998 26 26 9.000% due 1996 -

13 8.000% due 1998 7 7 9.140% due 1996 -

12 7.940% due 1998 5 5 9.050% duc 1996 -

10 8.470% due 1999 4 4 8.950% due 1996 -

40 7.720% due 1999 15 15 9.450% duc 1997 43 43 7.5(XYE due 20(X) 9.000% due 1998 5 5 7.380% due 2000 14 14 8.870% due 1998 10 10 7.460% duc 2000 17 17 I 8.260% due 1998 2 2 9.500% duc 2001 21 21 l 8.330% duc 1998 25 25 8.500% due 2001 8 8 8.17(YL duc 1998 11 11 8.620% due 2002 7 7 8.150% due 1998 8 8 8.650% due 2002 5 5 8.160% due 1998 5 5 8.180% due 2002 17 17 9.250% due 1999 52 52 7.820% due 2003 37 37 9.3(Krk due 1999 25 25 7.850% due 2003 15 15 7.670% due 1999 3 3 7.760% due 2003 5 5 7.250% due 1999 12 12 7.910% due 2003 3 3 7.850% duc 1999 25 25 7.780% duc 2003 1 1 7.770% duc 1999 17 17 10.000% due 2021 15 15 8.290% due 1999 10 10 9.220% due 2021 15 15 9.2(XY% duc 2001 15 15 7.420% due 2001 10 20 9.050% due 2001 5 5 32 -

Statement of Capitalization (conuno.al December 31, December 31. December 31, 1996 1995 1996 1995 1996 1995 (millions of dollars) (millions of douars) (millions of dollars)

LONG-TERM DEHT: (Continued)

Cleteland Electric Toledo Edison Medium-term notes secured by first mortgage bonds: (Contir.ued) 8.680% due 2001 15 15 8.540% due 2001 3 3 8.560% due 2001 4 4 8.550% due 2001 5 5 7.850% due 2002 5 5 8.130% duc 2002 28 28 7.750% due 2003 15 15 9.520% due 2021 8 8 366 516 237 250 603 766 Tux-exempt notes:

6.500% due 1996 -

3 5.750% due 2003 4 4 5.500% due 1997 *

• 10.000% due 2010 1 1 6.700% duc 2006 20 21 5.700% due 2008 7 8 6.700% due 2011 6 6 5.875% due 2012 14 14 47 s; 5 5 52 57 Bank loans secured by subordinate mortgage:

7.500% due 1996 -

2 9.050% duc 1996 -

25 7.500% due 1996 -

2 2 -

27 -

29 Notes secured by subordinate mortgage:

10.060% duc 1996 -

14 8.750% due 1997 8 11 8 25 8 25 Debentures:

8.700% duc 2002 135 135 135 135 Unamortized premium (discount), net: (6) (6) __R) (2) (8) (8) 2.556 2,813 1.052 1,124 3,608 3,937 Less: Current maturities 115 147 49 56 164 203 Total Long-Term Debt- $2 441 $2 666 $1001 $106R 3.444 3,734 TOTAL CAPITALIZATION $6 06R $63R9

• Denotes debt ofless than $1 million.

" Denotes variable rate issue with December 31,19% interest rate shou n.

• " Subject to optional tender by the owners on November 1,1997.

33

Notes to the Financial Statements (b) nevenues (1) Summary of Significant 4ccounting Customers are billed on a monthly cycle basis for their Policles energy consumption based on rate schedules or contracts i authorized by the PUCO or on ordinances of individual (a) General municipalities. An accrual is made at the end of each month to record the estimated amount of unbilled reve-Centerior Energy is a holding company with two electric nues for kilowatt-hours sold in the current month but not utility subsidiaries, Cleveland Electric and Toledo Edison, billed by the end of that month.

with senice areas in Northern Ohio. The consolidated A fuel factor is added to the base rates for electric service.

I.mancial statements also m. elude the accounts of Center-This factor is designed to recover from customers the ior E,nergy,s wholly owned subsidiary, C,enterior Senice costs of fuel and most purchased power. It is reviewed and C.ompany (S.ervice Company), and its three other wholly

. . adjusted semiannually in a PUCO proceeding. See Man-owned subsidianes, which m. the aggregate are not mate-nal. The S.ervice Company provides management, finan-agement's Financial Analysis - Outlook-FirstEnergy

. . Rate Plan.

cial, administrative, engineering, legal and other services at cost to Centerior Energy, the Operating Companies (c) Fuel Expense and the other subsidiaries. The Operating Companies operate as separate companies, each serving the custom- The cost of fossil fuel is charged to fuel expense based on t ers in its service area. The preferred stock, first mortgage inventory usage. The cost of nuclear fuel, including an bonds and other debt obligations of the Operating Com- interest component, is charged to fuel expense based on panies are outstanding securities of the issuing utility. All the rate of consumption. Estimated future nuclear fuel significant intercompany items have been eliminated in disposal costs are being recovered through base rates.

consolidation. The Operating Companies defer the differences between actual fuel costs and estimated fuel costs currently being Centerior Energy and the Operating Companies follow recovered from customers through the fuel factor. This the Uniform System of Accounts prescribed by the matches fuel expenses with fuel-related revenues.

FERC and adopted by the PUCO. Rate-regulated utili-Owners of nuclear generating plants are assessed by the ties are subject to SFAS 71 which governs accounting for

. federal government for the cost of decontamination and the effects of certain types of rate regulation. Pursuant to .. .

SFAS 71, certain incurred costs are deferred for recovery decommissiomng of nucient enrichment facilities oper-m f.uture rates. See Note 7(a). The S,ervice Company ated by the United States Department of Energy. The follows the Uniform System of Accounts for Mutual assessments are b sed upon the amount of enrichment Serv. ice C,ompanies prescribed by the Secun. . ties and services used in prior years and cannot be imposed for more than 15 > cars (to 2007). The Operating Companies Exchange Comm.ission (SEC) under the Public Utih.ty Holding Company Act of 1935. have accrued the liability for their share of the total assessments. These costs have been recorded as a regula-The preparation of financial statements in conformity t ry asset since the PUCO is allowing the Operating with generally accepted accounting principles requires Companies to recover the assessments through their fuel management to make estimates and assumptions that c st factors. See Note 7(a).

afTect the reported amounts of assets, liabilities, revenues (d) Deprec.iation and Decommissioning and expenses, and the disclosure of contingent assets and liabilities. The estimates are based on an analysis of the The cost of property, plant and equipment is depreciated best information available. Actual results could differ over their estimated useful lives on a straight-line basis.

from those estimates. In its April 1996 rate order, the PUCO approved changes in depreciation rates for the Operating Companies. An The Operating Companies are members of the Central increase in the depreciation rete for nuclear property from Area Power Coordination Group (CAPCO). Other 2.5% for both Operating Companies to 2.88% for Clese-members are Duquesne Light Company, Ohio Edison and land Electric and 2.95% for Toledo Edison increased its wholly owned subsidiary, Pennsylvania Power Com- annual depreciation expense approximately $21 million pany. The members have constructed and operate genera- for Centerior Energy. A reduction in the composite depre-tion and transmission facilities for their joint use. ciation rate for nonnuclear property from 3.34% to 3.23%

34

for Cleveland Electric and from 3.36% to 3.13% for includes $155 million of decommissioning costs previ-Toledo Edison decreased annual depreciation expense by ously expensed and the earnings on the external trust approximately $5 million for Centerior Energy. The funding. This amount exceeds the Balance Sheet amount changes in depreciation rates were efTective in April 1996 of the external Nuclear Plant Decommissioning Trusts and resulted in a $12 million net increase in 1996 depreci- because the reserve began prior to the external trust ation expense, funding. The trust earnings are recorded as an increase to The Operating Companies accrue the estimated costs of the trust assets and the related component of the decom-decommissioning their three nuclear generating units. missi ning reserve (included in Accumulated Deprecia-The accruals are required to be funded in an external ti n and Amortization).

trust. The PUCO requires that the expense and payments The staff of the SEC has questioned certain of the current to the external trusts be determined on a levelized basis accounting practices of the electric utility industry, by dividing the unrecovered decommissioning costs in including those of the Operating Companies, regarding current dollars by the remaining years in the licensing the recognition, measurement and classification of period of each unit. This methodology requires that the decommissioning costs for nuclear generating stations in net earnings on the trusts be reinvested therein with the the financial statements. In response to these questions, intent of having net earnings ofTset inflation. The PUCO the Financial Accounting Standards Board (FASB) is requires that the estimated costs of decommissioning arid reviewing the accounting for removal costs, including the funding lesel be revieued at least every five years. decommissioning. If current accounting practices are in April 1996, pursuant to the PUCO rate order, the changed, the annual provision for decommissioning could Operating Companies decreased their annual decommis- increase; the estimated cost for decommissioning could be sioning expense accruals to $22 million from the $24 mil- recorded as a liability rather than as accumulated depreci-lion level in 1995. The accruals are reflected in current tion; and trust fund income from the external decommis-rates. The accruals are based on adjustments to updated, si ning trusts could be reported as investment income site-specific studies for each of the units completed in rather than as a reduction to decommissioning expense.

1993 and 1994. These estimates reflect the DECON The FASB issued an exposure draft on the subject on method of decommissioning (prompt decontamination), February 7,1996 and continues to review the subject.

and the locations and cost characteristics specific to the units, and include costs associated with decontamination (e) Property, Plant and Equipment and dismantlement for each of the units. The estimate for Property, plant and equipment are stated at original cost Davis-Besse also includes the cost of site restoration. The less amounts disallowed by the PUCO. Construction costs adjustments to the updated studies which reduced the include related payroll taxes, retirement benefits, fringe annual accruals beginning in April 1996 were attributable benefits, management and general overheads and allow-to changed assumptions on radioactive waste burial cost ance for funds used during construction ( AFUDC).

estimates and the exclusion of site restoration costs for AFUDC represents the estimated composite debt and Perry Unit I and Beaver Valley Unit 2. After the decom- equity cost of funds used to finance construction. This missioning of these units in the future, the two plant sites n ncash allowance is credited to income. The AFUDC may be usable for new power production facilities or other rates averaged 10.2% in 1996,11.5% in 1995 and 9.8% in industrial purposes. I994' The revised estimates for the units in current dollars and Maintenance and repairs for plant and equipment are in dollars at the time of license expiration, assuming a 4% charged to expense as incurred. The cost of replacing annual inflation rate, are as follows. plant and equipment is charged to the utility plant I icense accounts. The cost of property retired plus removal costs, Generatine Unit Nar " A nmunt Nnt after deducting any salvage value, is charged to the onillions of accumulated provision for depreciation.

dollars }

D.n is-Besse 2017 1342 $ 877 Perry Unit 1 2026 217 79) (f) Deferred Ga.m and Loss from Sales of Utility Beaser Valley Unit 2 2027 _9.] M9 Plant Total W6 O M7 The sale and leaseback transactions discussed in Note 2 The classification, Accumulated Depreciation and Amor- resulted in a net gain for the sale of the Bruce Mansfield tization, in the Balance Sheet at December 31, 1996 Generating Plant (Mansfield Plant) and a net loss for the l

sale of Beaver Valley Unit 2. The net gain and net loss ment for financial reporting purposes. Costs associated were deferred and are being amortized over the terms of with the sale totaling $5 million in 1996 are included in the leases. See Note 7(a). These amortizations and the Other income and Deductions, Net in the income State-lease expense amounts are reported in the income State- ment. These costs are expected to be $1I million annually ment as Generation Facilities Rental Expense, Net. over the remaining period.

(g) Interest Charges (j) Materials and Supplies Debt Interest reported in the income Statement does not in December 1996, the Operating Companies sold sub-include interest on obligations for nuclear fuel under stantially all of their materials and supplies and fossil fuel construction. That interest is capitalized. See Note 6. inventories for certain generating units and other storage locations to an independent entity at book value. The Losses and gains realized upon the reacquisition or by ww provides all of these inventories under a con-redemption of long-term debt are deferred. consistent signment arrangement, in accordance with SFAS 49 with the regulatory rate treatment. See Note 7(a). Such accounting for product financing arrangements, the inven-losses and gains are either amortized over the remainder tories continue to be reported as assets in the Balance of the original life of the debt issue retired or amortized Sheet even though the buyer owns the inventories since over the life of the new debt issue when the proceeds of a the Operating Companies have guaranteed to be buyers of new issue are used for the debt redemption. The amorti- ;g rations are included in debt interest expense.

(k) AT&T Telecommunications Partnership (h) Federalincome Taxes in April 1996, a wholly owned subsidiary of Centerior We use the liability method of accounting for income Energy and an AT&T Wireless Services (Wireless) sub-taxes in accordance with SFAS 109. See Note 8. This sidiary entered into a 25%/75% partnership called AT&T method requires that deferred taxes be recorded for all PCS Cleveland, LLC. The partnership will operate a temporary differences between the book and tax bases of personal communications services network which uill assets and liabilities. The majority of these temporary pwvide wireless communications services to Northeast differences are attributable to property-related basis dif- Ohio and Western Pennsylvania pursuant to licenses ferences. Included in these basis differences is the equity ow ned by Wireless. The total investment of the Centerior component of AFUDC, which will increase future tax Energy subsidiary in the partnership at December 31, expense when it is recovered through rates. Since this 1996 is $23 million.

component is not recognized for tax purposes, we must record a liability for our tax obligation. The PUCO (2) Utillfy Plant Sale and Leaseback permits recovery of such taxes from customers when they Transactions become payable. Therefore, the net amount due from The Operating Companies are co-lessecs of 18.26% (150 customers through rates has been recorded as a regulatory megawatts) of Beaver Valley Unit 2 and 6.5% (51 mega-asset and will be recovered over the lives of the related watts),45.9% (358 megawatts) and 44.38% (355 mega- j assets. See Note 7(a).

watts) of Units 1, 2 and 3 of the Mansfield Plant, l Investment tax credits are deferred and amortized over respectively. These leases extend through 2017 and are  !

the lives of the applicable property as a reduction of the result of sale and leaseback transactions completed in l depreciation expense. j 9g7, Under these leases, the Operating Companies are respon-(i) Accounts Receivable Securitization sible for payine all taxes. insurance premiums, operation In May 1996, the Operating Companies began to sell on a and maintenance expenses, and all other similar costs for daily basis substantially all of their retail customer their interests in the units sold and leased back. They may accounts receivable and unbilled revenue receivables t incur additional costs in connection with capital improve-Centerior Funding pursuant to a five-year asset-backed ments to the units. The Operating Companies have securitization agreement.

options to buy the interests back at certain times at a in July 1996 Centerior Funding completed a public sale premium and at the end of the leases for the fair market of $150 million of receivables-backed investor certificates value at that time or to renew the leases. The leases l in a transaction that qualifies for sale accounting treat- include conditions for mandatory termination (and possi-l u ,

ble repurchase of the leasehold interests) upon certain I

(("n7'ns events of default, ou nerup Eqmpment Megaw atts (Lxclusive of Accumulated Future minimum lease payments under the operating * " ' ' " " " "" # " ' ' ' ""

"'['jii$'f[d$1 r leases at December 31,1996 are summarized as follows:

seneca Pumped storage _ 35i t80.0(n) $ 65 5 24

_ Year A mount Lastlake Unit 5 4tl (68.80) 161 -

(millions of Perry Unit i 609 ($1.02) 2.822 636 dollars) Beaver Valley Unit 2 and 1997 5 165 Common Faci litics 1998 165 (Note 2) ___ 214 (26.12) 1.4x8 377 1999 17N Total $4 m $1 m7 2000 187 2c01 186 Depreciation for Eastlake Unit 5 has been accumulated T tal Future Minimum Lease Payments 5 with all other nonnuclear depreciable property rather than by specific units of depreciable property.

Rental expense is accrued on a straight-line basis over the terms of the leases. The amount recorded in 1996,1995 (4) Construction and Contingencies and 1994 as annual rental expense for the Mansfield Plant (a) Construction Program leases was $115 million. The amounts recorded in 1996, The estimated cost of our construction program for the 1995 and 1994 as annual rental expense for the Beaver 1997-2001 period is $905 million, including AFUDC of Valley Unit 2 lease were $63 million, $63 million and

$25 million and excluding nuclear fuel.

$64 million, respectively. See Note 1 (f). Amounts charged to expense in excess of the lease payments are The Clean Air Act Amendments of 1990 (Clean Air classified as Accumulated Deferred Rents in the Balance Act) require, among other things, significant reductions in Sheet. the emission of sulfur dioxide and nitrogen oxides by fossil-fueled generating units. Our strategy provides for Toledo Edison is selling 150 megawatts of its Beaser compliance primarily through greater use of low-sulfur Valley Unit 2 leased capacity entitlement to Cleveland Electric. We anticipate that this sale will continue coal at some of our units and the use of emission indefinitely. allowances. Total capital expenditures from 1994 through 1996 in connection with Clean Air Act compliance (3) Property Owned with Other Utilities amounted to $36 million. The plan will require additional and Investors capital expenditures over the 1997-2006 period of approu imately $42 million for nitrogen oxide control equipment The Operating Companies own, as tenants in common and other plant process modifications. In addition, higher with other utilities and those investors who are owner- fuel and other operation and maintenance expenses will participants in various sale and leaseback transactions be incurred. Recently proposed particulate and ozone (Lessors), certain generating units as listed below. Each ambient standards have the potential to increase future owner owns an undivided share in the entire unit. Each compliance costs.

owner has the right to a percentage of the generating capability of each unit equal to its ownership share. Each (b) Hazardous Waste Disposal Sites utility owner is obligated to pay for only its respective The Operating Companies are aware of their potential share of the construction ecsts and operating expenses. involvement in the cleanup of three sites listed on the Each Lessor has leased its capacity rights to a utility Superfund List and several other sites. The Operating which is obligated to pay for such Lessor's share of the Companies have accrued a liability totaling $10 million at construction costs and operating expenses. The Operating December 31, 1996 based on estimates of the costs of Companies' share of the operating expenses of these cleanup and their proportionate responsibility for such generating units is included in the income Statement.

costs. We believe that the ultimate outcome of these The Balance Sheet classification of Property, Plant and matters will not have a material adverse efTect on our Equipment at December 31,1996 includes the following financial condition, cash flow s or results of operations. See facilities owned by the Operating Companies as tenants in Management's Financial Analysis - Outlook-11azardous common with other utilities and Lessors: Waste Disposal Sites.

.U

(5) Muclear Operaflons and 104 weeks. The amount and duration of extra expense Contingencies could substantially exceed the insurance coverage.

(s) Operating Nuclear Units (6) Nuclear Fuel Our three nuclear units may be impacted by activities or Nuclear fuel is financed for the Operating Companies events beyond our control. An extended outage of one of through lease 3 with a special-purpose corporation. The our nuclear units for any reason, coupled with any unfa- total amount of financing currently available under these vorable rate treatment, could have a material adverse lease arrangements is $273 million ($173 million from effect on our financial condition, cash flows and results of intermediate term notes and $100 million from bank operations. See the discussion of these and other risks in credit arrangements). The intermediate-term notes Management's Financial Analysis - Outlook-Nuclear mature in the 1997 through 2000 period. The bank credit Operations. arrangements terminate in October 1998. The special-purpose corporation may not need alternate financing in (b) Nuclear Insurance 1997 to replace $83 million of maturing intermediate-term notes. At December 31, 1996, $216 million of The Price-Anderson Act h.mits the public liabih.ty of the nuclear fuel was financed. The Operating Companies owners of a nuclear power plant to the amount provided

. severally lease their respective portions of the nuclear fuel by private insurance and an industry assessment plan. In ..

. .. and are obh. gated to pay for the fuel as it is consumed m. a the event of a nuclear .meident at any umt in the Um.ted .

reactor. The lease rates are based on van.ous intermedi-States resultmg m losses .m excess of the level of private ate-term note rates, bank rates and commercial paper insurance (currently $200 million), our maximum poten-rates.

tial assessment under that plan would be $155 million per incident. The assessment is limited to $20 million per year The amounts financed include nuclear fuel in the Davis-for each nuclear incident. These assessment limits assume Besse, Perry Unit I and Beaver Valley Unit 2 reactors the other C APCO companies contribute their proportion- with remaining lease payments of $92 million, $77 million ate share of any assessment for the generating units that and $32 million, respectively, at December 31,1996. The they have an ownership or leasehold interest in. nuclear fuel amounts financed and capitalized also j included interest charges incurred by the lessors amount-The utility owners and lessees of Davis-Besse, Perry and ing to $4 million in 1996, $5 million in 1995 and $11 mil-Beaver Valley also have insurance coverage for damage t lion in 1994. The estimated future lease amortization property at these sites (including leased fuel and cleanup payments based on projected consumption are $88 million costs). Coverage amounted to $1.3 billion for Davis-Ber,se in 1997, $69 million in 1998,$67 million in 1999 and l and $2.75 billion for each of the Perry and Beaver Valley $62 million in both 2000 and 2001.

sites as of January 1,1997. Damage to property could exceed the insurance coverage by a substantial amount. If (7) Regulatory Matters it does, our share of such excess amount could have a (a) Regulatory Accounting Requirements and material adverse effect on our financial condition, cash Regulatory Assets i flows and results of operations. In addition, we can be The Operating Companies are subject to the provisions of assessed a maximum of $22 m.llion i under these poh. .cies

. SFAS 71 and have complied with its provisions. SFAS 71 during a poh.:v year if the reserves available to the insurer

^

provides, among other things, for the deferral of certain are inadequate to p;.y claims arising out of an accident at incurred costs that are probable of future recovery in any nuclear facility covered by the .msurer.

rates. We monitor changes in market and regulatory We also have extra expense insurance coverage. It conditions and consider the etrects of such changes in includes the incremental cost of any replacement power assessir:g the continuing applicability of SFAS 71. Crite-purchased (over the costs which would have been ria that could give rise to discontinuation of the applica-incurred had the units been operating) and other inciden- tion of SFAS 71 include: (1) increasing competition tal expenses after the occurrence of certain types of which significantly restricts the Operating Companies' accidents at our nuclear units. The amounts of the cover- ability to charge prices which allow them to recover age are 100% of the estimated extra expense per week operating costs. carn a fair return on invested capital and during the 52-week period starting 21 weeks after an recover the amortization of regulatory assets and (2) a accident and 80% of such estimate per ucek for the next significant change in the manner in which rates are set by 38

the PUCO from cost-based regulation to some other form revaluation of assets. The PUCO invited the Operating of regulation. Regulatory assets represent probable future Companies to file a proposal to elTectuate the PUCO's revenues to the Operating Companies associated with recommendation and expressed a willingness to consider ahana certain incurred costs, which they will recover from cus- to b rwommendadon. & y Mad in tomers through the rate-making process. its order that failure by the Operating Companies to foHow the recommendation could result in a PUCO-Effective January 1,1996, the Operating Companies ordered write-down of assets for regulatory purposes. The adopted SFAS 121 which imposes stricter criteria for PUCO approved a return on common stock equity of carrying regulatory assets than SFAS 71 by requiring that 12.59% and an overall rate of return of 10.06% for both such assets be probable of recovery at each balance sheet Operating Companies. Ilowever, the PUCO also indi.

date. The criteria under SFAS 121 for plant assets require cated the authorized return could be lowered by the such assets to be written down if the book value exceeds PUCO if the Operating Companies do not implement the the projected net future undiscounted cash flows.

recommendation. In August 1996, various intervenors Regulatory assets in the 11alance Sheet are as follows: appeat ed the PUCO rate order to the Ohio Supreme pecember 31. Court. The Operating Companies did not appeal the order 19w, 1995 to the Ohio Supreme Court, in connection with the tmgs or PUCO order discussed in Management's Financial Amounts due from customers for future federal Analysis - Outlook-FirstEnergy Rate Plan, certain par-income taxes. nei $1.025 $1.067 ties agreed to request a stay of their appeals until comple-Unamorti/ed ?oss from Beaver Valley Unit 2 sale _ 92 96 Unamortized loss on reacquired debt 82 89 tion of the pending merger with Ohio Edison.

Pre-phase-in deferrals' 535 553 Rate Stabilization Program deferrals 48o 500 Other 64 70 (C) Assessment Total e ?7x 52 m The Operating Con panies agree with the concept of

• Represent deferrals of operating expenses and carrykg charges for accelerating the recognition of costs and recovery of assets Perry Unit I and Heaver Valley Unit 2 in 1987 and 1988 which are being amortized oser the lises of the related property. as such concept is consistent with the strategic objective to become more competitive. However, the Operating As of December 31, 1996, customer rates provide for Companies believe that such acceleration must also be recovery of all the above regulatory assets. The remaining consistent with the reduction of debt and the opportunity recovery periods for about $1.9 billion of the regulatory for Centerior Energy common stock share owners to assets approximate 30 years. The remaining recovery receive a fair return on their investment. Consideration of periods for the rest of the regulatory assets generally range whether to implement a plan responsive to the PUCO's from about two to 20 years. Regulatory liabilities in the recommendation to revalue assets by $1.25 billion is Balance Sheet at December 31,1996 and 1995 totaled pending the merger with Ohio Edison.

$37 million and $21 million, respectively.

The Operating Companies have evaluated their markets, (b) Rate Order regulatory conditions and abilities to bill and collect the On April i1,1996, the PUCO issued an order for the approved prices, and conclude that they continue to comply with the provisions of SFAS 71 and their regula-Operating Companies granting price increases aggregat-ing $119 million in annualized revenues ($84 million for tory assets remain probable of recovery. If there is a change in the Operating Companies' evaluation of the Cleveland Electric and $35 million for Toledo Edison). competitive environment, regulatory framework or other The PUCO rate order provided for recovery of all costs to factors, or if the PUCO significantly reduces the value of provide regulated ser ices, including amortization of regu-latory assets,in the approved prices. The new prices were the Operating Companies' assets or reduces the approved return on common stock equity of 12.59% and overall rate implemented in late April 1996. The average pnce of return of 10.06%, or both, for future regulatory pur-increase for Cleveland Electric and Toledo Edison cus-tomers was 4.9% and 4.7%, respectively, with the actual poses, the Operating Companies may be required to percentage increase depending upon the customer class. record material charges to earnings. In particular, if we determine that the Operating Companies no longer meet The Operating Companies intend to freeze prices through the criteria for SFAS 71, we would be required to record a at least 2002, although they are not precluded from requesting further price increases. before-tax charge to write otT the regulatory assets shown above. In the more likely event that only a portion of The PUCO also recommended that the Operating Com- operations (such as nuclear operations) no longer meets panies reduce the value of their assets for regulatory the criteria of SFAS 71, a write-off would be limited to purposes by an aggregate $1.25 billion through 2001. This regulatory assets that are not reflected in our cost-based represents an incremental reduction beyond the normal prices established for the remaining regulated operations.

level in nuclear plant and regulatory assets. Implementa- In addition, we would be required to evaluate whether the tion of the price increases was not contingent upon a changes in the competitive and regulatory environment 39

which led to discontinuing the application of SFAS 71 t

%ilion dolla some or all of our operations would also result in a write- Book income Before rederal Income Tax $?'9 542i Swn down of property, plant and equipment pursuant 1 Tax on Book Income at Statutory Rate 5 98 $147 $137 SFAS 121.

Increase (Decrease) in Tax:

See Management's Financial Analysis - Outlook- ,"S a $ zation Program (2 ) (2 )

FirstEnergy Rate Plan for a discussion of a regulatory Other items _- _,U ,_2 plan for the Operating Companies and its effect on their Total rederal income Tax Expense sin! 5140 5120 compliance with SFAS 71.

For tax reporting purposes, the Perry Nuclear Power (d) Rate Stabilization Program Plant Unit 2 (Perry Unit 2) abandonment was recognized

. in 1994 and resulted in a $327 million loss with a The Rate Stabilization Program that the PUCO approved . . .

. corresponding $114 milh.on reduction in federal income in October 1992 allowed the Operating Companies to tax liability. Because of the alternative minimum tax defer and subsequently amortize and recover certain costs (AMT), $65 million of the $114 million was realized in not being recovered in rates at that time. Recovery of both 1994. The remaining $49 million will not be realized until the costs no longer being deferred and the amortization of .

mn , a rePaym nt f 3PProximately the 1992-1995 deferrals began in late April 1996 with the

. . $29 milhon of previously allowed investment tax credits implementation of the price increases granted by the .

PUCO as discussed above. The cost deferrals recorded in

• * '*# E" # '"

1995 and 1994 pursuant to the Rate Stabilization Pro-Under SFAS 109, temporary difTerences and carrvfor-gram were $115 million and $112 million, respectively.

wards resulted m deferred tax assets of $582 milhon and The amortization of the deferrals began in Decem-deferred tax liabilities of $2.459 bilh,on at December 31, ber 1995. The total amortization was $20 million and 1996 and deferred tax assets of $604 milhon and deferred

$2 million in 1996 and 1995, respectively.

tax liabih, ties of $2.479 billion at December 31, 1995.

The regulatory accounting measures under the Rate Sta- These are summarized as follows:

bilization Program also provided for the accelerated December 31.

amortization of certain benefits during the 1992-1995 ];,;,,f,*r period. The total annual amount of such accelerated dollars) benefits was $46 million in both 1995 and 1994. Property, plant and equipment $2.094 $2.095 Deferred carrying charges and operating expenses _, 218 224 (8) FederalIncome Tax Net operating loss carr> forwards _ (44) (113)

Investment tax credits (139) (145)

The components of federal income tax expense recorded Sale and leaseback transactions (121) (127) in the income Statement were as follows: Other (131) (59)

O L90 PM Net deferred tax liability $1477 S t .R75 (millions of dollars)

Opetating Expenses:

Current 5 79 $ 88 $ 70 For tax purposes, net operating loss (NOL) carryforwards Deferred 32 47 44 of approximately $125 million are available to reduce Total Charged to Operating Expenses _ E _!l} ,,,,!j 4 g g gg gg g Nonoperating income:

Current (19) (20) (45) tax efTect of the NOLs is $44 million. Additionally, AMT Deferred _lf _R J credits of $275 million that may be carried forward Total Expense (Credit) to Nonoperating indefinitely are available to reduce future tax.

Income _L9 ) J J Total Federal Income Tax Expense E M g (9) Retirement Benefits '

The deferred federalincome tax expense results from the temporary differences that arise from the different years (a) Retirement income Plan when certain expenses are recognized for tax purposes as opposed to financial reporting purposes. Such temporary We sponsor a noncontributing pension plan which covers differences relate principally to depreciation and deferred all employee groups. The amount of retirement benefits operating expenses and carrying charges. generally depends upon the length of service. Under certain circumstances, benefits can begin as early as age Federal income tax, computed by multiplying the income 55. Our funding policy is to comply with the Employee I before taxes and preferred dividend requirements of sub- Retirement Income Security Act of 1974 guidelines.

sidiaries by the 35% statutory rate, is reconciled to the amount of federal income tax recorded on the books as Pension costs (credits) for 1994 through 1996 were com-follows: prised of the following components:

10 1

%;,d The accumulated postretirement benefit obligation and Service cost for benefits carned during the accrued postretirement benefit cost are as follows:

period $ 13 $ lo $ 13 Interest cost on projected benefit obligation _,, 28

))ecember 31.

26 26 1996 1995 Actual return on plan assets (50) (53) (2)

Net amortization and deferral _j 9 W_4 )

(millions of dollars)

Nel costs (credits) M) Mg) 1} Accumulated postretirement benefit obligation attributable to:

The following table presents a reconciliation of the funded Retired participants $(177) $(200) status of the plan. I'ully eligible active plan participants (4) (3)

J2pcember 31. Other active plan participants (31) J 8)

J.996 j995 Accumulated postretirement benefit obligation,. (212) (231)

(millions of Unrecognized net gain from variance between dollars) assumptions and experience (44) (21)

Actuarial present value of beneht obligations: Unamortized transition obligation 120 12R Vested benchts $326 $304 Nonvested benefits Accrued postretirement benefit cost included in

_ lk _._.;

Accumulated benefit obligation 342 306 Retirement Benefits in the Balance Sheet ~""""")'""")

$(I 4 $(124 Efrect of future compensation levels E _J.! A September 30 measurement date was used for 1996 and Total proice 395 360 Plan assets atir fa,ted marketbenefit value obligation 1995 reporting. At December 31,1996 and 1995, the 421 394 Funded status 26 34 settlement rate and the long-term rate of annual compen-Unrecognized net gain from variance between assumptions and experience sation increase assumptions were the same as those dis-($6) (68)

Unrecogniicd prior service cost 14 15 cussed for pension reporting in Note 9(a). At Transition asset at January 1,1987 being amortized December 31,1996, the assumed annual health care cost

""'((d pension liability included in trend rates (applicable to gross eligible charges) were Retirement Benefits in the Balance Sheet _ M41) g5) 7.5% for medical and 7% for dental in 1997. Both rates A September 30 measurement date was used for 1996 and reduce gradually to a fixed rate of 4.75% by 2003. Ele-1995 reporting. At December 31, 1996, the settlement ments of the obligation affected by contribution caps are significantly less sensitive to the health care cost trend (discount) rate and long-term rate of return on plan assets assumptions were 7.75% and i1%, respectively. The rate than other elements. If the assumed health care cost long-term rate of annual compensation increase assump- trend rates were increased by one percentage point in

~

each future year, the accumulated postretirement benefit tion was 3.5% for 1997 and 4% thereafter. At Decem-her 31,1995, the settlement rate and long-term rate of obligation as of December 31, 1996 would increase by return on plan assets assumptions were 8% and i1%, $6 million and the aggregate of the service and interest respectively. The long-term rate of annual compensation cost components of the annual postretirement benefit cost increase assumption was 3.5'70 for 1996 and 1997 and 4%

would increase by $0.5 million.

thereafter.

(10) Guarantees Plan assets consist primarily of investments in common The Operating Companies have guaranteed certain loan stock, bonds, guaranteed investment contracts, cash and lease obligations of a coal supplier under a long-term equivalent securities and real estate.

coal supply contract. At December 31,1996, the principal (b) Other Postretirement Benefits am unt of the loan and lease obligations guaranteed by the Operating Companies under the contract was We sponsor a postretirement benefit plan which provides

$30 million.

all employee groups certain health care, death and other postretirement benefits other than pensions. The plan is The prices under the contract uhich includes certain contributory, with retirce contributions adjusted annually. minimum payments are sufhcient to satisfy the loan and The plan is not funded. Under SFAS 106, the accounting le se bligations and mine closing costs over the life of standard for postretirement benefits other than pensions, the contract. If the contract is terminated early for any the expected costs of such benefits are accrued during the reas n, the Operatmg Companies would attempt to employees' years of service. reduce the termination charges and would ask the PUCO to allow recovery of such charges from customers through The components of the total postretirement benefit cost the fuel factor of the respective Operating Company.

for 1994 through 1996 were as follows:

See Management's Financial Analysis - Ou tlook-1996 M91 1994 E Ellions of dollE)- FirstEnergy Rale Plan.

Service cost for benefits carned during the period $2 $2 $2 Interest cost on accumulated postretirement benefit obligation 18 18 18 Amortization of transition obhgation at January l.1993 of $167 million over 20 > cars 7 7 8 Amortiration of pain _-- H) --

Total costs $27 $% $?x 11

(11) Crpit:liz:ti:n shares at an exercise price of $14.58. In 1994, options were issued for 264,900 shares at an exercise price of (a) Capital Stock Transactions and Common $13.20 but options for 9,500 and 6,800 shares were Shares Reserved for issuance surrendered in 1995 and 1996, respectively. The options 3 expire 10 years from the date of the grant and vest over Shares sold, retired and purchased for treasury during the for years. The number of shares available for iuuance three years ended December 31, 1996 are listed in the under the Compensation Pls M year is determined by following table, g g i994 formula, generally 0.5% of . !ing shares. Shares of (thousands of shares) common stock required fo' opensation Plan may centerior Energy common sim.k: be either issued as new sh2 med from treasury stcek D vidend Remvestment and Stock

_ _ g,g 3 or acquired in the open market specifically for distribution I Employee Saving Pla - -

259 under the Compensation Plan. No compensation cost has Employee Purchase Plan 46 been recognized for the options issued. Computing com-pensation cost for the options consistent with SFAS 123 Tr asu y Irs 5) 5) would not have materially affected net income in 1996 Net inercase (Decrease) 4 9 ~m on Preferred Stock of Subsidiaries Subject to and 1995, and earnings per common share reported in Mandatory Redemption: both years would not have changed.

Clevetand Electric Retirements s 7.35 Series C (10) (10) (10) Upon consummation of the pending merger of Centerior Adj a enes M (l Energy and Ohio Edison, outstanding options will become (1

9.125 Series N (15n) (111) (189) exercisable for shares of FirstEnergy common stock with 91.50 Serici o tii) (11) -

the prices and number of shares adjusted to reflect the

() exchange ratio. Limitations on restricted common stock Toled Id 0n R tirements

$100 par $9.375 (17) (17) (17) awarded under the Compensation Plan will lapse auto-  !

25 par 2.81 - (400) (koo) matically upon consummation of the merger.

Preferred Stock of Subsidiaries Not Subject to Mandatory Redemption:

cleveland Electric Retirements (b) Equity Distribution Restrictions Adjustable Series L _Lh) _ :: -

Net (Decrease) 2) If@ MHH The Operating Companies can make cash available to Shares of common stock required for our stock plans in fur.d Centerior Energy's common stock dividends by 1996 were acquired in the open market. p ying dividends on their respective common stock, which is held solely by Centerior Energy. Federal law prohibits in addition to such stock plan-related purchases, the the Operating Companies from paying dividends out of Board of Directors has authorized the purchase in the capital accounts. Each Operating Company has since open market of up to 10% of our common stock shares 1993 declared and paid preferred stock dividends, and outstanding until June 30,1997. No such purchases have Cleveland Electric has also declared and paid common been made, stock dividends, out of appropriated current net income The number of common stock shares reserved for issu. included in retained earnings. At the times of such decla- i ance under the Emp':ayee Savings Plan and the Employee rati ns and p yments, each Operating Company had a Purchase Plan was 1,702,475 and 423.797, respectively, at deficit in its retained earnings. At December 31, 1996, December 31,1996. Cleveland Electne and Toledo Edison had $130 milhon and $223 million, respectively, of appropriated retained in June 1996, the Board of Directors adopted a share earnings for the payment of dividends. Toledo Edian also I owner rights plan under which Centerior Energy common has a provision in its mortgage applicable to approxi-stock share owners of record on July 8,1996 were granted mately $94 million of outstanding first mortgage bonds a right to purchase one five-hundredth of a share of ($31 million of which mature in August 1997) that .

Centerior Energy preferred stock for each share of com- requires common stock dividends to be paid out of its mon stock owned on that date. The Board of Directors total balance of retained earnings, which had been :

will decide if the rights will be exercisable in the event of deficit from 1993 through November 1996. At Decem-an unsolicited takeover attempt that the Board deter- ber 31,1996, Toledo Edison's total retained earnings were mines not to be in the best interest of Centerior Energy or $5 million. See Management's Financial Analysis-its share owners. Capital Resources and Liquidity-Liquidity, Under an Equity Compensation Plan (Compensation Plan) adopted in 1994, options to purchase shares of (c) Preferred and Preference Stock common stock and awards of restricted common stock I were granted to management employees. In 1996, options Amounts to be paid for preferred stock which must be l were issued for 619,800 shares at an exercise price of redeemed during the next five years are $32 million in 1

$11.00 but options for 4,000 shares were subsequently 1997,$16 million in 1998,$35 million in 1999. $33 mil-surrendered. In 1995, options were issued for 285,000 lion in 2000 and $80 million in 2001.

42

l The annual mand.non redemption provisions are as June 1999. The letters of credit are in an aggregate

( follows: amount of approximately $225 million and are secured by Shares To P ce first mortgage bonds of Cleveland Electric and Toledo Redeemed in Sharc Edison in the proportion of 40% and 60%, respectively. At Cleveland Licctnc heterred:

$ 7.35 Series C 10.000 1984 5 100 December 31, 1996 Toledo Edison had outstanding 88.00 Series L 3.000 1981 1.000 $8 m.lb.on i of notes secured by subordinated mortgage 1 9,125 Series N 150.000 1993 100 collateral.

l 91.50 Series Q 10,714 1995 1.000 e $5 9J (12) Short-Term Borrowing Arrangements l Toledo Edison Prererred: Centerior Energy has a $125 million revolving credit sloo par 59.375 16.650 1985 100 facility through May 1997. Centerior Energy and the

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

Service Company may borrow under the facility, with all in 1995, Cleveland Electric purchased 1,000 shares of borrowings jointly and severally guaranteed by the Oper-Serial Preferred Stock, $90.00 Series S, which reduces ating Companies. Centerior Energy plans to transfer any the 2002 redemption requirement shown in the above of its borrowed funds to the Operating Companies. The table. credit agreement is secured with first mortgage bonds of Cleveland Electric and Toledo Edison in the proportion of The annualized preferred dividend requirement for the 40% and 60%, respectively. The credit agreement also Operating Companies at December 31, 1996 was provides the participating banks with a subordinate mort-

$55 milhon.

gage security interest on the Operating Companies' The preferred dividend rates on Cleveland Electric's properties. The banks' fee is 0.625% per annum payable Series L ed Toledo Edison's Series A and 11 fluctuate quarterly in addition to interest on any borrowings. There based on prevaUing interest rates and market conditions. were no borrowings under the facility at December 31, The dividend rates for these issues averaged 7%, 7.11% 1996. Also, the Operating Companies may borrow from and 7.75%, respectively, in 1996. each other on a short-term basis.

l Preference stock authorized for the Operating Compa-nies are 3.000,000 shares without par value for Cleveland (13) FinancialInstruments Electric and 5,000,000 shares with a $25 par value for The estimated fair values at December 31,1996 and 1995 Toledo Edison. No preference shares are currently out. of financial instruments that do not approximate their standing for either company. carrying amounts in the Balance Sheet are as follows:

December 31 With respect to dividend and liquidation rights, each iv96 iv93 Operating Company's preferred stock is prior to its prefer- Carrying rair carrying i air ence stock and common stock, and each Operating Com-

^*""" '

^"$"s"h d V '"

pany's preference stock is prior to its common stock. Capitalization and Liabilities:

Preferred Stock, with Mandatory (d) Long-Term Debt and Other Borrowing Redemption Provisions 5 221 5 225 $ 252 5 239 L ng-Term Debt 3.616 3.716 3.945 3,961 Arrangements Noncash investments in the Nuclear Plant Decommis-Long-term debt which matures or is subject to put ,

si ning Trusts are summarized in the following table.

options during the next five years is as follows: $164 mil- December 31.

lion in 1997,$107 million in 1998,$253 million in 1999, n996 jv93

$36 million in 2000 and $92 million in 2001. (millions or dollars)

The mortgages of the Operating Companies constitute T"I ederal Government T [cht IIu"NtiN 5 24 direct first hens on substantially all property owned and 547

"' ~

i franchises held by them. Excluded from the liens, among $"hef "^

other things, are cash, securitics, accounts receivable, 32 72 l

fuel, supplies and, in the case of Toledo Edison, automo-tive equipment.

[

Q Maturities of Debt Securities:

t Certain credit agreements of the Operating Companies due within one year $- $1 l , .

Due m one to hve years 17 22 contain covenants relating to h.xed charge coverage ratios Due in six to 10 years 7 24 and limitations on secured financing other than through D"* "h*' ' Ol'""' -! 2 i

first mortgage bonds or certain other transactions. The Total tr m Operating Companies were in compliance with all such The fair value of these trusts is estimated based on the covenants as of December 31,1996. The Operating Com- quoted market prices for the investment securities and panics have letters of credit in connection with the sale approximates the carrying value. The fair value of the l and leaseback of Beaver Valley Unit 2 that expire in Operating Companies' preferred stock, with mandatory i

redemption provisions, and long-term debt is estimated (15) Pending Merger of Centerior Energy based on the quoted market prices for the respective or and Ohio Edison similar issues or on the basis of the discounted value of future cash flows. The discounted value used current On September 13, 1996, Centerior Energy and Ohio dividend or interest rates (or other appropriate rates) for Edison entered into an agreement and plan of merger to similar issues and loans with the same remaining form a new holding company, FirstEnergy. Following the maturities. merger, FirstEnergy will directly hold all of the issued and The estimated fair values of all other financial instru- utstanding common stock of the Operating Companies ments approximate their carrying amounts in the Balance nd all of the issued and outstanding Ohio Edison com-I Sheet at December 31,1996 and 1995 because of their m n st ek. As a result of the merger, the common stock short-term nature. share owners of Centerior Energy and Ohio Edison will own all of the issued and outstanding shares of First-(14) Quarterly Results of Operations Energy common stock. Centerior Energy share owners (Unaudited) will receive 0.525 of a share of FirstEnergy common stock The following is a tabulation of the unaudited quarterly for each share of Centerior Energy common stock owned.

results of operations for the two years ended Ohio Edison share owners will receive one share of December 31,1996. FirstEnergy common stock for each share of Ohio Edison ouartm i nded common stock owned. FirstEnergy plans to account for the merger as a purchase in accordance with generally i

150 s orll ,

except per share amounto accepted accounting principles.

tw6 Operating Resenues $605 5609 5727 $612 In addition to the approvals by the share owners of Centerior Energy and Ohio Edison common stock, vari-eY1 m $$ $ s Ascrape Common Share, ous aspects of the merger are subject to the approval of

( milliono 148 0 148.0 148.0 148.0 the FERC and other regulatory authorities. A rate reduc-I.arrinp rer common sm 5J3 30 .5 tion and economic development plan for the Operating Dnidends Paid Per Companies has been approved by the PUCO. From the Common Sharc 5.20 1.20 $ .20 $ .20 date of consummation of the merger through 2006, the perating Revenues 5588 5607 $740 $581 Nan pp&s kr e rehch, hn fuel M fadors, operating Income $130 5137 5205 5118 cconomic development incentive prices, an energy-Net income 5 38 5 44 $109 5 29 Average Common Shares efliciency program, an carnings cap at:d an accelerated (mittiono 148.0 148.0 148.0 148.0 reduction m nuclear and regulatory assets for regulatory r.arnings Per Common purposes. The plan will require the Operating Companies Di idends Paid Per

• O # "O" "8M9 "C" "I N N Common Share 5.20 $ .20 $ .20 $ .20 merger becomes probable, which is expected to be after Earnings for the quarter ended March 31,1996 were btaining the aforementioned approvals of the merger.

decreased by $7 million, or $.05 per share, as a result of The write-oft amount to be charged against earnings, Toledo Edison's $11 million writemown of the net book estimated by FirstEnergy to be approximately $750 mil-value of two inactive production facilities. The write-down li n, will be determined based upon the plan's regulatory resulted from a decision that the facilities are no longer accounting and cost recovery details to be submitted by expected to provide revenues. FirstEnergy to the PUCO stalT for approval.

Earnings for the quarter ended September 30,1996 were if the merger is not consummated, the plan would be null decreased by $15 million, or $.10 per share, as a result of and void. See Management's Financial Analysis - Out-a $23 million charge for the disposition of materials and look-Pending Merger with Ohio Edison and -FirstEnergy supplies inventory. The sale and disposa! of inventory was Rate Plan for a discussion of the proposed merger and the part of the reengineering of the supply chain process. plan.

44 L

_ _ . . _ . . _ _ .. _ . _ _ _ _ ._. _ _ ._._. _ _m____ . . . _ . _ _ . _ _ _ ,

I  !

t Executives of Centerior Energy Corporation l Chairman, President and Chief Executive Officer Robert J. Farling (60) 1

[

Executive Vice President Afurray R. Edeltnan (57) i Senior Vice President Fred J, limge, Jr (47)

Senior Vice President Gary R Leidich (46)

Senior Vice President, Chief Financial Officer and General Counsel Terrence G. Linnert (50)

Controller E. Lyle Pepin (55) i Treasurer

! David Af. Blank (48)

Secretary Janis 7: Perrio (44)

Executives.of Centerior Service Company i Chairman, President and Chief Executive Officer (and Chairman &.CEO of Cleveland Electric and Toledo Edison) Robert J. Farling (60)

Executive Vice President; President - Transmission.

Services and Business Enterprises Groups (and Vice Chairman of Toledo Edison and President of Cleveland Electric) Afurray R. Edelman (57)

Senior Vice President; President - Distribution Group .

(and President of Toledo Edison) fird J. Lange, Jr (47)

Senior Vice President; President - Power Generation Group Gary R. leidich (46) l Senior Vice President - Corporate Administration Group, Chief Financial Officer and General Counsel Terrence G. Linnert (50)

Senior Vice President - Nuclear John 1: Stet:(SI)

Vice President - Business Services Jacquita K. Hauserman (54)

Vice President - Distribution Services David L. Afonseau (56)

Vice President - Nuclear-Perry Lew Ll: Afyers (47)

Vice President - Engineering & Planning Stanley E 5:wed (44)

Vice President - Sales & Marketing Al R. Temple (51)

Vice President - Nuclear-Davis-Besse John K.Hbod(45) n Controller E. L3le Pepin (SS)

Treasurer David h!. Blank (48) i Secretary Janis T Percio (44) i l Nwnber in parentheses indicates age.

15

Finrnciti and Stctisticcl Rcvi w Operating Resenues (millions of dollars)

Total Total Total Strum Operatmg Year Residential Commercial Industrial Other Retail Wholesale i lecine lleatmp Revenues 1996 $808 765 777 133 2 483 70 2 553 -

$2 553 1995 797 747 777 136 2 457 59 2 516 --

2 516 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 1986 599 517 676 80 1 872 19 1 891 13 1 904 Operating Expenses (millions of dollars)

Other Generation Amortitation of I uci & Operaimn i acihtu:s Depreciation Tames. (Jeferred i'ederal Total Purchned & Rental & Other Than Operating income Operating Year Pour M aintenance r xpense. Net Amorti/ation l'IT I xpene. Net Taxes I spenses 1996 $465 635 159 304 320 43 1II $2 037 1995 465 617 160 281 322 (53) 135 1927 1994 442 $95 160 278 309 (55) I14 1 843 1993 474 9241a) 159 258 312 23(b) 1I 2 161 i 1992 473 623 161 256 318 (52) 122 1 901 19#6 530 551 -

141 195 -

138 1 555 Income (Imss) (millions of dollars) l'ederal income Other Deferred income ( Lon)

Income & Carrying Taxes- liefore Operating AI'U DC- Deductions, Charges, Credit Interest Debt Year income i quity Net Net (1 xpensel Charecs inicTest 1996 $516 3 (17) -

9 511 337 1995 589 3 6 43 (5) 636 358 1994 578 5 8 40 (6) 625 361 1993 313 5 (589)(c) (649)(b) 398 (522) 359 1992 537 2 9 100 (7) 641 365 19#6 349 308 (8) -

116 765 406 i

Income (Imss) (millions of dollars) Common Stock (dollars per share & %)

Return on Pruerred & Average Average Prefnence Net Shares Common AlUDC- Sinck income Outstandmg 1.arnings Stock Dividends llook Year Debt Dwidends iIou) f milliond (loui I uuitv Declared Value l 1996. $ (3) 56 $ 121 148.0 $ .82 6.1 % $ .80 $13.42 1995 (3) 61 220 148.0 1.49 11.4 .80 13.40 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 1992 (1) 65 212 141.7 1.50 7.4 1.60 20.22 19#6 (118) 85 392 128.9 3.04 13.7 2.49 22.13 (al includes early retirement progrant expenses and other charges of $272 mdlion.

(b) Includes write-of of phase-in deferrals of $877 million. consisting of $172 million of deferred operating expenses and $705 million of deferred carrying charges.

i j

I I

46 l

{

Centerior Energy Corporation and Subsidiaries Electric Sales (millions of KWil) Electric Customers Residential Usage (thousands at year end)

Average Average Average Pnce Revenue Yeur Rcud< ntial Commercial Indu=inal indus' rial k%il Per Per Per w holemale Oi! er Total Residential Commercial & Other Total C ustomer k% )l C ustomer 1996 _ 7 103 7 648 12 278 2 804 1 011 30 894 925 98 1 034 7 685 11 11.38c $874.53 l

1995 _ 7 227 7 694 12 168 2 626 1 050 30 765 930 99 11 1 040 7 791 11.02 858.66 ,

1994 _ 6 980 7 481 12 069 1 842 1 074 29 446 925 98 11 1 034 7 556 10.86 820.89 1 l1993____ 6 974 7 306 ll 687 3 027 1022 30 016 924 97 1033 12 7 546 11.01 830.99 1992 _ 6 666 7 Oh6 11 551 2 814 1 011 29 128 925 97 13 1035 7 227 10.98 793.68 1986 _ 6 527 6 239 II409 359 909 25 443 899 88 12 999 7 108 9.18 654.99 '

l.oad (MW & %) Energy (millions of KWil) Fuel l Net l Scanonal C,"*P""Y U'"# Lfficiency- )

Peak Capacity Load Purchased Tuct Cost itTU Per i

Year CapaMnv load Margm l actor l oud tdl Nuclear Total Power Total Per k% H k% Il 1996 5 873 5 679 3.3% 61.2% 19 $84 12 404 31 988 817 32 805 I

1. 32c 10 336 1995 5 924 5 779 2.4 60.0 17 260 14 936 32 196 338 32 534 1.38 10 447

1991 6 226 5 291 15.0 63.9 18 (XX) I1 824 29 824 922 30 746 1.35 10 454

1993 6 226 i 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 31 063 (122) 1.45 10 395

1936 5 535 5 021 9.3 63.0 22 613 24 22 637 4 669 27 306 1.79 10 292 Imestment (millions of GJlars)

Cone.uctmn

%ork in Total Utihty Accumulated Progreu Nuclear Propert). Utility Plant in Depreciatmn & Net & Perry 1uciand Plant and Plant Total Year Service Amotivation Plant t Imt 2 Other i ympment Additions A ncts

.1996 $9 867 3 272 6 595 79 278 $6 952 $ 160 $10 210

'1995 9 768 3 036 6 732 101 302 7 135 210 10 643 1994 9 Tio 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

'1986 4 640 1368 3 272 5 144 653 9 069 1 134 9 918 Capitalitation (millions of dollars & %)

Preferred & Preference Preferred Stock, without Stock, with Mandatory Mandatory Redemption Year Common himk I quity Redempoon Provisions Provisions I ong-Term Debt Total

.1996 $1987 33% 189 3% 448 7% 3 444 57% $6 068

'1995 I 984 31 220 3 451 7 3 734 59 6 389 1994 I882 30 253 4 451 7 3 697 59 6 283 1993 1785 27 313 5 451 7 4 019 61 6 568 1992 2 889 39 364 5 354 5 3 694 51 7 301

1986 2 991 39 488 7 404 5 3 793 49 7 676 i(c) includes write-off of Perry Unit 2 of $3U million.

i td) Reduced by net energy used by the seneca Pumped Sturage Plantfor pumping.

l 57

Board of Directors Richard P. Anderson I67)

Chairman and Chief Executive Officer of The Andersons Inc., a grain, farm supply and retailing firm.1986

, Albert C. Bersticker (62)

Chairman and Chief Executive Officer of Ferro Corporation, a pmducer of speciahy chemical materials for manufactured products.1990 Thomas A. Commes (54)

President and Chief Operating Officer of The Sheruin-Williams Company, a manufacturer of paints and painting supplies.1987 n1lliam F. Conway (66)

President of William F. Conway & Associates,Inc., a management consulting firm.

Retired Executive Vice President. Nuclear of. Arizona Public Service Company, an electric utility.1994 M'a yne R. Embry (59)

President and Chief Operating Officer of the Cleveland Cavaliers, a pro. .aional basketball team.

Chairman of M.A.L. Co., a fabricator of hardboard, fiberglass and carpet,.

• materials for tb .,numative industry.1991 Robert J. Farling 460)

Chairman, President and Chief Executive Officer of the Company and Centerior Service Company.1988 Richard A. Afiller (70)

Retired Chairman and Chief Executive Officer of the Company and Centerior Service Company.1986 Frank E. Musier (66)

Retired Vice Chairman of the Advisory Board of BP America Inc., a producer and refiner of petroleum products.1986 Sister Afary Afarthe Reinhard, SND (67)

Director of Development for the Sisters of Notre Dame of Cleveland, Ohio 1986 Robert C. Savage (59)

President and Chief Executive Officer of Savage & Associates, Inc., an insurance, financial planning and estate planning firm.1990 1 l

l Milliam J. Milliams (681 Retired Chairman of Iluntington National Bank.1986 Robcrt 31. Ginn Chairman Emeritus John P Milliamson Chairman Emeritus Number in parentheses indicates age.

Date indicates first year in which elecicJ to 13aard.

Committees of the Board Emimnmental Capital and Community Executive iluman Audit Ctpenditures Responsibility and Nominating I'inance Resowres Nuclear T.A. Commes. A.C. Bersticker, Sr. M.M. Reinhard, R.J. Farling, R. A. Miller, EE. Mosier, W.E Conway, Chairman Chairman Chairman Chairman Chairman Chairman Chairman R.E Anderson W.E Conway W.R. Embry A.C. Bersticker T. A. Commes W.E Conway R.P. Anderson W.R. Embry R.J. Farling R. A. Miller T. A. Commes R.J. Fariing W.R. Embry A.C. llersticker Sr. M.M. Reinhani R. A. Miller EE. Mosier R. A. Miller EE. Mosier R.C. SavaFe Sr. M.M. Reinhard W.J. Williams EE. Mosier R C. Savage W.J. Williams R.C. Savage W.J. Williams W.J. Williams 18

NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES BUSINESS REPLY MAIL =

FIRST-CLASS M All PERMIT NO. 3356 CLEVELAND OH POSTAGEWILL BE PAID BY ADDRESSEE - .

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< SHARE OWNER SERVICES """""""'""

CENTERIOR ENERGY CORPORATION PO BOX 94661 CLEVELAND OH 44101-9886 l.l..l.l..l...llll......lli.l. l..l.l..l..ll..l.l..I J

NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES BUSINESS REPLY MAIL =

FIRST-CLASS MAIL PERMIT NO. 3356 CLEVELAND OH POSTAGEWILL BE PAID BY ADDRESSEE summmmmmmmmmmmmm SHARE OWNER SERVICES - .

CENTERIOR ENERGY CORPORATION PO BOX 94661 CLEVELAND OH 44101-9886

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i To Share Owners who hold Centerior Energy stock certificates or participate in Complete this card if you hold Centerior stock certificates or participate in our Dividend Reinvestment Plan: Centerior's Dividend Reinvestment Plan and wish to discontinue duplicate mailings coming to this address.

If you receive duplicate copies of Company mailings in your household and have no need for the extra copies, you will help us Name (Please Pnnt) economize by completing and returning the card on the upper right. street Your instructions will eliminate all duplicate mailings except dividend checks, proxy city state zip code cards and tax information. . Ehminate Continue Mailings to Mashngs to Your help is appreciated. Account (s) No. Account No.

(Account riurnber appears cn your dwidend check stub or DRP staternent of account)

If yc i have questions, please call Share Owner Services at 800-433-7794 or at signature of share owner (s) 447-2400 in the Cleveland area.

Do not return this card if you receive only one copy of each mailing in your household.

To Share Owners who own Centerior Complete this card if you own Centerior stock through a broker and wish to be on Energy stock through a broker: our mailing list to receive Quarterly Reports to Share Owners, as released.

If your stock is held by your broker and you want to receive our Quarterly Reports to Share Owners, as released, complete and Name (Please Pnnt) return the card on the lower right.

If you are already on our mailing list, you do street not need to complete and return the card to continue receiving Quarterly Reports. city state z:p coda If you have questions, please call Share ,

Owner Services at 800-433-7794 or at 447-2400 in the Cleveland area. -signature of snare owner (s)

You do not need to complete and return this card if you, as a beneficial share owner, are already on our mailing list for Quarterly Reports. Do not return this card if you hold Centerior stock certificates or participate in our Dividend Reinvestment Plan since you already receive Quarterly Reports with your dividend checks or DRP statements of account.

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Share Owner information Executive Offices investor Relations Common Stock Centerior Energy Corporation Inquiries from security analysts and institu- Listed on the New York, Chicago and 6200 Oak Tree Eoulevard tional investors should be directed to Pacific Stock Exchanges. Options are traded independence, Oil Ronald E. Seeholier, Manager-Investor on The Pacific Stock Exchange. New York Telephone: (216) 447-3100 Relations, at the Company's mail address Stock Enhange symbol-CX. Newspaper FAX: (216) 447-3240 or by telephone at (216) 447-3339. abbreviation - CentEn or CentrEngy.

Mail Address Dividend Reinvestment and Stock Annual Meeting Centerior Energy Corporation Purchase Plan and Individual The 1997 annual meeting of the share P.O. Box 94661 Retirement Account (CX*lRA) owners of the Company will be held on Cleveland, Oil 44101-4661 The Company has a Disidend Reinvestment May 8,1997. Owners of common stock as and Stock Purchase Plan which provides of March 12,1997, the record date for the General infonnation about the Company share owners of record and customers of meeting, will n.e eligible to vote on matters is available on the Internet at .

bttp://w ww.centenor.com Cleveland Electnc and Toledo Edison a brought up for share owners' consideration.

convement means of purchasing shares of Transfer Agent Company common stock by investing all Environmental Report Centerior Energy Corporation or a part of their quarterly dividends as well The Company will furmsh to share owners, Share Owner Senices as making cash investments. In addition, without charge, a copy of a report on its P.O. Box 94661 individuals may establish an individual environmental performance. Requests Cleveland, Oil 44101-4661 retirement account (IRA) w hich invests in should be directed to Share Ow ner Services.

Company common stock through the Plan.

stock transfers may be presented at Information relating to the Plan and the Form 10-K liarris Trust Company of New York CX+ IRA may be obtained from Share The Company will furnish to share owners, 77 Water Street,5th Floor Owner Services. without charge, a copy of its most recent N'ew York, NY 10005 annual report to the Securities and CX*1RA Custodian Exchange Commission. Requests should Registrar All communications about an existing be directed to Share Owner Services.

KeyBank National Association CXalRA should be directed to the Corporate Trust Division Custodian at the address or telephone Audio Cassettes RO. Box 6477 numbers listed below: Share ow ners with impaired vision may "leveland, Oil 44101 obtain audio cassettes of the Company's KeyBank National Association Quarterly Reporu. and Annual Report.

independent Public Accountants Custodian, CX.!RA, P.O. Box 6477 To obtain a cassette, simply write or call Cleseland,01144101 arthur Andersen LLP Share Owner Services. There is no charge

)iuite 18G) In Cleveland area: 813-5745 for this service.

J00 Public Square Outside Cles eland area: (800) 542-7792 Cleveland, OH 44114 thare Owner Services We hase made forward-looking statements in this Annual Report to Sharc Owners with respect to the financial condition, results of operations. strategic plan and business of Centerior Energy, and FirstEnergy 10mmumcations regarding stock transfer following the consummation of the merger with Ohio Edison, w hich involve certain risks and uncertainties.

equirements, lost certificates, dividends and Forward-huking statements are statements about future performance or results, including any statements hanges of address should be directed to udng the words "believel* " expect," "anucipate" or similar words. For all of those statements, w e claim the protection of the safe harter for forward-kmking statements contained in the Private Secunties Litigation Share Owner Sen ices. To reach Share Reform Act of 1995. Factors that may cause actual results to differ materially from those contemplated by

)wner Services by phone, call: such forward-hmking statements include, among others. the following possibdities: (1) expected cost nasings from the merger are not fully realized; (2) regional competitive preuure in the electric utihty n Cleveland area: 447-2400 industry increases significantly; 0) the effects of unanticipated esents on the Operating Companies' expectatmns regarding cosi recmcry over the regulatory plan period or on the carrying value of regulatory lutside Cleveland area: (800) 433-7794 assets and on the Operatmg Companies' ability to continue to comply with the provisions of SFAS 71 (as defmed herein) cause un impairment of property, plant and equipment or variances from the amounts I' lease have your account number ready disclosed:(4) costs or difficulties related to the inteFration of the businesses of Ohio Edison and Centerior then calling. are greater than expected; (5) state and federal regulatory initiatives are implemented that further increase competition, threaten cost and imestment recmcry or impact rate structures or dividends; and (M national and regional econorMe conditions are less favorable than expected.

49

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l l-Centerior Energy Corporation i BULK RATE

' P.O. Box 94661 i U.S. POSTAGE

. Cleveland,OH 44101-4661 PAID l CMYELAND, Omo  !

PERMIT NO.409

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