ML20140B903

Toledo Edison Co 1996 Annual Rept

ML20140B903
Person / Time
Site:	Beaver Valley
Issue date:	12/31/1996
From:	Andersen A TOLEDO EDISON CO.
To:
Shared Package
ML20140B855	List: ML20140B850 ML20140B865 ML20140B878 ML20140B886 ML20140B897 ML20140B903 ML20140B908
References
NUDOCS 9706060379
Download: ML20140B903 (30)

Text

.- ._. - . - - - -_ .

4 y il f(l'h

9 J g

,,;m.

?q

, ,

{

);;' .A 4

A

~

I.c '

inn i j p'a % L e

27

- . gy",

4

^ l:?i i b; ..'y . 4 A

j i ,

1 r

[3

\.

x 3.,. : ..

, L.

m ~g a I

~

L{

- f:. .y j f,g ' . ,#

'M.<

S ,4);bff $; i

l

.;. X T .mW ! ' -

1996 Annual Repoit i

The To edo Edison Company A SL'lISIDIARY OF CENTERIOR ENERGY CORPORATION N[0ADOCK I [

ibOU!

Toledo Ed' son Table of contents The Company, a wholly ow ned subsidiary of Centerior Energy Corporation.

1 Managernent's was incorporated under the laws of the State of Ohio in 1901 and provides Financial Analysis electric senice to a 2.500-square mile area of northwestern Ohio. The Company 8 Report of Independent aho prosides electric energy at w holesale to 13 municipally ow ned distribution Public Accountants systems and one rural electric cooperative distribution system in ih service area.

9 Financial Statements Although the principal city in its service area is Toledo, the Company derives and Notes about 5% of its total electric retail revenues from customers outside the city. The y _cnr.rcY rnd OminO IM W3p saa obaut 29M0d cusmmeis.

Statistical Review This report includes discussions regarding the pending merger of Centerior Energy 28 investor Information Corporation and Ohio Edison Company to form FirstEnergy Corp. On March 27, 1997, common stock share owners of both companies approved the merger.

Various aspects of the merger still remain subject to approval by certain regulatory agencies. The merger is expected to be consummated in late 1997, at which time the Company would become a w holly owned subsidiary of FirstEnergy Corp.

Executive Offices The Toledo Edison Company 300 Madison Asenue Toledo, Oil 43652-0001 Telephone: (419) 249-5000 Directors General information about the Company Robert J. Earling, Chairman and Chief and Centerior Energy Corporation is available on the internet at hupWw w w.centnioremn E .ecutive Officer of the Company and The Cleseland Electric illuminating Company and Chairman, President and Officers Chief Executive Officer of Centerior Eneigy Corporation and Centerior Chainnan and Chief Executive Officer Robert l. Farling Senice Company.

Vice Chairman Sturray R. EJciman Murray R. Edelman, Vice Chairman of the Company President of The President Fred /. Langc. fr.

Cleveland Electric illuminating Vice President & Chief Financial Officer Terrence (1. Linneri Company and Executive b,.ee Pres.i dent of Centerior Energy Corporation and Vice President Gary R. Leidich Centerior Service Company.

Regional Vice President - West John E. Paganic fred J. Lange, Jr., President of the Company, Vice President of The Treasurer David A1. Illanl<

Cleveland Electric illuminating Controller E. Lv/c npin

~

Company and Senior Vice President of Centerior Energy Corporation and Secretary Janis T. Percio Centerior Senice Company.

ne cmr. rh.,in,apius t~m .,w % Pa n ' aJsarmom nwmar Q Per< J anon ys lall wrn

Management's Financial Analysis customer base in a changing industry. Prior to these renewals,94% of our industrial base rate (nonfuel) reve-Outlook nues under contract was scheduled for renewal before Strategic Plan 1999. Following the renewals. the comparable percentage

. is 19%. At year-end 1996,61% of our industrial base rate in early 1994, Centerior E.nergy Corporation (Centenor revenues was under long-term contracts.

Energy), ung with The Toledo Edison Company (Com-pany) ano I he Cleveland Electric illuminating Company Northwest Ohio is recognized as one of the nation's (Cleveland Electric), created a strategic plan to achieve leading areas in job creation and economic growth. New the twin goals of strengthening their financial conditions and expanded operations at businesses such as and improving their competitive positions. The Company Delafoil/Phillips and Alcoa, as well as the development and Cleveland Electric are the two wholly owned electric surrounding a new, major North Star BHP Steel facility, utility subsidiaries of Centerior Energy. The plan's objec- are adding to our opportunities for revenue growth. In lives relate to the combined operations of all three com. 1996, we gained commitments on 23 economic develop-panics. To meet these goals, we seek to maximite share ment projects, representing almost $5 million in new and ow ner return on Centerior Energy common stock, achieve retained annual base rate revenues and o er 3,000 new profitable revenue growth, become a leader in customer and retained jobs for Northwest Ohio.

sad 3 faction, build a wmmng employee team and attam Unir (Lc s.ragic plan, Center oc E. erg ud its sub .1-increasingly competitive supply costs. During 1996, the iaries are structured in six strategic business groups to third year of the eight-> car plan. we made strong gains better focus on competitiveness. During 1996, the Com- l toward reaching some plan objectives but need significant pany reduced employment from about 1,800 to 1,600.

improvement on others. Further reduction in our uork force to about 1,400 is A major step taken to reach the twin goals was Centerior planned by year-end 1997. We also plan to reduce Energy's agreement to merge with Ohio Edison Company expenditures for operation and maintenance activities (Ohio Edison) to form a new holding company called (exclusive of fuel and purchased power expenses) and FirstEnergy Corp. (FirstEnergy). The proposed merger, capital projects from $384 million in 1996 to approxi-combined with good operating performance, a successful mately $360 million in 1997 by continuing to streamline price increase and the accelerated paydown of debt, operations. We will continue to reduce our unit cost of resulted in a significant stock price gain, such that the fuel used for generating electricity, w hile safely improving total return to Centerior Energy common stock share the operating performance of our generation facilities.

owners during 1996 was 33% The merger is espected to Reducing fixed financing costs is another primary objec-better position the merged companies to meet coming tive in strengthening the Company's financial and com-competitive challenges. petitive po3ition. In 1996, we reduced our fixed Resenue growth is a key objective of the plan, from bligations for debt, preferred stock and generation facili-pricing actions as well as market expansion, ties leases by $82 millioc. See Note 2. Interest expense and preferred disidends dropped $16 million. In the last in April 1996 The Public Utilities Commission of Ohio three s ears, fixed obligations w ere reduced by (PUCO) approved in full the $119 million price increases $277 million.

requested by the Company and Cleveland Electric

~

($35 million and $84 million, re3pectivelv). The primary in 1996, we reported earnings available for common stock

~ '

purpose of the increases was to provide additional reve. of $40 million compared to $79 million in 1995. The nues to recover all the costs of providing electric service, reported decrease masks a $5 million increase in basic l

including deferred costs, and provide a fair return to earnings from operations and a sigmficant improvement m l Centerior Energy common stock share owners. The addi. the quality of reported earnings. The decline in reported tional revenues also provided cash to accelerate the earnings is primarily attributable to the delay in imple-redemption of debt and preferred stock. menting ur price increase until late April, while we 1 began at the end of 1995 to charge earnings for operating Kilowatt-hour sales to the Company's retail customers expenses and amortization of deferrals which the price increased by 1.6% compared to 1995 results as sales t nerease was designed to recover. The price increase industrial and commercial customers increased by 3% and contributed approximately $14 million (after tax) more 2.4%, respectively. Adjusted for weather, kilowatt-hour cash to our earnings in 1996. The change in regulatory '

sales to commercial and residential customers increased accounting measures resulted in a $47 million decrease in by 4.7% and 1%, respectively. reported earnings for 1996 versus 1995. In addition,1996 Another key element of our revenue strategy is to otter results included noncash charges against earnings of long-term contracts to large industrial customers who Sil million after tax for the disposition of inventory and might otherwise consider changing power suppliers. Dur- write-down of inactise production facilities. The full ben-ing 1996, we renewed and extended for seven to ten years efit of our $35 million price increase, substantial reduc-contracts with many of our large industrial customers, tions in operation and maintenance expenses and a including the six largest. While this strategy has resulted continuing decline in interest charges are expected to in lower prices for these customers, in the long run, it is result in improvement in earnings and cash flow from expected to maximite share owner value by retaining our operations in 1997.

I

Panding M:rg r with Ohio Edison least $2.5 billion through the year 2000, yielding addi-ti n 1 i ng-term savings in the form of lower interest i On September 16,1996, Centerior Energy announced its l l merger with Ohio Edison in a stock-for-stock transaction. ' Y# "

• i Centerior Energy share owners will receise 0.525 of a The Company's share of the $1 billion of savings will share of FirstEnergy common stock for each share of permit the Company to reduce prices to its customers as Centerior Energy common stock owned, while Ohio discussed bel' ' ander FirstEnergy Rate Plan. Absent the Edison share owners will receive one share of FirstEnergy merger, the Company plans to achieve savings as well, but common stock for each share of Ohio Edison common at a lower level, which is expected to allow prices to bc l stock owned. Following the merger, FirstEnergy will frozen at current levels until at least 2002 despite infla-directly hold all of the issued and outstanding common tionary pressures.  ;

stock of the Company, Cleveland Electric and Ohio Various aspects of the merger are subject to the approval Edison. of the Federal Energy Regulatory Commission (FERC)

FirstEnergy plans to account for the merger as a purchase and other regulatory authorities. Common stock share i in accordance with generally accepted accounting princi. ou ners of Centerior Energy and Ohio Edison are expected ples. If FirstEnergy elects to apply, or " push down", the to vote on approval of the merger agreement on elTects of purchase accounting to the financial statements March 27,1997. The merger must be approved by the of the Company and Cleveland Electric, the Company aflirmative votes of the share owners of at least two-thirds and Cleveland Electric would record adjustments to: of the outstanding shares of Ohio Edison common stock (1) reduce the carryirq value of nuclear generating plant and a majority of the outstanding shares of Centerior by $1.25 billion to faii value; (2) recognize goodwill of Energy common stock. The merger is expected to be

$865 million; (3) reduce common stock equity by $401 elTective in late 1997.

million; (4) reset retaired earnings of the Company and Cleveland Electric to zero; and (5) reduce the related FirstEnergy Rate Plan )

deferred federal income tax liability by $438 million. On January 30,1997, the PUCO approved a Rate Reduc-These amounts reflect FirstEnergy's estimates of the pro tion and Economic Development Plan (Plan) for the forma combined adjustments for the Company and Company and Cleveland Electric to be etTective upon the Cleveland Electric as of September 30,1996. The actual consummation of the Centerior Energy and Ohio Edison adjustments to be recorded could be materially ditTerent merger. The Plan would be null and void if the merger is from these estimates. FirstEnergy has not decided not consummated. The rate order granting the April 1996 whether to push down the etTects of purchase accounting price increase will remain in full force and effect during to the financial statements of the Company and Cleveland the pendency of the merger or if the merger is not Electric if the merger with Ohio Edison is completed, nor consummated.

has FirstEnergy estimated the allocations between the The Plan calls for a base rate freeze through 2005 (except two compames if push-down accounting is elected.

to comply with any significant changes in environmental, We believe that the merger will create a company that is regulatory or tax laws), followed by an immediate better positioned to compete in the electric utility industry $310 million (which represents a decrease of approxi- .

than either Centerior Energy or Ohio Edison could on a mately 15% from current levels) base rate reduction in I stand-alone basis, enhancing long-term share owner value 2006 (the Company's share is expected to be $93 mil-and providing customers with reliable service at more lion); interim reductions beginning seven months after ,

stable and competitive prices. consummation of the merger of $3 per month increasing i The combination of Centerior Energy and Ohio Edison is to $5 per month per residential customer by .luly 1,2001; a natural alliance of two companies with adjoining service $105 million for economic development and energy etli- l areas who already share many major generating units. ciency programs (the Company's share is expected to be l FirstEnerg'y expects to reduce costs, maximize efficiencies $35 million); carnings caps for regulatory purposes for the and increase management flexibility in order to enhance Company and Cleveland Electric; a commitment by revenues, cash flows and earnings and be a more etrective FirstEnergy for a reduction, for regulatory accounting competitor in the increasingly competitive electric utility '

purposes, in nuclear and regulatory assets by the end of industry. 2005 of at least $2 billion more than it otherwise would be, through revaluing facilities or accelerating deprecia-b..rstEnergy anticipates the merger will result in net tion and amortization; and a frecie in fuel cost factors savings for the combmed companies of approximately until December 31, 2005, subject to PUCO review at

$1 billion over ten years, in addition to the ,mpact i of cost 3 car-end 2002 and annualinflation adjustments. The Plan reduction programs underway at both compames. The permits the Company and Cleveland Electric to dispose additional savings, which probably could not be ach,evedi of generating assets subject to notice and possible PUCO without the merger, will result primarily fron] the reduc-

_ appmval and to enter into associated power purchase tion of duphcative functions and positions, jomt dispatch arrangements.

of generatmg facihties and procurement ethciencies.

FirstEnergy expects reductions in labor costs to comprise Total prica savings for the Company's customers of about i slightly over half the estimated savings. In addition, $11I million are anticipated over the term of the Plan, as l FirstEnergy expects to reduce sptem-wide debt by at summarized below, excluding potential economic devel- '

I l

_ _. _. ~ _ __

l 1

l opment benefits and assuming that the merger takes place be determined at that time. FirstEnergy estimates the I on December 31, 1997. The total price savings for cus- write-off amounts for the Company and Cleveland Elec-tomers of the Company and Cleveland Electric are tric will total approximately $750 million. The Company's expected to be about $391 million. share of the write-olTis expected to be about one-third of this amount. Under the Plan, some or all of this write-off D cannot be applied toward the $2 billion regulatory com-l dollars) mitment discussed above. I or Imancial reportmg pur-i998 $ a poses, nuclear generating units are not expected to be

'999 to impaired. If events cause either the Company or Cleve-Q

$0u2 y

17 land Electric or both companies to conclude they no longer meet the criteria for applying SFAS 71 for the 2u03 17 remainder of their business, they would be required to 20n4 17 w rite oft their remaining regulatory assets and measure all 2M 2

• other assets for impairment. For a discussion of the E criteria for complying with SFAS 71, see Note 7(a).

Under the Plan',s earnings cap, the Company and Cleve- April 1996 Rate Order land Electne wdl be permitted to earn up to an 11.5%

return on common stock equity for regulatory purposes in its April 1996 order, the PUCO granted price increases during calendar years prior to 2000,12% during calendar of $35 million and $84 million in annualized revenues to years 2000 and 2001, and 12.59% during calendar years the Company and Cleveland Electric, respectively. The 2001 through 2005. The regulatory return on equity is Company and Cleveland Electric intend to freeze rates at i generally expected to be lower than the return on equity existing levels until at least 2002, although they are not )

calculated for financial reporting purposes due to the precluded from requesting further price increases. In the calculation methodology defined by the Plan and, as order, the PUCO provided for recovery of all regulatory discussed in the next paragraph, anticipated difTerences in assets in the approved rates, and the Company and accounting for the Plan for financial reporting versus Cleveland Electric continue to comply with the provisions regulatory purposes. If for any calendar year the regula- of SFAS 71.

tory return on equity erceeds the specified level, the in connection with its order, the PUCO recommended excess will be credited to customers, first through a that the Company and Cleveland Electric write down I reduction in Percentage of Income Payment Plan (PillP) certain assets for regulatory purposes by an aggregate of arrearages and then as a credit to base rates. PIPP is a $1.25 billion through 2001. If the merger is consum-deferred payment program for low-income residential mated, the Company and Cleveland Electric believe custmnus, acceleration of $2 billion of costs under the Plan would i The Plan requires, for regulatory purposes, a revaluation fully satisfy this recommendation. The Company and of or an accelerated reduction in the investment in Cleveland Electric agree with the concept of accelerating i nuclear plant and certain regulatory assets of the Com- the recognition of costs and the recovery of assets as such pany and Cleveland Electric (excluding amounts due concept is consistent with the strategic objective to from customers for future federal income taxes) by at become more competitive. However, the Company and least $2 billion by the end of 2005. FirstEnergy has not yet Cleveland Electric believe that such acceleration must determined each company's estimated share of the $2 bil- also be consistent with the reduction of debt and the lion. Only a portion of the $2 billion of accelerated costs is opportunity for Centerior Energy common stock share expected to be charged against the two companies' earn- owners to receive a fair return on their investment. Con-

ings for financial reporting purposes by 2005. sideration of whether to implement a plan responsive to the PUCO's recommendation to revalue assets by FirstEnergy believes that the Plan will not provide for the

$i.25 bilhon is pending the merger with Ohio Edison.

i full recovery of costs and a fair return on investment associated with the nuclear operations of the Company Notwithstanding the pending merger with Ohio Edison and Cleveland Electric. Pursuant to the PUCO's order, and discussions with regulators concerning the effect of FirstEnergy is required to submit to the PUCO stafT the the Plan on the Company's nuclear generating assets, we regulatory accounting and cost recovery details for imple- believe it is reasonable to expect that rates will be set at menting the Plan. After approval of such details by the levels that will recover all current and anticipated costs PUCO staff, FirstEnergy expects that the Company and associated with the Company's nuclear operations, Cleveland Electric will discontinue the application of including all associated regulatory assets, and such rates Statement of Financial Accounting Standards (SFAS) can be charged to and collected from customers. If there 71 for their nuclear operations if and when consummation is a change in our evaluation of the competitive environ-of the merger becomes probable. The remainder of their ment, regulatory framework or other factors, or if the business is expected to continue to comply with the PUCO significantly reduces the value of the Company's provisions of SFAS 71. At the time the merger is proba- assets or reduces the approved return on common stock ble, the Company and Cleveland Electric would be equity of 12.59% and overall rate of return of 10.06% or required to write oft certain of their regulatory assets for both, for future regulatory purposes the Company may be financial reporting purposes. The w rite-off amounts uould required to record material charges to earnings.

3

Margtr cf the Company into Clevalznd Elsctric customer classifications) is at least several 3ears away and that any transition to pure competition will be in phases.

In October 1996, the FERC authon. zed the merger of the The FERC and the PUCO have acknowledged the need Company into Cleveland Electric. The merger agreement to provide at least partial recovery of stranded investment between Centenor Energy and Ohio Edison requires the 7 as greater competition is permitted and, therefore, we approval of Ohio Edison prior to consummation of the believe that there will be a mechanism developed for the ,

proposed merger of the Company into Cleveland Electnc. '

recovery of at least some stranded investment. Ilowever, Ohio Edison has not yet made a decision. See Note 16.

due to the uncertainty involved, there is a risk in connec-Competit. ion - tion with the introduction of retail wheeling that some of the Company's assets may not be fully recovered.

Structural changes in the electric utility industry from Competition from municipal electric suppliers for retail actions by both federal and state regulatory bodies are business in our service area is producing both favorable continuing to place downward pressure on prices and and unfavorable results in our business. All existing cus-increase competition for customers. The Company's tomers in the City of Clyde now have the right to choose nuclear plant licenses have required open-access trans-between the municipal supplier and the Company, as a

• nussmn for its wholesale customers for 20 years. More result of a November 1996 referendum overtur'ning a i recently, the Federal Energy Pohey Act of 1992 initiated broader access to utility transmission systems and, in Clyde ordinance limiting such choice. In the City of '

Toledo, City Council funded a consultant's study of 1996, the FERC adopted rules relating to open-access alternatives to our senice. A draft of the consultant's transmission services. The open-access rules require utili-report states that, if Centerior Energy and Ohio Edison ties to deliver power from other utilities or generation merge, a municipal system in Toledo could not compete i sources to their wholesale customers at nondiscriminatory with the Company because of the rate reductions con-PS'S' tained in the Plan approved by the PUCO. The consult-  !

A number of states have enacted transition legislation ant's draft report also states that, if the merger does not I which provides for introduction of competition for retail occur, a muaicipal system could be competitive with the electric business and recovery of stranded investment. Company in one portion of the City, flowever, errors have Several groups in Ohio are studying the possible introduc- been found in the draft report which may change the I tion of retail wheeling and stranded investment recovery. content of the final consultant's report. The final report Retail wheeling occurs when a customer obtains power will be considered by the City's Electric Franchise from a utility company other than its local utility. The Review Committee before making its recommendation to term " stranded investment" generally refers to fixed costs City Council later in 1997. Municipal expansion activity approved for recovery under traditional regulatory meth- continues in areas surrounding several towns serviced by ods that would become unrecoverable, or " stranded", as a municipal systems in our service area. We continue to result of legislative changes which allow for widespread pursue legal remedies to halt illegal municipal expansion competition. The PUCO is sponsoring discussions among in our service area.

a group of business, utility and consumer interests to The merger with Ohio Edison and the benefits of the Plan explore ways of promoting competitive options without to our customers are expected to better position us to deal unduly harming the interests of utility company share with the structural changes taking place in the industry owners or customers. The PUCO also has introduced t" and to improve our competitive position with respect to pilot projects, both intended as imtial steps to introduce municipalization.

competitive elements into the Ohio electric utility business. Nuclear Operations A bill to restructure the electric utility industry in Ohio The Company has interests in three nuclear generating has been introduced in the Ohio llouse of Representa- ur.its - Davis-Besse Nuclear Power Station ( Davis-tives. A bipartisan committee from both legislati e houses Besse). Perry Nuclear Power Plant Unit 1 (Perry Unit 1) has been formed to study the issue. Centerior Energy and Beaver Valley Power Station Unit 2 (Beaver Valley presented the Company's model for customer choice. Unit 2)-and operates the first one. Cleveland Electric called Energy Choice, to the PUCO discussion group in operates Perry Unit 1.

August 1996. Under this model, full retail competition All three units were out of service temporarily for refuel-should be miroduced by 2002, but two essential elements, ng durbg 1996; thus, plant availability factors for Davis-recovery of stranded investment and levelization of tax Besse, Perry Unit I and Beaver Valley Unit 2 were 85%

burdens among energy suppliers, must be resolved m the 76% and 70% respectively, for 1996. The 1994-1996 mtenm to assure share owners recovery of and a fair availability factors for the units were 91% 72% and 85%

return on their mvestments.

for Davis-Besse, Perry Unit I and Beaver Valley Unit 2, Although competitive pressures are increasing, the tradi- respectively. The comparable industry averages for a tional regulatory framework remains in place and is three-year period (as of August 31,1996) are 82% for expected to continue for the foreseeable future. We can- pressurized water reactors such as Davis-Besse and Bea-not predict when and to what extent retail wheeling or ver Valley Unit 2 and 78% for boiling water reactors such other forms of competition will be allowed. We believe as Perry Unit 1. Davis-Besse established a plant record that pure competition (unrestricted retail u becling for all with its 509-day continuous run at or nect full capacity

.I

, l before shutting down for its scheduled refueling outage in A new Statement of Position issued by the Accounting April 1996. Standards Executive Committee of the American Insti-A s.igmficant part of the strategic plan m.volves ongoing tute of Certified Public Accountants, Inc. effective Janu.

efforts to increase the availability and lower the cost of pmvides guidance on the recognition and production of our nuclear units. In 1996, we contmued our disclosure of environmental remediation liabilities. Adop-i progress toward increasing long-term unit availabih_ty h d k mW b 1997 is m gM m W a i while continuing to lower production costs. The goal of material aderse effect on our financial condition or i k our nuclear improvement program is for Cleveland Elec- resuhs of peratms I tric to replicate Davis-11 esse's operational excellence and Common Stock Dividends i cost reduction gains at Perry Unit 1, while improving .

< performance ratings. The Company has not paid a common stock dividend to Centerior Energy smce February 1991. From 1993

Our nuclear units may be impacted by activities or events through November 1996, the Company was prohibited 4 beyond our control. Operating nuclear units have exper- from paying a common stock dividend by a provision in its I ienced unplanned outages or extensions of scheduled mortgage. See Capital Resources and I.iquidity-l.iquidity l outages because of equipment problems or new regulatory below. The declaration and payment of future common requirements. A major accident at a nuclear facility stock dividends is at the discretion of the Company's

, anywhere in the world could cause the Nuclear Regula- Board of Directors, subject to applicable legal restrictions.

i tory Commission (NRC) to limit or prohibit the opera-tion or licensing of any domestic nuclear unit. If one of Capital Resources and Liquidify l i our nuclear units is taken out of service for an extended '

1 period for any reason, including an accident at such unit 1994-1996 Cash Requirements or any other nuclear facility, we cannot predict whether We need cash for normal corporate operations (including regulatory authorities would impose unfavorable rate

' the payment of dividends), retirement of maturing securi-treatment. Such treatment could include taking our ties, and an ongoing program of constructing and improv-

, alTected unit out of rate base, thereby not permitting us to ing facilities to meet demand for electric service and to recover our investment in and earn a return on it, or comply with government regulations. Our cash construc- l

. disallowing certain construction or maintenance costs. An tion expenditures totaled $41 million in 1994, $53 million j extended outage coupled with unfavorable rate treatment in 1995 and $47 million in 1996. Our debt and preferred  ;

could have a material adverse elTect on our linancial stock maturities and sinking fund requirements totaled l condition, cash flows and results of operations. Premature $57 million in 1994,$83 million in 1995 and $58 million plant closings could also have a material adverse etTect on 4

in 1996. In addition, we optionally redeemed $184 million

] our financial condition, cash flows and results of opera- of securities in the 1994-1996 period, including $94 mil-3 tions because the estimated cost to decommission a plant lion of tax-exempt issues refunded in 1995.

exceeds the current funding in the decommissioning trust.

As discussed in Note I(j), in May 1996, the Company i Hazardous Waste Disposal Sites and Cleveland Electric began to sell on a daily basis i substantially all of their retail customer accounts receiv-The Ccmpany is aware of its potential involvement in the ables and unbilled revenue receivables to Centerior Fund-l cleanup of several sites. Although these sites are not on ing Corporation (Centerior Funding), a wholly owned i

the Superfund National Priorities List, they are generally subsidiary of Cleveland Electric. In July 1996, Centerior l being administered by various governmental entities in

~

Funding issued $150 million in AAA-rated accounts

the same manner as they would be administered if they receivable-backed investor certificates due in 2001 with were on such list. Allegations that the Company disposed an interest rate of 7.2% The Company's share of the net i of harardous waste at these sites, and the amount proceeds from the accounts receivable securitization was j involved, are often unsubstantiated and subject to dispute. used to redeem higher-cost securities and for general i Federal law provides that all "potentially responsible corporate purposes.

parties" (PRps) for a particular site be held liable on a joint and several basis. If the Company were held liable As a result of these activities, the embedded cost of the for 100% of the cleanup costs of all the sites referred t s debt at the end of 1996 declined to 9.13%

above, the cost could be as high as $115 mdhon. Ilow- ersus 9.23% in 1995 and 9.48% in 1994.

ever, we believe that the actual cleanup costs will be The Company is a party to a $125 million revolving credit substantially lower than $115 million, that the Company's facility which was renewed in May 1996 for a one-year share of any cleanup costs will be substantially less than term. In 1996, portions of the nuclear fuel lease financing 100% and that most of the other PRPs are financially able vehicles for the Company and Cleveland Electric to contribute their share. The Company has accrued a matured: 584 million of intermediate-term notes in Sep-liability totaling $3 million at December 31,1996 based tember and a $150 million letter of credit supporting on estimates of the costs of cleanup and its proportionate short-term borrowing in October. These facilities were responsibility for such costs. We believe that the ultimate replaced by $100 million ofintermediate-term notes and a outcome of these matters will not have a material adverse $100 million two-year letter of credit. The net reduction elTect on our financial condition, cash flows or results of in the facility size results from lower nuclear fuel financ-operations. ing requirements.

S

i l 1997 cnd B: yond C:sh R quirsm:nts financing for the maturing issues may not be needed in r

1997. The Company is a party to a $125 million revolving l Our anticipated 1997 cash requirements for construction credit facility which is expected to be renewed when it are $61 million. Debt and preferred stock matunties and matures in May 1997, smkmg fund requirements are $51 milhon. Of this amount, $10 million are for a tax-exempt issue secured by Current credit ratings for the Company are as follows:

first mortgage bonds and subject to optional tender by the standar,d Moody's owners on November I,1997, which we expect to replace dM"1 se'"7Cc.

with a similar issue at a substantially lower interest rate.

We expect to meet remaining requirements with internal "* " ""8 8' h""d* BB B2 cash generation and cash reserves. We also expect to be subordinate debt B+ Bt able to optionally redeem more debt in 1997 than we did I'IC"'d "'k-- B b2 in 1996. Following the FirstEnergy merger announcement, both We expect to meet all of our 1998-2001 cash require. rating agervies placed the Company's securities on credit l ments with internal cash generation. Estimated cash watch v.ith positive implications.

l l

requirements for our construction program during this Federal law prohibits the Company from paying dividends

period total $213 million. Debt and preferred stock matu- out of capital accounts. The Company has since 1993 l

rities and sinking fund requirements total $207 million for declared and paid preferred stock dividends out of appro-j the same period. If economical, additional securities may priated current net income included in retained earnings. ,

l be redeemed with funding expected to be provided At the times of such declarations and payments, the '

through internal cash generation. Company had a deficit in its retained earnings. At l Consummation of the merger with Ohio Edison is December 31, 1996, the Company had $223 million of I expected to reduce the Company's cash construction appropriated retained earnings for the payment of divi-requirements and improve its ability to redeem fixed dends. The Company also has a provision in its mortgage obligations. applicable to approximately $94 million of outstanding first mortgage bonds ($31 million of which mature in Liquidity August 1997) that requires common stock dividends to be Net cash flow from operating activities in 1996 was p id out of its total balance of retained earnings, which significantly increased from 1995 by implementation of had been a delicit from 1993 through November 1996.

the price increase effective in April 1996. A part of the As part of a routine audit, the FERC is considering net proceeds from our accounts receivable securitization statements which it requested and received from the of $78 million was used to redeem other higher-cost Company and Cleveland Electric supporting the payment securitics, producing net savings in our overall cost of of dividends out of appropriated current net income borrowing. In 1996, we reduced our fixed obligations for included in retained earnings while total retained earnings debt, preferred stock and generation facilities leases by were a deficit. At December 31, 1996, the Company's

$82 million. At year-end 1996, we had $81 million in cash total retained earnings were $5 million. The final disposi-  ;

and temporary cash investments, down from $94 million tion of this issue is a factor expected to be considered by I at year-end 1995. FirstEnergy in deciding whether to apply purchase l Additional first mortgage bonds may be issued by the accounting to the Company and Cleveland Electric, one Company under its mortgage on th'e basis of property elTect of u hich would be to reset retained earnings to zero.

additions, cash or refundable first mortgage bonds. If the if the merger is not consummated or if FirstEnergy applicable interest coverage test is met, the Company determines not to apply purchase accounting to the two may issue first mortgage bonds on the basis of property companics, the Company and Cleveland Electric intend additions and, under certain circumstances, refundable to contmue to support their position and pursue all availa-bonds. At December 31,1996, the Company would have ble alternatives to allow them to continue the declaration been permitted to issue approximately $148 million of and payment of dividends.

additional first mortgage bonds. If FirstEnergy elects to apply purchase accounting to the Company if the merger Results of Operations with Ohio Edison is completed, the Company's first mortgage bond capacity would be adversely afTected. 1996 vs.1995 There are no restrictions on the Company's ability to issue Factors contributing to the 2.77c increase in 1996 operal-preference stock. Under its articles of incorporation, the ing revenues are as follows:

1 Company cannot issue preferred stock unless certain Minions earnings coverage requirements are met. Ilased on its increaw_Lpserrase) in oreratin2_R_r.yrnun nLpoliars 1996 carnings, the Company could not issue additional Base Rates sii preferred stock. Kwli sales volume and Mn 11 Wholesale Revenues 4 The Company and Cleveland Electric have $273 million y g gymyn nemny., ,

in financing vehicles to support their nuclear fuel leases, Miscenancous Reienues _m

$83 million of which mature in 1997. Replacement lotal O 6

The increase in 1996 base rates revenues resulted prima- the supply chain process increases the use of technology, tily from the April 1996 rate order issued by the PUCO consolidates uarehousing and uses just-in-time purchase j for the Company as discussed under Outlook-April 1996 and delivery. Federal income taxes decreased as a result i Rate Order and in Note 7(b). The impact of the of lower pretax operating income.

April 1996 price increase was offset by a change in the implementation of summer prices. As a result of this ^ """ P.erating loss resulted in 1996 primarily from an change, higher summer prices were in efTect for most $11 milhon write-down of two inactive production facili-customers from June through September 1996. Previ- ties, as discussed in Note 14, and the Company's share of j ously, higher summer prices were in etreet from May merger-related expenses. The deferral of carrying charges i through September. Consequently, base rates revenues related to the Rate Stabilization Program ended in for the May 1996 billing period were lower relative to November 1995. The federal income tax credit for nonop-l the May 1995 amount. Renegotiated contracts for er tmg mcome mereased m 1996 accordingly.

l certain large industrial customers also resulted in a Interest charges and preferred dividend requirements

decrease in base revenues which partially offset the elTect decreased in 1996 because of the redemption of securities l of the general price increase. Although total kilowatt-hour and refundings at favorable terms in 1996 and 1995.

sales decreased 0.9% in 1996 from the 1995 amount, i industrial and commercial kilowatt-hour sales increased 1995 vs.1994 i 3% and 2.4%, respectively. Residential kilowatt-hour sales decreased 0.9% primarily because of the cooler summer Factors contributing to the 1% increase in 1995 operating j weather. The industrial sales growth reflected increased revenues are as follows:

[ sales to petroleum refineries, large primary metal and Mihions

! glass manufacturers, and the broad-based, smaller indus- "'**""**'I"D"*""""*' # """

i trial customer group. On a weather-normalized basis, Kwil saics volume and Mix $ 29 commercial and residential sales increased 4.7% and l%,

respectively. The number of commercial customers

"*[*l*"" gerc,,e, increased 3.4% in 1996. Other sales (including nholesale Miscenancous Resenues m wg F5 sales) decreased 8%. Wholesale revenues increased m 1996, although wholesale sales results were adversely Total kilowatt-hour sales increased 2.2% in 1995 primarily alrected by the Ileaver Valley Unit 2 refueling outage in because of the hot summer weather. Residential and l 1996. See Note 2 for a discussion of the lleaver Valley commercial kilowatt-hour sales increased 5.2% and 2.2%,

Unit 2 capacity sale to Cleveland Electric. A slight respectively, which included about 1% nonweather-increase in 1996 fuel cost recovery revenues resulted from related growth in residential sales. Industrial kilowatt-an increase in the fuel cost factors. The weighted average hour sales increased 1.8% on the strength of increased 1 of these fuel cost factors increased approximately 1%. sales to large glass manufacturers and the broad-based, smaller industrial customer group. Other sales increased For 1996, operating revenues were 27% residential. 22% 0.5%. Weather accounted for approximately $13 million commercial,28% industrial and 23% other, and kilowatt- of the $21 million increase in 1995 base rate revenues.

hour sales were 19% residential,16% commercial. 39% Wholesale revenues decreased because of the lower reve-industrial and 25% other. The average prices per kilowatt- nues associated with the Beaver Valley Unit 2 capacity hour for residential, commercial and industrial customers sale to Cleveland Electric. Lower 1995 fuel cost recovery were i1.47,10.82 and 5.87 cents, respectively. revenues resulted from favorable changes in the fuel cost factors. The weighted average of these fuel cost factors Operating expenses mereased 8% in 1996. The cessation decreased approximately 6%.

of the Rate Stabilization Program deferrals and the com-mencement of their amortization in December 1995 For 1995, operating revenues were 27% residential,21%

resulted in the increase in the net amortization of deferred commercial,29% industrial and 23% other, and kilowatt-operating expenses. See Note 7(d). Depreciation and hour sales were 19% residential,16% commercial, 37%

( amortization expenses increased primarily because of a $4 industrial and 28% other. The average prices per kilowatt- '

million net increase in depreciation related to changes in hour for residential, commercial and industrial customers l

! depreciation rates, as discussed in Note 1(c), and the w ere 10.99, 10.51 and 6.09 cents, respectively. The

! cessation of the accelerated amortization of unrestricted changes from 1994 were not significant.

l investment tax credits under the Rate Stabilization Pro- Operating expenses increased 0.1% in 1995. I ederal gram, which was reported m 1995 as a $5 nullion reduc- income taxes increased as a result of higher pretax operat-  ;

tion of depreciation. Fuel and purchased power expenses ing income. Fuel and purchased pow er expenses I

mereased because of increased purchased power require- decreased because of lower purchased power require-

ments to meet retail customer sales throughout the 3 ear ments resulting from the increased availability of the but particularly during the refueling outages of Perry nuclear generating units in 1995.

Unit I and Davis-11csse in 1996. Other operation and 9

maintenance expenses in 1996 included a $6 million one- Interest charges and preferred dividends decreased in i

time charge for the disposition of inventory as part of a 1995 because of the redemption of securities and refund-reengineering of the supply chain process. Reengineering ings at favorable terms in 1995 and 1994.

7 l

Rep:rt of Indapendent on a test basis, evidence supporting the amounts and Public Accountants disclosures in the financial statements. An audit also To the Share Owners and includes assessing the accounting principles used and l Iloard of Directors of significant estimates made by management, as well as The Toledo Edison Company: evaluating the overall financial statement presentation.

l We beliese that our audits provide a reasonabic basis for We have audited the accompanying balance sheet and our opinion.

statement of capitalization of The Toledo Edison Com-l pany (a wholly owned subsidiary of Centerior Energy in our opinion, the financial statements referred to above Corporation) as of December 31,1996 and 1995, and the present fairly, in all material respects, the financial posi-related statements of income, retained earnings and cash tion of The Toledo Edison Company as of December 31, flows for each of the three years in the period ended 1996 and 1995, and the results of its operations and its December 31, 1996. These financial statements are the cash flows for each of the three years in the period ended responsibility of the Company's management. Our December 31, 1996, in conformity with generally responsibility is to express an opinion on these financial accepted accounting principles.

statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that #f /tM#r/ I we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free Cleveland, Ohio of material misstatement. An audit includes examining, l'ebruary 14,1997 l

l h

Inccm3 St::tsm:nt m ra ao u aon o,, ,,,7 For the years end;d December 31.

1996 1995 1994 (millions of dollars)

Operating Reienues (1) 5897 1h24 5865 Operating Espenses Fuel and purchased power 169 157 167 l l Other operation and maintenance 231 225 229 i l '

! Generation facilities rental expense, net _104 104 104 Total operation and maintenance 504 486 500 l Depreciation and amortization 94 84 83 Taxes, other than federal income taxes 90 91 90  :

! Amortization af deferred operating expenses, net 17 (17) (21)  !

42 33  !

l Federal income taxes 36 741 686 685 Operating Income 156 _L88 _180 $

Nonoperating income (I oss) [

, Allowance for equity funds used during construction i 1 1 l Other income and deductions, net (10) 6 3 l Deferred carrying charges -

14 15  !

Federal income taxes-credit (expense) $ __(2 ) (2) l (4) 19 17 l i

Income liefore Interest Charges _LJ _202 197 Interest Charges Debt interest 96 111 116 ,

Allowance for borrowed funds used during construction (1) (1) (1)  ;

l 95 110 115 L

, Net income _ 57 97 87 Preferred Diiidend Requirements 17 18 20 l l

Earnings Anallable for Common Stock M Q M ,

(1) includes revenuesfrom all bulli power sales to Cleveland Electric of $105 million $102 million and $111 million in i996,1995 and 1994, respectively, l l -t Retained Earnings  :

l For the years ended Dgcember 31.

1996 1995 1994  !

(millions of dollars) l l

Retained Earnings (Deficit) at Beginning of Year SQ5) $(l13) $(175) l

! Additions Net income 57 97 82 Deductions

- preferred stock dividends declared and other (17) (19) (20)

Net increase 40 78 62 Retained Earnings (Delicit) at End of Year S 5 5 (M) $(113) i The accompanying notes are an integralpart of these statements. ,

4 9

y -

B Ir;nca Shact JhtsmbstA_

1996 1995 (millions of dollars)

ASSETS '

l'roperty,1*lant and l'quipment .

Utility plant in service $2,929 $2.896 Less: accumulated depreciation and amortization 1.020 942 1,909 1,954 ,

Construction work in progress 22 28 1,931 1,982 Nuclear fuel, net of amortization 76 78 Other property, less accumulated depreciation 8 20 ,

_2el5 ,_L0hD Current Assets Cash and temporary cash investments 81 94 Amounts due from customers and others, net 13 68 Amounts due from alliliates 13 19 Notes receivable from afTiliates 82 -

Unbilled revenues 4 22  ;

Materials and supplies, at average cost Owned 33 49 Under consignment 10 -

Taxes applicable to succeeding 3 cars 68 71 Other 4 4 308 ,127 Itegulator) and Other Assets Regulatory assets 928 978 Nuclear plant decommissioning trusts 64 52 Other 42 31 1.034 1.067 Total Assets $1 M7 51474 l

i The accompan.ving notes are an integral part of this . statement. \

l I

Ill

_. ~. . . -_ = .-

The Toledo Idiwn Company December 31.

1996 1995 i (millions of dollars) l 1

CAPITALIZATION AND LIABILITIES Capitalliation l Common stock equity $ 803 $ 763 l Preferred stock I With mandatory redemption provisions 3 5 Without mandatory redemption provisions 210 210 .

Long-term debt 1.003 _[,068 l 2.0[9 _2JQ46 Current I.iabilities  !

Current portion of long-term debt and preferred stock 51 58 Current portion of nuclear fuel lease obligations 36 40 Accounts payable 46 56 Accounts and notes payable to alliliates 30 53

{

Accrued taxes 73 78 j Accrued interest 22 24  :

Other 20 20  ;

27h 32.9 Deferred Credits and Other 1.iabilities Unamortized investment tax credits 75 79 [

Accumulated deferred federal income taxes 566 573 Unamortired gain from 13ruce Mansfield Plant sale 179 188 Accumulated deferred rents for 13ruce Mansfield Plant and licaver Valley Unit 2 39 54 f

Nuclear fuel lease obligations 49 52 Retirement benefits 102 103 Other 50 50 1.060 1.099 Total Capitalization and I.iabilities $1M7 51474, i

11

Ccsh Flows n, u.s,, um,,,, o,,,,y,,r For the years ended ,

December 31.

1996 1995 ,1994 (millions of dollars)

Cash Flows from Operating Actisities (1)

Net income $ 57 1 97 1 82 Adjustments to Reconcile Net income to Cash from Operating Activities: '

Depreciation and amortization 94 84 83 Deferred federal income taxes IS 16 46 Unbilled revenues (7) -

3 Deferred fuel 9 (3) 3 Deferred carr>mg charges -

(14) (15)

Leased nuclear fuel amortization 33 54 44 Amortization of deferred operating expenses, net 17 (17) (21)

Allowance for equity funds used during construction (1) (1) (1)

Changes in amounts due from customers and others, net (2) (6) i Net proceeds from accounts receivable securitization 78 - -

Changes in materials and supplies 6 8 (2)

Changes m accounts payable (10) 8 (15)

Changes in working capital alTecting operations (1) 4 (16)

Other noncash items (10) 9 10 Total Adjustments _ _224 142 120 Net Cash from Operating Activities __28J _ 239 202 Cash Flows from Financing Actisities (2)

Notes payable to alliliates (21) 21 -

First mortgage bond issues -

99 31 Maturities, redemptions and sinking funds (73) (215) (98)

Nuclear fuel lease obligations (39) (44) (49)

Dividends paid (17) (18) (20) 1 remiums, discounts and expenses -

__L6) -

Net Cash from Financing Activities _{L60) (163) (136)

Cash Flows from Imesting Actisities (2)

Cash applied to construction (47) (53) (41)

Interest capitalized as allowance for borrowed funds used during construction (1) (1) (l) 1.oans to alliliates (82) - -

Contributions to nuclear plant decommissioning trusts (10) (11) (12)

Other cash applied (4) (5) __16 )

Net Cash from Investing Activities _114_4) (70) (60)

Net Change in Cash and Temporary Cash Imestments (13) 6 6 Cash and Temporar3 Cash Imestments at lleginning of Year 94 88 82 Cash and Temporar) Cash Imestments at End of Year 5 kl $ 94 5 KR (l) Interest paid (nel of unmunts capitali:ed) S 92  % 93  ? 94 Federal income rases paid 5 16  % ?3 8  %

(2) Increases in Nuclear Fuel and Nuclear Fuel Lease Obligations in the Balance Sheet re.udting f om the noncash capitali:ations under nuclearfuel agreetnents are escludedfrom this . statement.

The accompanying notes are an integralpart of this statement.

i l

12

St t m:nt of Ccpitalization ne raao u m.,,,n,,,,y,,r DeSimberjj 1996 lh (niilhons of dollars)

CO\l%10N STOCK I QUITY:

Common shares $5 par value: 60 million authoriied; 39.1 rnillion outstanding in 1996 and 1995_ $ 196 $ 196 Premium on capital stock 481 481 Other paid-in capital 121 121 Retained earnings (deticit) 5 (35)

Total Common Stock Equity 801 763 1996 Current Shares Call Price Outstanding I'q t S lia.irg r

PREITkH1'D STOCK:

$100 par value,3.(XK)(K)0 preferred shares authorized;

$25 par value,12.(XX),000 preferred shares authorized Subject to mandatory redemption:

$100 par $9.375 50.200 $ 100.99 5 7 Less: Current maturities 2 2 Total Preferred Stock, with Mandator)

Redemption Provisions 3 5 Not subject to mandatory redemption:

$100 par $4.25 160.(KX) 104.625 16 16 4.56 50,000 101.00 5 5 4.25 100,OtX) 102.00 10 10 8.32 100.0fX) 102.46 10 10 7.76 150.0(X) 102.437 15 15 7.80 150,000 10I.65 15 15 10.00 190,(KX) 101.00 19 19 25 par 2.21 1,(K K).(XX) 25.25 25 25 2.365 1,400,0(X) 27.75 35 35 Series A Adjustable 1,200.000 25.00 30 30 Series 11 Adjustable 1,200.000 25.00 30 30 Total Preferred Stock, without Mandatory Redemption Provisions 210 210 1.ONG-TERNI DI:llT:

l'irst mortgage bonds:

6.125% due 1997 31 31 7.250% due 1999 85 100 7.5(K)% due 2002 26 26 N.(XXI% duc 2003 36 36

'f.875% due 2004 145 145 3D 33K Tax-exempt issues secured by first mortgage bonds:

10.000% due 1998 I i 3.700% due 2011" 31 31 8.000% duc 2019 67 67 7.625% duc 2020 45 45 7.750% due 2020 54 54 7.400% due 2022 31 31 9.875% due 2022"' 10 10 7.550% due 2023 37 37 6.875% due 2023 20 20 8.(KX)% due 2023 50 50 346 346 The accompanying notes are an integral part of this statement.

13

Stct0m:nt of Ccpitalization (conunoul December 31.

1996 1995 (nulhons of dollars)

I ONG-TI

lut DI:111: (Continued)

Medium-term notes secured by first mortgage bonds:

9.050% due 1996 -

10 9.0(Kf1 due 1996 -

3 9.300% duc 1998 26 26

, 8.000% duc 1998 7 7 l 7.940% due 1998 5 5 1 8.470% due 1999 4 4 i 7.720% doc 1999 I5 15 l 7.5(X)% due 2(XX) *

• 7.380% due 2(XX) 14 14 7.460% due 2000 17 17 l 9.500% due 2001 21 21 8.5(XYL due 2001 8 8 8.620% due 2002 7 7 8.6$0% due 2002 5 5 8.180% due 2002 17 17

! 7.820% duc 2003 37 37 l

7.850% due 2003 15 15 7.760% due 2003 5 5 7.910% due 2003 3 3 7.7h0% due 2003 1 1 10.000% due 2021 15 15 9.220% due 2021 _ .,_L1 15 037 250 Tax-exempt notes:

5.750% due 2003 4 4 10.(KK)% duc 2010 [ _

,_1 5 5 llank loans secured by subordinate mortgage:

9.050% due 1996 -

25 7.500% due 1996 -

2 21 Notes secured by subordinate mortgage:

10.060% due 1996 -

14 8.750% due 1997 8 11 8 _ 21 Debentures:

8.700% due 2002 135 135 Unamortired premium (discount), net (2) (2) 1,052 1,124 Less: Current maturities 49 56 Total Long-Term Debt _ L!K_d _L)M TOTAL. CAPITAL.17.ATION S? Ol4 $?046

• Denutes debt of le.n than $1 milli <m.

\ " Denotes variable rate i.une with December 31,1996 interest rate shou n.

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

l l

l l

14

l-Nctas to tho Financial StatomontS (c) Fisvenues (1) Summary of Significant Accounting Customers are billed on a monthly cycle basis for their Policies - energy consumption based on rate schedules or contracts (c) General authorized by the PUCO or on ordinances of individual municipalities. An accrual is made at the end of each i

.The Company is an electric utility sening Northwest m nth to record the estimated amount of unbilled reve.

Ohio and a wholly owned subsidiary of Centerior Energy.

nues f r kilowatt-hours sold in the current month but not j The Company follows the Uniform System of Accounts billed by the end of that month.

prescribed by the FERC and adopted by the PUCO.

Rate-regulated utilities are subject to SFAS 71 which A fuel factar is added to the base rates for electric service.

governs accounting for the elTects of certain types of rate This factor is designed to recover from customers the j regulation. Pursuant to SFAS 71, certain incurred costs costs of fuel and most purchased power. It is reviewed and are deferred for recovery in future rates. See Note 7(a). adjusted semiannually in a PUCO proceeding. See Man-agement's Financial Analysis - Outlook-FirstEnergy The preparation of fmancial statements in conformity ate Mam with generally accepted accounting principles requires management to make estimates and assumptions that (d) Fuel Expense afTect the reported amounts of assets, liabilities, revenues The cost of fossil fuel is charged to fuel expense based on and expenses, and the disclosure of contingent assets and inventory usage. The cost of nuclear fuel, including an l liabilities. The estimates are based on an analysis of the interest component, is charged to fuel expense based on best information available. Actual results could differ the rate of consumption. Estimated future nuclear fuel from those estimates. disposal costs are being recovered through base rates.

The Company is a' member of the Central Area Power The Company defers the difTerences between actual fuel Coordination Group (CAPCO). Other members are costs and estimated fuel costs currently being recovered l

i Cleveland Electric, Duquesne Light Company, Ohi from customers through the fuel factor. This matches fuel Edison and its wholly owned subsidiary, Pennsylvania expenses with fuel-related revenues.

l l Power Company. The members have constructed and Owners of nuclear generating plants are assessed by the i operate generation and transmission facilities for their federal government for the cost of decontamination and

! , joint use.

l decommissioning of nuclear enrichment facilities oper-l (b) Related Party Transactions ated by the United States Department of Energy. The

! Operating revenues, operating expenses and interest assessments are based upon the amount of enrichment charges include those amounts for transactions with allili. services used in prior years and cannot be imposed for ated companies in the ordinary course of business more than 15 years (to 2007). The Company has accrued operations. a liability for its share of the total assessments. These l . costs have been recorded as a regulatory asset since the The Company stransact. ions with Cleveland Electric are

. PUCO is allowing the Company to recover the assess-primarily for firm power, mterchange power, transmission

ments through its fuel cost factors. See Note 7(a).

l line rentals and j.om. tly owned power plant operations and construction. See Notes 2 and 3. As discussed in (e) Depreciation and Decommissioning Note 1(j), beginning in May 1996, Cleveland Electric's The cost of property, plant and equipment is depreciated wholly owned subsidiary, Centerior Funding, began serv- over their estimated useful lives on a straight-line basis. 1 ing as the transferor in connection with the accounts In its April 1996 rate order, the PUCO approved changes i receivable securitization for the Company and Cleveland in depreciation rates for the Company. An increase in the  !

Electric. depreciation rate for nuclear property from 2.5% to 2.95%

Centerior Service Company (Service Company), a increased annual depreciation expense approximately

{

wholly owned subsidiary of Centerior Energy, provides $8 million. A reduction in the composite depreciation rate management, financial, administrative, engineering. legal for nonnuclear property from 3.36% to 3.13% decreased

{

I and other services at cost to the Company and other annual depreciation expense by approximately $2 million.

. afliliated companies. The Service Company billed the The changes in depreciation rates were efTective in Company $60 million, $67 million and $59 million in April 1996 and resulted in a $4 million net increase in

( 1996,1995 and 1994, respectively, for such services. 1996 depreciation expense.

15

The Company accrues the estimated costs of decommis- assets and the related component of the decommissioning sioning its three nuclear generating units. The accruals reserve (included in Accumulated Depreciation and are required to be funded in an external trust. The PUCO Amortization).

requires that the expense and payments to the external T.he staff of the h,ecurities and Exchange C,ommission trusts be determined on a levelized basis by dividing the has questioned certain of the current accounting practices unrecovered decommissioning costs in current dollars by of the electne utih.ty

~ mdustry, including those of the the remaining years in the licensing period of each unit. '

C,.ompany, regarding the recognition, measurement and This methodolog"y requires that the net earnings on the ~

cla>sification of. decommissioning costs f.or nuclear gener-trusts be reinvested therein with the intent of having net . .

ating stations m the financial statements. In response to carnings offset innation. The PUCO requires that the .

these questions, the h..nancial Accounting Standards estimated costs of decommissioning and the funding level . . .

Board (F.ASB) is reviewmg the accounting for removal be reviewed at least every fne years. . . .

costs, includmg decommissionmg. If current accounting in April 1996, pursuant to the PUCO rate order, the practices are changed, the annual provision for decom-Company decreased its annual decommissioning expense missioning could increase; the estimated cost for decom-accruals to $10 million from the $11 million level in 1995. missioning could be recorded as a liability rather than as The accruals are redected in current rates. The accruals accumulated depreciation; and trust fund income from are based on adjustments to updated, site-specific studies the external decommissioning trusts could be reported as for each of the units completed in 1993 and 1994. These insestment income rather than as a reduction to decom-estimates reucct the DECON method of decommission- missioning expense. The FASB issued an exposure draft ing (prompt decontamination), and the locations and cost on the subject on February 7,1996 and continues to i characteristics specific to the units, and include costs review the subject.

l associated with decontamination and dismantlement for each of the units. The estimate for Davis-Bene also (f) Property, Plant and Equipment i

j includes the cost of site restoration. The adjustments to Property, plant and equipment are stated at original cost the updated studies which reduced the annual accruals less amounts disallowed by the PUCO. Construction costs beginning in April 1996 were attributable to changed include related payroll taxes, retirement benefits, fringe assum;.tions on radioactive waste burial cost estimates benefits, management and general overheads and allow-l and the exclusion of site restoration costs for Perry Unit I ance for funds used during construction ( AFUDC).

and Beaver Valley Unit 2. After the decommissioning of AFUDC represents the estimated composite debt and i these units in the future, the two plant sites may be usable equity cost of funds used to finance construction. This l

for new power production facilitics or other industrial noncash allowance is credited to income. The AFUDC purposes. rate was 10.12% in 1996,12.6% in 1995 and 9.87% in The revised estimates for the units in current dollars and in dollars at the time of license expiration, assuming a 4% Maintenance and repairs for plant and equipment are annual inflation rate, are as follows: charged to expense as incurred. The cost of replacing 1 icense plant and equipment is charged to the utility plant I cranon I.uture n tinn gyna ne Mr Amount A rnou nt accounts. The cost of property retired plus removal costs,

("jy"f after deducting any salvage value, is charged to the na@ nesse 2017 sloo 5427 accumulated provision for depreciation.

Perry (1nii 1 2026 85 m

, neacr nnc3 Unn 2 2n27 44 105 (g) Deferred Gain and Loss from Sales of Utility Tout w wo Plant The classification, Accumulated Depreciation and Amor- The sale and leaseback transactions discussed in Note 2 tiration, in the Balance Sheet at December 31, 1996 resulted in a net gain for the sale of the Bruce Mansfield includes $71 million of decommissioning costs presiously Generating Plant (Mansfield Plant) and a net loss for the expensed and the earnings on the external trust funding. sale of Beaser Valley Unit 2. The net gain and net loss This amount exceeds the Balance Sheet amount of the were deferred and are being amortized oser the terms of external Nuclear Plant Decommissioning Trusts because the leases. See Note 7(a).1hese amortizations and the the reserve began prior to the external trust funding. The lease expense amounts are reported in the income State-trust earnings are recorded as an increase to the trust ment as Generation Facilities Rental Expense, Net.

16

ll (h) Intsr:st Ch:rg2s all of these inventories under a consignment arrangement.

Debt Interest reported in the Income Statement does not in accordance with SFAS 49 accounting for product include interest on obligations for nuclear fuel under financing arrangements, the imentories continue to be construction. That interest is capitalized. See Note 6. reported as assets in the llalance Sheet even though the

, buyer nwns the inventories since the Company has guar-cosses and gains realu.ed upon the reacquisition or anteed to be a buser of last resort.

redempt. ion of long-term debt are deferred, cons.istent -

with the regulatory rate treatment. See Note 7(a). Such losses and gains are either amortized over the remainder (2) Ufflity Plant Sale and Leaseback of the original life of the debt issue retired or amortized Transactions

' The Company and Cleseland Electric are co-lessees of over the life of the new debt issue when the proceeds of a new issue are used for the debt redemption. The amorti. 18.26"6 (150 megawatts) of IleaserV alley Unit 2 and rations are included in debt interest expense, 6.5% (51 megawatts), 45.9% (358 megawatts) and 4

44.38% (355 megawatts) of Units I, 2 and 3 of the (i) FederalIncome Taxes Mansfield Plant, respectively. These leases extend The Company uses the liability method of accounting for through 2017 and are the result of sale and leaseback l l

income taxes in accordance with SFAS 109. See Note 8. transactions completed in 1987. i This method requires that deferred taxes be recorded for

, , Under these leases, the Company and Cleveland Electric i all temporary dilferences between the book and tax bases are responsible for paying all taxes, insurance premiums, of assets and liabilities. The majority of these temporary operation and maintenance expenses, and all other similar dilTerences are attributable to property-related basis dif-costs for their interests in the units sold and leased back.

ferences. Included in these basis ditTerences is the equity They may incur additional costs in connection with capi.

component of Al'UDC, which will increame fature tax tal improvements to the units. The Company and Cleve-

expense when it is recovered through rates. Since this land Electric have options to buy the interests back at component is not recogni/ed for tax purposes, the Com- certain times at a premium and at the end of the leases for pany must record a liability for its tax obligation. The the fair m;uket value at that time or to renew the leases.

PUCO permits recovery of such taxes from customers The leases include conditions for mandatory termination when they become payable. Therefore, the net amount (and possible repurchase of the leasehold interests) upon due from customers through rates has been recorded as a certain events of default.

regulatory asset and will be recovered over the lives of the As co-lessee with Cleveland Electric, the Company is also <

related assets. See Note 7(a). l obligated for Cleveland Electric's lease payments. If l Investment tax credits are deferred and amortized over Cleveland Eltetric is unable to make its payments under the lives of the applicable property as a reduction of the Mansfield Plant leases, the Company would be obli-depreciation expense. gated to make such payments. No such payments have (j) Accounts Receivable Securitization been made on behalf of Cleveland Electric.

In May 1996, the Company and Clescland Electric began Future minimum lease payments under the operating to sell on a daily basis substantially all of their retail leases at December 31,1996 are summerized as follows:

customer accounts receivable and unbilled revenue $' g,Giand

. receivables to Centerior Funding pursuant to a five-year year cmman> i lectric asset-backed securitization agreement. , l"(I'"ns or doitar in July 1996, Centerior Funding completed a public sale U* *2 M i

lW9 iuk 70 of $150 million of receivables-backed insestor certificates 2nno ni 4 in a transaction that qualifies for sale accounting treat- 2uoi til 75 ment for financial reporting purposes.

'"Y'*" M M letd i uture Minnnum 1. case (k) Materials and Supplies P"""'"" "* "*

In December 1996, the Company sold substantially all of Rental expense is accrued on a straight-line basis mer the its materials and supplies and fossil fuel inventories for terms of the leases. The amount recorded h: 1996,1995 certain generating units and other storage locations to an and 1994 as annual rental expense for the Mansfield Plant independent entity at book value. The bu3 er now provides leases was $45 million. The amounts recorded in 1996, 17

1995 and 1994 as annual rental expense for the licaver The Clean Air Act Amendments of 1990 (Clean Air Valley Unit 2 lease were $63 million, $63 million and Act) require, among other things, significant reductions in

$64 million, respectively. See Note 1(g). Amounts the emission of sulfur dioxide and nitrogen oxides by charged to expense in excess of the lease payments are fossil-fueled generating units. Our strategy provides for classified as Accumulated Deferred Rents in the llalance complianpe primarily through greater use of low-sulfur Sheet. coal at some of our units and the use of emission allowances. Total capital expenditures from 1994 through The Company is selling 150 megawatts of its lleaver 1996 in connection with Clean Air Act compliance Valley Unit 2 leased capacity entitlement to Cleveland amounted to $4 million. The plan will require additional lilectric. Revenues recorded for this transaction were capital expenditures over the 1997-2006 period of approx-

$99 million, $98 million and $108 million in 1996,1995 imely $16 million for nitrogen oxide control equipment and 1994, respectisely. We anticipate that this sale will and other plant process modifications. In addition, higher continue indefinitely. The future minimum lease pay- fuel and other operation and maintenance expenses will ments through 2017 associated with Ikaver Valley Unit 2 he incurred. Recently proposed particulate and ozone aggregate $1.265 billion.

ambient standards have the potential to increase future

'*"P"'"""

(3) Property Owned with Other Utilities and Investors (b) Hazardous Waste Disposal Sites The Company owns, as a tenant in common with other The Company is aware of its potential involvement in the utilities and those investors who are owner-participants in cleanup of several sites. The Company has accrued a various sale and leaseback transactions (l.cssors), certain liability totaling $3 million at December 31,1996 hased generating units as listed below. Each owner owns an on estimates of the costs of cleanup and its proportionate undnided share in the entire unit. Each owner has the responsibility for such costs. We believe that the uhimate right to a percentage of the pencrating capability of each outcome of these matters will not have a material adverse cEcet on our financial condition, cash flows or results of unit equal to its ownership share. Each utility owner is obligated to pay for only its respective share of the operadont See M anagement's Financial A nalysis -

construction costs and operating expenses. Each lessor Outlook-Ilazardous Waste Disposal Sites.

has leased its capacity rights to a utility w hich is obligated (5) Nuclear Operaflons and to pay for such I essor's share of the construction costs Contingencies and operating expenses. The Companis share of the

,, (a) Operating Nuclear Units operating expenses of these generating units is meluded m, the income Statement. The llalance Sheet classification The Company's three nuclear units may be impacted by of Property, Plant and Equipment at December 31,1996 actWes or events beyond our control. An extended includes !! e following facilities ow ned by the Company as utage d one of our nudcar unb Nr any reason, mum

. with any unfavorable rate treatment, could have a mate-a tenant in common with other utih. . ties and 1.cssors: -

rial adverse efTect on our financial condition, cash flows Prwm Plant and and results of operations. See the discussion of these and Ow nership i aiuipmerit Mepwans naciuse or Accumutaico other risks in Management's Financial Analysis- Out-centreing I 'nd vi *rel hkarAch herreciamn innihons of doitarsi look-Nuclear O Perations.

1)asticue 429 ux+2% ) 5 as 535 Perr> t!mi 1 .38 0991) 1.04 .44 (b) Nuclear insurance Becer Vancy Unn 2 and The Price-Anderson Act limits the public liability of the t 13 039 209 _ix owners of a nuclear power plant to the amount provided Totai um 3 by private insurance and an industry assessment plan. In the event of a nuclear incident at any unit in the United (4) Construction and Contingencies States resulting in losses in excess of the lesel of private insurance (currently $200 million), the Companis maxi-(a) Construction Program mum potential assessment under that plan would be The estimated cost of the Company's construction pro- $70 million per incident. The assessment is limited to gram for the 1997-2001 period is $2N2 million, including $9 million per year for each nuclear incident. These AFUDC of $8 million and excluding nuclear fuel. assessment limits assume the other CAPCO companies 18

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

contribute their proportionate share of any assessment for it is consumed in a reactor. The lease rates are based on the generating units that they have an ownership or various intermediate-term note rates, bank rates and com-leasehold interest in, mercial paper rates.

The utility owners and lessees of Davis-Besse, Perry and The amounts financed include nuclear fuel in the Davis-Beaver Valley also have insurance coverage for damage to Besse, Perry Unit I and Beaver Valley Unit 2 reactors property at these sites (including leased fuel and cleanup with remaining lease payments for the Company of costs). Coverage amounted to $1.3 billion for Davis-Besse

$43 million, $26 million and $14 million, respectively, at j and $2.75 billion for each of the Perry and Beaver Valley December 31, 1996. The nuclear fuel amounts financed i sites as of January 1,1997. Damage to property could and capitalized also included interest charges incurred by exceed the insurance coverage by a substantial amount. If the lessors amounting to 52 million in both 1996 and l it does, the Company's share of such excess amount could 1995, and $4 million in 1994. The estimated future lease have a material adverse effect on its financial condition. amortization payments for the Company based on pro-cash flows and results of operations. In addition, the jected consumption are 536 million in 1997,$29 million Company can be assessed a maximum of $10 million in both 1998 and 1999,527 million in 2000 and 528 mil-under these policies during a policy year if the reserves lion in 2001.

available to the insurer are inadequate to pay claims arising out of an accident at any nuclear facility covered (7) Regulafory Matters by the insurer.

(a) Regulatory Accounting Requirements and The Company :dso has extra expense insurance coverage. Regulatory Assets it includes the incremental cost of any replacement power The Company is subject to the provisions of SFAS 71 and purchased (over the costs which would base been has complied with its prosisions. SFAS 71 provides.

incurred had the units been operating) and other inciden-among other things, for the deferral of certain incurred l tal expenses after the occurrence of certain types of costs that are probable of future recovery in rates. We l accidents at our nuclear units. The amounts of the cover-monitor changes in market and regulatory conditions and l age are 100% of the estimated extra expense per week consider the effects of such changes in assessing the during the 52-week period starting 21 weeks after an continuing applicability of SFAS 71. Criteria that could accident and 80% of such estimate per week for the next give rise to discontinuation of the application of SFAS 71 104 weeks. The amount and duration of extra expense include: (1) increasing competition which significantly could substantially exceed the insurance coverage. restricts the Company's ability to charge prices which "Ho" it to recover operating costs, earn a fair return on (6) Nuclear Fuel

"" # '"P " "" '#'" *"" '" " "E" Nuclear fuel is financed for the Company and Cleveland

~

tory assets and (2) a significant change in the manner in Electnc through leases with a special-purpose corpora-

. which rates are set by the PUCO from cost-based regula-tion. The total amount of financing currently available under these lease arrangements is $273 million ($173 mil-

"' * *" #' b"" "E" "' "E" " 4 " "' "

represent probable future revenues to the Company asso-h.on f. rom mtermediate-term notes and $100 million from

. ciated with certain incurred costs, which it will recover bank credit arrangements). The .mtermediate-term notes mature in the 1997 through 2000 period. The bank credit

• • '"" *#" " " ' * " "EI*#*

i arrangements terminate in October 1998. The special. EITective January 1,1996, the Company adopted SFAS purpose corperation may not need alternate financing in 121 which imposes stricter criteria for carrying regulatory l

l 1997 to replice $83 million of maturing intermediate- assets than SFAS 71 by requiring that such a3 sets be term notes. At December 31,1996, $87 million of nuclear probable of recovery at each balance sheet date. The fuel was financed for the Company. The Company and caiteria under SFAS 121 for plant assets require such Cleseland Electrie severally lease their respective portions assets to be written down if the book value exceeds the of the nucinar fuel and are obligated to pay for the fuel as projveted net future undiscounted cash flows.

19

Regulatory assets in the llalance Sheet are as follows: return on common stock equity of 12.59% and an merall

_pecember R rate of return of 10.06% for both companies.110 wever, the <

m6 tws

! 7;niong PUCO also indicated the authorized return could be dollars) lowered by the PUCO if the Company and Cleveland Amounts due from customers for future federal income taxes, net 9 Electric do not implement the recommendation. In Unamortized low from Heaver VaUey Unit 2 nale __ 92 96 August 1996, various intervenors appealed the PUCO Unamortved lov on *cacquired debt N 28 Pre. phase-m deitrrah* 215 222 rate order to the Ohio Supreme Court. The Company and Rate Stabilization Program deferrals 180 188 Cleveland Electric did not appeal the order to the Ohio

• (g d Supreme Court. In connection with the PUCO order

• Represent deferntis of operating expenses and carrying charpes for discussed in Management's Financial Analysis - Out-Peny tinit I and Beaver Vuilcy Unit 2 in 1987 and 1988 which are look-FirstEnergy Rate Plan, certain parties agreed to being amorti/ed over the lives of the related property. .

request a stay of their appeals until complet. ion of the As of December 31, 1996, customer rates provide for pending merger with Ohio Edison.

recovery of all the above regulatory assets. The remaining )'

recovery periods for about $740 million of the regulatory (c) Assessment assets approximate 30 years. The remaining recovery The Company and Cleveland Electric agree with the periods for the rest of the regulatory assets generally range concept of accelerating the recognition of costs and recov-from about two to 20 years. Regulatory liabilities in the cry of assets as such concept is consistent with the Balance Sheet at December 31,1996 and 1995 totaled strategic objective to become more competitive. lionever,

$13 million and $4 million, respectively. the Company and Cleveland Electric believe that such acceleration must also be consistent with the reduction of i

(b) Rate Order I debt and the opportunity for Centerior Energy common j On April 11, 1996, the PUCO issued an order for the stock share owners to receise a fair return on their .

l Company and Cleveland Electric granting price increases investment. Consideration of whether to implement a l aggregating $119 million in annualized revenues plan responsive to the PUCO's recommendation to l ($35 million for the Company and $84 million for Cleve- revalue assets by $1.25 billion is pending the merger with land Electric). The PUCO rate order provided for recov- Ohio Edison.

cry of all costs to provide regulated sersices, including i We have evaluated the C,ompany's markets, regulatory amortization of regulatory auets, in the approved prices.

! conditions and ability to bill and collect the approved i The new prices were implemented in late April 1996. The . i pnces, and conclude that the Company contmues to i l

average price increase for the Company,s customers was

~ .

comply with the provisions of SFAS 71 and its regulatory )

4.7% with the actual percentage increase depending upon .

. assets remain probable of recoverv. If there is a change .m the customer class. The C.ompany and Cleveland Electnc "

our evaluat. ion of the competitive environment, regulatory mtend to freeze prices through at least 2002, although . .

framework or other facte or if the PUCO s.igmticantly they are not precluded from requesting further price ,

reduces the value of the . . ipany s assets or reduces the increases.

approved return on co* , stock equity of 12.59% and The PUCO also recommended that the Company and overall rate of return 0: 10.06% or both, for future Cleveland Electric reduce the value of their assets for regulatory purposes, the Company may be required to l regulatory purposes by an aggregate $1.25 billion through record material charges to earnings. In particular, if we

'001. This represents an incremental reduction beyond determine that the Company no longer meets the criteria I

the normal level in nuclear plant and regulatory assets. for SFAS 71, the Company would be required to record a Implementation of the price increases was not contingent before-tax charge to write off the regulatory assets shown

! upon a revaluation of assets. The PUCO invited the above. In the more likely esent that only a portion of Company and Cleveland Electric to file a proposal to operations (such as nuclear operations) no longer meets i effectuate the PUCO's recommendation and expressed a the criteria of SFAS 71, a write-off would be limited to willingness to consider alternatives to its recommenda- regulatory assets that are not reflected in the Company's tion. The PUCO stated in its order that failure by the cost based prices established for the remaining regulated Company and Cleveland Electric to follow the recom- operations. In addition, we would be required to evaluate mendation could result in a PUCO-ordered write-down of whether the changes in the competitive and regulatory assets for regulatory purposes. The PUCO apprmed a environment which led to discontinuing the application of  !

20

1996 199s 1994 SFAS 71 to some or all of the Company'c operations (minons or dollars) would also result in a write-down of property, plant and 5xx 0 41 0 17 tiook income liefore lederal income Tax _.

equipment pursuant to SFAS 121. Tax on Ibk Income at Statutory Rate $31 5 49 5 41 See Managr ment's Financial Analysis - Ou tlook- '"[3,]c$,#

ga, (,, g, FirstEnergy Rate Plan for a discussion of a regulatory Rate stabilization Program -

(9) (9) plan for the Company and Cleveland Electric and its sale and leaseback transactions and amortization 5 5 5 effect on their compliance with SFAS 71. Other items E -

t (d) Rate Stabilization Program The Rate Stabilization Program that the PUCO approved The Company joins in the filing of a consolidated federal in October 1992 allowed the Company to defer and income tax return uith its afliliated companies. The i subsequently amortize and recover certain costs not being method of tax allocation reflects the benefits and burdens )

recovered in rates at that time. Recovery of both the costs realized by each company's participation in the consoli-no longer being deferred and the amortization of the dated tax return, approximating a separate return result 1992-1995 deferrals began in late April 1996 with the for each company. l implementation of the price increase granted by the For tax reporting purposcs, the Perry Nuclear Power PUCO as discussed above. The cost deferrals recorded in Plant Unit 2 (Perry Unit 2) abandonment was recognized 1995 and 1994 pursuant to the Rate Stabilization Pro- in 1994 and resulted in a $122 million loss with a j gram were $39 million and $43 million, respectively. The corresponding $43 million trJuction in federal income tax l amortization of the deferrals began in December 1995. liability. Because of tl*e alternative minimum tax  !

The total amortization was $8 million and $1 million in ( AMT), $25 million of the $43 million was realized in 1996 and 1995, respectively. {

1994. The remaining $18 million will not be realized until l

The regulatory accounting measures under the Rate Sta- 1999-  !

bilization Program also provided for the accelerated Under SFAS 109, temporary difTerences and carryfor-amortization of certain benefits during the 1992-1995 wards resulted in deferred tax assets of $162 million and period. The total annual amount of such accelerated deferred tax liabilities of $728 million at December 31, benefits was $18 million in both 1995 and 1994. 1996 and deferred tax assets of $179 million and deferred t x li bilities of $752 million at December 31, 1995.

(8) FederalIncome Tax These are summariicd as follows:

i The components of federal income tax expense recorded g_g, g in the Income Statement were as follows: pyg g L999 p93 pg (millions of (millions of dollars) dollars)

Operating I:xpenses: I'"PC 't), pbmt and equipment 5612 $627 Current $ 23 5 do $ Ig Defen-d carrying charges and operating expenses._ K4 85 Deferred _)) 2 15 Net operating losr carryforwards (18) (44)

Total Charged to Operating tapenses _ _3 _4.1 _JJ investment ta credits (44) (46)

Nonoperating income: Sale and leaseback transar:tions -

(4)

Current (10) (12) (29) Other y) _(45)

Deferred 5 I4 J Net deferred tax liability $w 5sn Total I;spense (Credit) to Nonoperating Total I ed r income las I xpense k~-~ *" W "E I

of approximately $51 million are available to reduce The deferred federal income tax expense results from the future taxable income and will expire in 2009. The 35%

temporary ditTerences that arise from the different years tax effect of the NOLs is $18 million. Additionally, AMT

! when certain expenses are recognized for tax purposes as credits of $100 million that may be carried forward

, opposed to financial reporting purposes. Such temporary indefinitely are available to reduce future tax.

differences relate principally to depreciation and deferred operating expenses and carrying charges. (9) Retirement Benefits Federal income tat computed by multiplying income (a) hhnet inconw Man before taxes by the 35% statutory rate,is recorC to the Centerior Energy sponsors jointly with its subsidiaries a mount of federal income tax recorded on the books as noncontributing pension plan (Centerior Pension Plan) j follows: which covers all employee groups. The amount of retire-21

ment benefits generally depends upon the length of ser- Plan assets consist primarily of investments in common vice. Under certain circumstances, benefits can begin as stock, bonds, guaranteed investment contracts. cash early as age 55. The funding policy is to comply with the equivalent securities and real estate.

Employee Retirement income Security Act of 1974 guidelines. (b) Other Postretirement Benefits Pension costs (credits) for Centerior Energy and its Centerior Energy sponsors jointly with its subsidiaries a subsidiaries for 1994 through 1996 ucre comprised of the postretirement benefit plan which provides all employee following components: groups certain health care, death and other postretirement hii;ook,h benefits other than pensions. The plan is contributory, ser ice cost for benehts carned during the with retiree contributions adjusted annually. The plan is period $ 13 $ 10 $ 13 1 merest cosi on pro;ccied henchi obhganon _ 28 26 26 not funded. Under SFAS 106, the accounting standard for ket n$rtN"ti$"n nil [r aT Op j postretirement benefits other than pensions, the expected Net costs (credits) t (7) t (q Q costs of such benehts are accrued during the employees' Pension costs (credits) for the Company and its pro rata share of the Service Company's costs were $(2) million, The components of the total postrctirement benefit costs

$(3) million and $1 million for 1996,1995 and 1994, for 1994 through 1996 were as follows:

respectively. E E M (millions of doilars)

The following table presents a reconciliation of the funded S'{il[* gcost for benehts earned during the status of the Centerior Pension Plan. The Company's '

Inierest cost on accumulated postretiremeni beneht obligation 6 7 7 share of the Centerior Pension Plan's total projected Amortiration of transmon obhganon at l

benefit obligation approximates 301 $"""3 ' 3"93 "I 563 *Uh " " , ,

3 N G tiecember 31. Totai costs N e m ~ - -

(mations of dollars) These amounts included costs for the Company and its Actuarial present value of bencht obligations:

Vested benehh $326 $304 pro rata share of the Service Company's costs.

Nonvested benchis 16 2 Accumulated bencht obligation 342 306 The accumulated postretirement benefit obligation and 1.!Tect of future compensation levels 53 .,_.S accrued postretirement benefit cost for the Company and

'Iotal projected beneht ob!igation 395 360 .

Plar assets at fair market value 421 394 its share of the Serv. ice (,ompany's obligation are as I unded status 26 34 fo))ows:

Unrecognized net gain f rom variance t,etween assumptions and cycrience (56) (68) 1)ecember 31.

Unrecognized prior service cost 14 15 19'$ M Transition asset at January 1. IM7 being amortued (millions of over 19 3 cars E) B) dollars)

Net accrued pension liabihty (#

~ 44 tt")

Accumulated postretirement benefit obligation attributable to:

A September 30 measurement date was used for 1996 md ['l,idg%,'['$',' ri,, r,,,;c r,,,,

1995 reporting. At December 31, 1996, the settleroent other active plan participants _llo) _t 9)

(discount) rate and long-term rate of return cn plan ^ '""I"d P" i '"' b'"'II' "blir 'i""- 480) '868 .

L'nrecogni/cd net gam from variance between s assets assumptions were 7.75% and i1% respectively. The assumptions und experience (13) 19)

U "" *"'"d """E""

• h 8 """" #6 d*

long-term rate of annual compensation increase assump.- l Accrued postrctirement beneht cost f(47)

~~~ """ ((44 i tien was 3.5% for 1997 and 4% thereafter. At Decem- I her 31,1995, the settlement rate and long-term rate of The Balance Sheet classification of Retirement Benefits return on plan assets assumptions were 8% and 11% at December 31,1996 and 1995 includes only the Com-respectively. The long-term rate of annual compensation pany's accrued postretirement benefit cost of $40 million increase assumption was 3.5% for 1996 and 1997 and 4% and $39 million, respectively, and excludes the Service thereafter. At December 31.1996 and 1995, the Com- Company's portion since the Service Company's total pany's net accrued pension liability included in Retire- accrued cost is carried on its books.

ment Benefits in the Balance Sheet was $62 million and A h.eptember 30 measurement date was used for 1996 and

$64 million, respectisely.

1995 reporting. At December 31,1996 and 1995, the settlement rate and the long-term rate of annual compen-3ation increase assumptions were the same as those dis- l i

22

l -

i  !

1 cussed for pension reporting in Note 9(a). At Decem- applicable to approximately $94 million of outstandmg  !

I, ber 31,1996, the assumed annual health care cost trend first mortgage bonds ($31 million of which mature in ,

t j rates (applicable to gross eligible charges) were 7.5% for August 1997) that requires common stock dividends to be j

! medical and 7% for dental in 1997.130th rates reduce paid out of its total balance of retained earnings, which j gradually to a fixed rate of 4.75% by 2003. Elements of had been a deficit from 1993 through November 1996. At '

l the obligation afTected by contribution caps are signifi- December 31,1996, the Company's total retained earn- l cantly less sensitive to the health care cost trend rate than ings were $5 million. See Management's Financial Analy-

] f 4 other elements. If the assumed health care cost trend sis- Capital Resources and Liquidity-Liquidity.  ?

j rates were increased by one percentage point in each l future year, the accumulated postretirement benefit obli- (c) Preferred and Preference Stock -

3 gation as of December 31,1996 would increase by $3 mij. Amounts to be paid for preferred stock which must be

! . lion and the aggregate of the service and interest cost redeemed during the next live years are $1.665 million in  ;

j components of the annual postretirement benefit cost each year 1997 through 1999 only. }

} uould increase by $0.2 million. The annual preferred stock mandatory redemption provi-  !

j (10) Guarantees Shares To Pn.ce ,

The. Company has guaranteed certain loan and lease y(d " * ""i"# sire

{ i I i obligations of a coal supplier under a long-term coal 5100 par $9375 16.650 1985 5100 l supply contract. At December 31, 1996, the principal The annualized preferred dividend requirement at j amount of the loan and lease obligations guaranteed by December 31,1996 was $17 million.

! the Company under the contract was $11 million. l

The preferred dividend rates on the Company's Series A <

l The prices under the contract which includes certain and 13 fluctuate based on prevailing interest rates and minimum payments are sufficient to satisfy the loan and 4

market conditions. The dividend rates for these issues lease obligations and mine closing costs over the life of averaged 7.11% and 7.75%, respectively, in 1996.

the contract. If the contract is terminated early for any Preference stock authorized for the Company is 5.000.000

) reason, the Company would attempt to reduce the termi.

4 nation charges and would ask the PUCO to allow recov- shares with a $25 par value. No preference shares are

! ery of such charges from customers through the fue currently outstanding.

l factor. See Management's Financial Analysis - Outlook- With respect to dividend and liquidation rights, the Com-

' FirstEnergy Rate Plan. pany's preferred stock is prior to its preference stock and l

common stock, and its preference stock is prior to its 1 (11) Capitah,zation

common stock.

1 (a) Capital Stock Transactions i

(d) Long-Term Debt and Other Borrowing Preferred stock shares retired during the three years i

Arrangements i ended December 31,1996 are listed in the following table.

g g g Long-term debt which matures or is subject to put j

(thousands of shares) options during the next five years is as follows: $49 million i sub.icci to Mandatory Redemption:

5100 par $9375 in 1997, $39 million in 1998, $104 million ir.1999.  !

. (17) (17) (17) 25 par 2.81 _- L4Lm Lkto) $31 million in 2000 and $30 million in 2001.

Total ~)

(17

~)

1. 4t7

~)

(M7 The Company's mortgage constitutes a direct first lien on (b) Equity Distribution Restrictions substantially all property owned and franchises held by Federal law prohibits the Company from paying dividends the Company. Excluded from the lien, among other

. out of capital accounts. The Company has since 1993 things, are cash, securities, accounts receivable, fuel, supplies and automotive equipment.

declared and paid preferred stock dividends out of appro-j priated current net income included in retained earnings. Certain credit agreements of the Company contain cove-

[ At the times of such declarations and payments, the nants relating to fixed charge coverage ratios and limita-I Company had a deficit in its retained earnings. At tions on secured financing other than through first j December 31, 1996, the Company had $223 million of mortgage bonds or certain other transactions. The Com-appropriated retained earnings for the payment of divi- pany was in compliance with all such covenants as of dends. The Company also has a provision in its mortgage December 31,1996. The Company and Cleveland Elec-i 23

tric have letters of credit in connection with the sale and fj"*'$

leaseback of Beaver Valley Unit 2 that expire in (nunions of dollan)

June 1999. The letters of credit are in an aggregate c of securines; amount of approximately $225 mil' ion and are secured by Ty$d N$$lrnment sm $2l first mortgage bonds of the Company and Cleveland $'jici,Pal q 11 Electric in the proportion of 60"4 and 40%, respectively. i3 32 N" # '"

At December 31, 1996, the Company had outstanding g

$8 million of notes secured by subordinated mortgage hris d den hmier collateral. Due within one year $- 51 Due in one to the scarn 7 9 l

Due in sis to 10 3 11 (12) Short-Term Borrowing Arrangements ""' ""c' * ' c"> c'ars A Al

'l oial (n m Centerior Energy has a $125 million revolving credit The fa.ir value of these trusts is estimated based on the facility through May 1997. Centerior Energ3 and the quoted market prices for the investment securities and Serv,ce i Company may borrow under the facility, with all 1

.. approximates the carrying value. The fa.ir value of the i borrow.ings jointly and severally guaranteed by the Com- . .

. . C,ompany's pref. erred stock, with mandatory redemptmn I pany and Cleveland Electnc. Centenor Energy plans to . .

provisions, and long-term debt is estimated based on the transfer any of its borrowed funds to the Company and "

. quoted market prices for the respective or similar issues or Cleveland Electnc. The credit agreement is secured with .

on the basis of the discounted value of future cash flows, h.rst mortgage bonds of the Company and Cleveland

.The discounted value used current dividend or interest Electne in the proportion of 60% and 40%, respectively. .

rates (or other appropriate rates) for s.imilar issues and The credit agreement also provides the participating .

. loans with the same remaining maturities. ,

banks with a subord. mate mortgage secunty interest on  !

the properties of the Company and Cleveland Electric. The estimated fair values of all other financial instru-The banks' fee is 0.625% per annum payable quarterly in ments approximate their carrying amounts in the Balance addition to interest on any borrowings. There were no Sheet at December 31,1996 and 1995 because of their borrowings under the facility at December 31,1996. Also, short-term nature.

the Company and Cleveland Electric may borrow from (14) Quarterly Results of Operations each other on a short-term basis. At December 31,1996, (Unaudited) the Company had outstanding $82 million of notes receiv-The following is a tabulation of the unaudited quarterly able from Cleveland Electric with a weighted average '

results of operations for the two y ears ended interest rate of 6.18%.

December 31,1996.

QuditeN I'fuled (13) FinancialInstruments wren 31. June an. sera an. Dec. 31.

(nuthons of dollarO The estimated fair values at December 31,1996 and 1995 19""

Operating Resenues $2l1 $2l1 5252 5223 of financial instruments that do not approximate their Opereing income 33 31 52 42 carrying amounts in the Balance Sheet are as follows:

Deecmber 31.

[rn!n"[ tom Avadable for Common Stosk t1) 3 24 14 1946 1995 i993 Carning l' air Carry mg i air Operating Resenues $206 $215 5246 52n6 A mount Value Amount \ alue Operaung income 43 45 59 41 (milbons of dollars) Net income 20 22 33 22 Capitalization and Liatuhues I arnings Avadable for long-Term Debt $1.054 $1.Os6 51.126 $ 1.137 Common Stott 15 17 29 18 Noncash investments in the Nuclear Plant Decommis- Earnings for the quarter ended March 31,1996 were sioning Trusts are summarized in the following table. In decreased by $7 million as a result of an $11 million 1996, the Company and Cleveland Electric transferred write-down of the net book value of tuo inactise produc.

the bulk of their imestment assets in existing trusts into tion facilities. The write-down resulted from a decision Centerior Energy pooled trust funds for the two compa- that the facilities are no longer expected to provide nies. The December 31,1996 amounts in the table repre- revenues sent the Compan3's pro rata share of the fair value of Earnings for the quarter ended September 30,1996 were such noncash investments. decreased b) $4 million as a result of a $6 million charge H

l l

for the disposition of materials and supplies inventory. and Cleveland Electric to write olT certain regulatory The sale and disposal of inventory was part of the reen. assets at the time the merger becomes probable, which is gineering of the supply chain process. expected to be after obtaining the aforementioned approv-als of the merger. The write-off amounts for the Company (15) Pending Merger of Centerior Energy and Cleveland Electric to be charged against carr.ings, and Ohio Edison estimated by FirstEnergy to total approximately 5750 mii-On September 13, 1996. Centerior Energy and Ohio lion, will be detennined based upon the plan's regulatory Edison entered into an agreement and plan of merger to accounting and cost recosery details to be submitted by form a new holding company, FirstEnergy. Following the FirstEnergy to the PUCO staff for approval. The Com-merger. FirstEnergy will directly hold all of the issued and pany's share of the w rite-off is expected to be about outstanding common stock of the Company, Cleveland one-third of this amount. l Electric and Ohio Edison. As a result of the merger, the l If the merger is not consummated, the plan would be null l common stock share owners of Centerior Energ'y and . .  :

and vo.d.

i See Management's h..nancial Analysis - Out- 1 Oh.io Edison wd. l own all of the . issued and outstanding .

I look-Pending Merger with Ohio Edison and -FirstEnergy shares of IirstEnergy common stock. Centerior Energy 1

Rate Plan for a discussion of the proposed merger and the '

share owners w.d l receive 0.525 of. a share of h..rstEnergy 1 plan.

common stock for each share of Centerior Energy com- l mon stock owned. Ohio Edison share owners will receive (16) Pending Merger of the Company into I one share of FirstEnergy common stock for each share of Cleveland Electric Ohio Edison conmon stock owned. I In March 1994, Centerior Energy announced a plan to I iirstEnergy plans to account for the merger as a purchase l merge the Company into Cleveland Electric. The merger in accordance with generally accepted accounting princi-agreement between Centerior Energy and Ohio Edison ples. If FirstEnergy elects to apply, or " push dow n", the requires the approval of Ohio Edison prior to consumma-effects of purchase accounting to the financial statements tion of the proposed merger of the Company into Cleve-of the Company and Cleveland Electric, the Company land Electric. Ohio Edison has not yet made a decision.

and Cleveland Electric muld record adjustments to: All necessary regulatory approvals have been obtained, (1) reduce the carrying of nuclear generating plant except the NRC's approval. This application was with-by $1.25 billion to fair u . (2) recognize goodwill of drawn at the NRC's request pending Ohio Edison's deci-

$865 million; (3) reduce common stock equity by 5401 sion whether to complete this merger.

million; (4) reset retained earnings of the Company and Cleveland Electric to zero; and (5) reduce the related in June 1995, share owners of the Company's preferred j deferred federal income tas liability by S438 million. stock approved the merger and share owners of Cleseland l

These amounts redect FirstEnery>'s estimates of the pro Electric's preferred stock approved the authorization of '

forma combined adjustments for the Company and additional shares of preferred stock. If and when the Cleveland Electric .s of September 30.1996. The actual merger becomes elTective, share ou ners of the Company's adjustments to be recorded could be materially ditTerent preferred stock will exchange their shares for preferred from these estima es. FirstEnergy has not decided stock shares of Cleveland Electric having substantially the whether to push down the elTects of purchase accountiag same terms. Debt holders of the merging companies will to the financial statements of the Company and Cleveland become debt holders of Cleveland Electric.

Electrie if the merger with Ohio Edison is completed nor for the merging companies. the combined pro forma has FirstEnergy estimated the allocations between the operating revenues were $2.554 billion,52.516 billion and two companies if push-down accounting is elected. 52.422 billion and the combined pro forma net income In addition to the apprmals by the share owners of was $174 million, $281 million and $268 million for the Centerior Energy and Ohio Edison common stock, vari- years 1996,1995 and 1994, respectisely The pro forma ous aspects of the merger are subject to the approval of data is based on accounting for the merger on a method the i ERC and other regulatory authorities. A rate redoc- similar to a pooling of interests. The pro forma data is not tion and economie development plan for the Company necessarily indicative of the results of operations which and Cleveland Electric has been approsed by the PUCO. would have been reported had the merger been in cirect I rom the date of consummation of the merger through during those years or w hich may be reported in the future.

2006, the plan provides for rate reductions, frozen fuel The pro forma data does not relleet any potential clTects cost factors, economic deselopment incenti e prices, an related to the consummation of the Centerior Energy and energy-etliciency program. an earnings cap and an accel- Ohio Edison merger. The pro forma data should be read crated reduction in nuclear and regulatory assets for in conjunction with the audited hnancial statements of regulatory purposes. The plan will require the Compr.n3 both the Company and Cleveland Electric.

25

i Financini cnd Statistical Rovicw Operating Resenues (millions of dollars)

Total TotJ Operat'mg Year Residential Commercial Industrial Other Retail Wholesale Resenues 1996 $246 194 253 67 760 137 $897 l 1995 238 184 254 65 741 133 874 199J 227 181 251 64 723 142 865 1993 229 180 244 71 724 147 871 1992 215 175 236 61 687 158 845 1986 189 134 214 24 561 13 574 Operating Expenses (millions of dollars)

Other Generation Amortization of I cdcral f uel & Operanon Faedmes Depreciation Ta xes. Deferred income Total Purchawd & Rental & Other Than Operating Taxes Operating I Year P. m cr Maintenance i spenw. Net Amortization iIT I spenws. Net t Credit ) I spenws '

1996 $169 231 104 94 90 17 36 $741 1995 157 225 104 84 91 (17) 42 686 )

1991 167 229 104 83 90 (21) 33 685 )

1993 173 352(a) 104 76 91 (4)(b) (10) 782 1992 169 236 106 77 91 (17) 33 695 1936 160 168 -

38 51 -

41 458 )

I income (Imss) (millions of dollars)

I ederal income O her DcIerred Income ( Loss)

Income & Carryms T a w. - Before Operatmg Al l'DC- Deduc tions, Charges. Credit Interest

'. ear income l' quits Net Nei a l- spenw) C harpes 1996 $156 1 (10) -

5 $ 152 1995 188 1 6 14 (2) 207 1994 180 1 3 15 (2) 197 1993 89 I (232)(c) (161)(b) 129 (174) 1992 150 1 1 41 (1) 192 1986 116 130 (2) -

52 296 l 1

1 income (Loss) (millions of dollars) I LarninF5

( 1.o% ) .

Net Prcierred Available for I Debt Al l'DC- Income Stock Common l Year Interest Debi ( L oso Dmdends Niock 1996 $ 96 (I) 57 17 $ 40 1995 11I (1) 97 18 79 1994 116 (l) 82 20 62 1993 116 (l) (289) 23 (3i2) 1992 122 (1) 71 24 47 1936 174 (55) 177 45 132 (aJ includes early retirenrent progran: ex;wnses and other charges qf $1W nulliun (b) includes writeap ofphaw-in daferrah of $NI million onsisting of $$$ rnillion of deferred n;wrating erpernes and 5IN6 rnithon of deferred vartring

< harges.

26

i.

a The T< deja Edwm Company 2

Electric Sales (millions of KWil) Electric Customers Residential Usage (thousands at year end)

Average Average 1

AveraFe Price Revenue Industnal A% il Per Per Per Year Reudential Commercial Industrial Wholesale Other Tota: Residential Commercial & Other Total Customer k w il Customer 1996 _ 2 145 1 790 4 301 2 330 488 11 054 262 27 4 293 8 284 11.47c $950.10 1995 _ 2 164 1 748 4 174 2 563 500 11 149 260 27 4 291 8 384 10.99 921.23 1994_._ 2 056 17l1 4 099 2 548 499 10 913 257 26 4 287 8 044 I l .04 888.30 1993 _._ 2 039 1 672 3 776 2 146 490 10 123 255 26 4 285 7 997 11.23 897.65 1992 _ i 941 1 619 3 563 2 753 478 10 354 255 26 5 286 7 632 11.08 845.99 1936 _ 1 941 1495 3 482 348 449 7 715 247 25 4 276 7 881 9.75 768.43 1.oad (MW & %) Energy (millions of KWil) Fuel .

Net Cmnpam C,enerated I theiency-Seawnal Peak Capacity Luad Purchased l'uel Cost tr!U Per Year Capabihiv l oad Marym f actor Fowl N uclear l otal Power Total Per Au ll Kwll 1996 1 951 1758 9.9% 62.1% 5 173 5575 10 748 870 Ii 618 1.26c 10 295 1995 1 651 1 738 (5.3) 62.4 4 576 6 761 I1 337 299 11 636 1.32 10 341 1994 1 726 1 620 6.1 64.7 5 160 5 419 10 579 773 11 352 1.35 10 298 1993 1726 1568 9.2 64.3 5 548 4 791 10 339 196 10 535 1.42 10 146 1992 1759 I 514 i 3.9 63.2 4 656 6 293 10 949 (82) 10 867 1,41 10 284 1986 1760 l423 19.1 64.8 6 462 12 6 474 1795 8 269 1.82 9 860 Imestment (millions of dollars)

Construction w ork in lotal Utahty Accumulated Progress N uclear Property. Utihty Plant in  !>cpreciaton & Net & Perry l-uctand Plant and Plant Total Year Nervice Amortuation Plant iinii 2 Ot her I quipment Additions Assets 1996 $2 929 1 020 1 909 22 84 $2 015 $ 49 $3 357 1995 2 896 942 1 954 28 98 2 080 56 3 474 1994 2 899 892 2 007 30 125 2 162 41 3 502 1993 2 837 788 2 049 40 142 2 231 43 3 510 1992 2 847 760 2 087 280 164 2 531 44 3 939 1986 1443 416 1 027 2 130 269 3 426 463 3 774 Capitalliation (millions of dollars & %)

Preferred Stock. Preferred Stock, with Manelator) without Mandator)

Year Common Nwk I ymn Redemption Provnions Redemption Proviuons I one-Term lieb Total 1996 5 803 40% 3 -% 210 10% 1003 50% $2019 1995 763 38 5 --

210 10 1 068 52 2 046 1994 685 34 7 -

210 10 1154 56 2 056 1993 023 30 28 1 210 10 1225 59 2 086 1972 935 39 50 2 210 9 1178 $0 2 373 1986 1 075 36 149 5 260 9 1 481 50 2 965 1

(c) includes write-off of Perry l'ntt 2 of $23: mahan. '

i 1

I I

27

w --.,.m-L-,4 4 m-p,a,>.1pmB-- 4--+u *-b-W --.+--*+--n

-A&- b M INVESTOR INFORMATION Share Owner Information Exchange Listings Bondholder and Debenture-hrfenrd stocA ($25 par s alue): holder Information 8.849 Series,52.365 Series, Adjustable Share Owner Services Series A and Ad.justable Series B are Communications regarding stock transl.er (7rs.t Mortgage livnd Trinter and I.med on the New York Stock Exchange.

requirements, lost certibcates, dis idends Payu.rg Agent and changes of address should be directed P&lenrd stocA ($100 par value): The Chase Manhattan Bank, N.A.

to Share Owner Services at Centorior 41/6 Series 8.329 Series,7.769 Bondholder Services Energy Corporation. Correspondence Series and 109 Series are listed on 4 Chase Metrotech Center,11ox 3016 should be sent to the address indicated the American Stock Exchange. Brooklyn, NY I1245 below for the Stock Transfer Agent. Telephone: (800) 355-2663 To reach Share Owner Services by Dividend Reinvestment and Stock phone, call: -

Purchase Plan and Individual Ikbenture Trustcc and Paying Agent Retirement Account (CX*lRA) Fifth Third Bank in Cleveland area 447-2400 Centerior Energy Corporation has a Corporate Trust Operations Outside Clescland area: (800) 433-7794 Dividend Reinvestment and Stock 38 Fountain Square Plaza Purchase Plan which provides Toledo Cincinnati. Oil 45263 I, lease base your account number ready lidison share owners of record and other Telephone: (800) 837-2755 w hen calling.

investors a convenient means of purch:ts-StockTransfer Agent ing shares of Centerior common stock by Centerior Energy Corporation imesting all or a part of their quarterly We hase made forward-looking statements in thiy Annaal Report w uh respect to the financial conde Share Ow ner Sers ices dividends as well as making cash invest- tion. tesuhs of operations strategic plan and busi-P.O. Bos 94661 ments. In addition. indisiduals may estab- ness of the Company, Centerior Energy and Cles cland, Oil 44101-4661 lish an Individual Retirement Account Cleseland Electric, and FirstEnergy following the

, consummanon of Centerior Energy's merger with (IRA) w hich invests in Centenor common Ohio Edison, which imohe certain risks and Stock transfers may be presented at stock through the Plan. Information uncertain ies. Forwd-looking statements are liarris Trust Company of New York a tements about future performance or resuhs, relating to the Plan and the CX*1RA may 77 Water Street,5th Floor .

. including any statements using the words be obtamed f. rom Share Owner S.ervices. .. believer " expect? anticipaie" or similar words New York, Ni,10005 For all of those statements, we cla.im the protee-Independent Public Accountants lion of the safe harbor for forward-looking Mate-Stock Registrar Arthur Andersen LLP ments contained in the Private Seturities KeyBank National Association . Lingation Refonn Act of 1995. Factors that may Suite 1800 cause actual resuhs to differ materialh from those Corporate Trust I. . . .hvision 200 Public Square contemplated by such foruard-hiokin's statements P.O. Box 6477 include, among others the foHowing possibihties:

Cles clar.d. Oil 44114 Cleveland, Oil 44101 (1) expected cost sasings from the merger of Centerior Energy and Ohio Edison are not fully Environmental Report reaiired. m regional competitive pressure in the

~

Imfestor Relations The Company will furnish to share own- electric utihty industry inercases sigmneantly; th Inquiries from security analysts and ers. uithout charge, a copy of a report on ge effects M unanocipated esents on the institutional investors should be ditected . , C ompany,s and Cleveland Electne > eyiectanons its emironmental performance. Requests regarding cost recoser) or on the carrying salue of to Ronald E. Seeholier, Manager-imestor should be directed to Share Owner regulatory asseis and on the company's and Relations, at Centerior Energy Services. Cleveland Uecuici abany to connnue to comply Corporation. P.O. Hot 94661, with the prm isions of SFAS 71 tas deGned herein) cause an impainnent of property, plant and equip-Cleseland,011441014661 Form 10 K mem or variances from the amounts disclosed;14) or by telephone at (216) 447-3339. The Company will furnish to share own- costs or dif6eutties related to the integration of the ers, w ithout charge, a copy of its most h"'i"'" "I "h'" ' di'"" ""d C#*i"' E"FF i are creater than expected,151 state and federal reg- ,

recent annual report to the Securities and ubbr> imtiatives are unplemented that further '

Exchange Commission. Requests should increase compeution, threaten cost and im est ment be directed to Share Du ner Senices. "'# 9 "' ""P" '" "* " "' d" *"d';

and t6) national and regional economic conditions are less fasorable than eylected.

18 \

The Toledo Edison Company 300 Madison Avenue Ill'LK RATE l'.S. IOS1 AGE Toledo, Oil 43652-0001 l'A1D I Cl1VilANI),01110 PT RMIT NO. 409 t

.