ML20112D628

Centerior Energy 1995 Annual Rept

ML20112D628
Person / Time
Site:	Beaver Valley
Issue date:	12/31/1995
From:	Farling R CENTERIOR ENERGY
To:
Shared Package
ML20112D597	List: ML20112D593 ML20112D604 ML20112D610 ML20112D620 ML20112D628 ML20112D641
References
NUDOCS 9606040434
Download: ML20112D628 (40)

Text

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CENTERDOR ENERGY .

1 1

" Restructuring into strategic business groups . . . changes Centerior from a traditional vertically integrated utility into l a family of related but distinct operating entities. Thus it enhances our ability first to prepare for and then to operate successfully in  ;

increasingly competitive markets" 1

s 1995 Annual Report l

l D ADO K 05 334 I PDR l

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Financial Summary jg,3 1994  % change Earnings Per Share of Common Stock $ 1.49 $ 1.38 8 Dividends Declared Per Share of Common Stock $ ,80 $ .80 -

Book Value Per Share of Common Stock at Year End__ $ 13.40 $ 12.71 5 Closing Common Stock Price at Year End $ 8% $ 8% -

Common Stock Share Owners at Year End 137,396 149,237 (8)

Common Stock Shares Outstanding at Year End (millions) 148 148 -

Operating Revenues (millions) $ 2,516 $ 2,421 4 Operating Expenses (millions) $ 1,927 $ 1,843 5 220 i Net income (millions) $ $ 204 8 Return on Average Common Stock Equity 11.4 % 11.1 % 3 r Kilowatt-hour Sales (Millions of Kilowatt-hours)

{

Residential 7,227 6,980 4 Commercial 7,694 7,481 3 Industrial 12,168 12,069 i Wholesale 2,626 1,842 43 Other 1,050 1,074 (2)

Total 30,766 29,446 4 Employees at Year End 6,821 6,767 1

.h Quarterly Range Of Common Stock Prices 1995 liigh low 1994 liigh low ist Quarter $10 $8 'X. Ist Quarter $13 % $10%

2nd Quarter 9% 8% 2nd Quarter 11 % 9%

3rd Quarter 11 9M 3rd Quartet 10 % 8%

4th Quarter 11W 8M 4th Quarter 9M 8 Or4 < rider- on,

debt and preferred stock obligations by sales and marketing programs so they more than $130 million. We outper- can generate significant amounts of formed our targets for cash flow and new revenue. l production costs per kilowatt-hour.

p Total spending was below the 1994 Our overall revenue situation will also l SHARE OWNERS level. Though operation and main. be significantly affected, in 1996 and :

tenance spending was up, the increase beyond, by the plan for transitioning Nobody said it was going to be easy.

was more than outweighed by a large the company into a more competitive  !

l decline in capital spending. The O&M future that we presented to the From the start it was clear that the increase resulted in large part from in. Public Utilities Commission of Ohio transition from Centerior's highly .

ventory adjustments and the write-off of in March 1995. Though we were regulated, highly stable, highly costs connected with engineering studies. reluctant to propose rate increases l predictable past to a volatile, fast- ,

in today's tough marketplace, the l changing, competitive future was going The performance of our power plants increases contained in our transition to take effort and persistence. Time is mproved in 1995. The availability of plan are necessary to enable us to perhaps the key ingredient.

the Davis-Besse nuclear facility was recover cost increases and deferred 100% for the year. February 21,1996 costs, generate a fair return for our That's why our transition road map, was the plant's 463rd consecutive day share owners over time, and have cash the strategic plan we launched at the on line, a remarkable achievement by with which to reduce debt. l start of 1994, was designed for U.S. and world standards. The Perry implementation over a period of eight nuclear facility, which continues to Approximately $45 million of the years. Even as we began, we said that move toward Davis-Besse's level of requested increase is needed to cover the plan's goals wouldn't be achieved performance, had an availability rate higher state and local taxes. Another quickly or easily or without pain.

of 93% in 1995. When it began a $35 million is for an increase in scheduled refueling and maintenance depreciation of nuclear facilities that The arrival of 1996 finds us two years

.. outage on January 27,1996 Perry had will bring us into line with industry into our transition and ach. .

ieving

. been on line for 506 of the 531 days norms. Approximately $25 million is mixed results. We are not keeping

, since the end of its most recent to Provide recovery of cost increases pace with the strategic plan in one key refueling outage. that have been deferred, area, revenue growth. Though our retail revenue was substantially higher But these successes do not alter the The increase we are requesting is m 1995 than in the previous year in . .

fact that revenue growth remains sigmficantly less than we are permitted absolute terms, on a weather-adjusted essential to the achievement of the to request under traditional regulatory

. basis (which means taking into strategic plan, and therefore is a top guidelines. If implemented, it will be account the fact that in 1995 higher priority in 1996. Revenue growth is the the first increase in five years for all of summer temperatures ra,ised a,r i con-reason for our emphasis on improved our customers, the first in six years for ditioning use well above the previous customer satisfaction, and it is essential many. It will raise rates by 4.9%

year's level) the increase was not as for the reduction of fixed. charge overall, much less than the cumulative big as we anticipated.

obligations that ultimately will make effect of inflation since our hst reduced rates (and increased com. increase. The electric bills of the At the same time, we made good petitiveness) possible. We are pursuing average residential customer will rise progress toward the achievement of it by every appropriate means. Above by approximately $3 per month - ten other major goals. For the second all we are working to strengthen our cents a day.

consecutive year, in 1995 we reduced rWO

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Terrence G. Linnert Robert J. Farling Gary R. Leidich Murray R. Edelman Fred J. Lange, Jr.

Senior Mce President. Chairman, President President Executive Mce President President Corporate Administration Group, and CEO Power Generation Group and President, Transmissic>n, Distribution Group Chief Financial Oficer Enterprises and Services Groups and General Counsel Most importantly, we intend to follow the write-down of nearly $1.4 billion Our rate case shows the extent to this increase with a freeze that will last in corporate assets have already which such proceedings are, like so until the year 2002 at least. If in the imposed a substantial burden on our many other aspects of our business, course of this freeze circumstances share owners. We are not opposed to changing. The Utilities Commission is made it impossible to earn a fair return accelerated asset write-downs, but considering, in addition to rate levels for share owners, we would ask for a only if they are part of an agreement to and structure, questions that it has further increase - but only after provide a reasonable rate of return to rarely if ever dealt with in the past -

taking all appropriate actions to make generate the necessary cash now for questions such as whether assets such a request unnecessary. recovery of assets and concurrent should be revalued downward, and paydown of our debt, what other financial measures might It has been argued in the course of improve Centerior's ability to deal the rate case - and these arguments As we send this report to press, it is with increased competition. The have been given much attention in the impossible to know when the new handling of such questions could, news media - that Centerior should rates might be implemented. Whenever depending on the outcome of the case, eliminate the common stock dividend implementation happens, the resulting have important implications for our i and write down assets at a greatly higher revenues will help speed the financial results and position. They accelerated pace. In response, we pace at which Centerior is able to re- could lead to fundamental accounting have pointed out that two dividend value and recover its assets and become changes, and thereby to write-offs or reductions since 1988, a sharp decline more capable of competing effectively faster write-downs of assets if our rates in the price of our common stock and in increasingly deregulated markets. don't provide recovery of our costs. l three

.m. _. . _ . _ __ __ ___ _._ __._ _ _ _. _ . _ _ _ . _ _ _ . __

- Ultimately, such developments would . We know that we will have to compete The restructuring of Centerior into

[ . reduce c our earnings. A detailed for every customer in the marketplace - strategic business groups increases the discussion of these: possibilities is of the future, while at the same time ability of employees at all levels to presented in Management's Financial earning a fair return for our share focus on the strategic plan and its Analysis, which begins on page 10 of ~ owners. Our strategic plan is specifi- objectives. By making the core distri-this report. cally designed to prepare us to do so. bution, generation and transmission groups responsible for their profits, it As called for in our strategic plan, at -The ambitious reengineering effort promotes accountability while strength-the end of 1995 we stopped deferring that we began late in 1994 was pro- - ening our ability to control costs and certain costs and began amonizing ducing significant results before the end

- mprove customer service. -

l them. Our earnings for 1995 included of 1995. Focused at first on the cor-

$159 million in deferrals and accel. Poration's internal financial reporting It accelerates and canies closer to ersted amortization of tax-related and customer service processes,' It completion the transformation of our

. benefits. In 1996 we will not defer caused us .to question whether company. It changes Centerior from a expenses, and ~we will include $25 Centerior's traditional structure was - traditional vertically integrated utility 8PPropriate to the changed realities of into a family of related but distinct

.million' of amortization of deferrals

~ in our expenses. Our requested rate ur industry and markets. This led, in operating entities. Thus it enhances our increase will provide cash recovery the third quarter, to a reorganization ability first to prepare for and then to of the costs which are now being that divides the corporation into six operate successfully in increasingly I amortized. Although 1996 earnings strategic business groups: competitive markets.

l l will decline significantly as a result of (1) A distribution group that operates l

l The following pages are a report on this change, virtually all earnings will as a utility serving our one million our progress and plans w.ithm. the ,

be cash earnings - a sharp departure retail customers in northeastern and  !

framework of the busm, ess groups. 4 from past years, northwestern Ohio. i (2) A power generation gmup respon- The past year- provided plenty of j It is a paradoxical fact that the pace of sible for operating all company-owned evidence - as if any were needed -

our transformation into a new, more electricity-Producing facilities including 'of just how formidable the challenges competitive electricity provider is nuclear and fossil-fuel plants. facing us are. But it provided equally partly dependent on a rate case - on, l~ that is, the traditional regulatory 3) A transmission group that manages mPressh e&w of k OnW process. The parado : is one measure cam s a y to confmnt Gose power transactions with other utilities of the complexity of the changes

• *"8*** "' " ' " " "* I on the company's transmission system.

n to the next stage of implementing

! taking place not only at Centerior but l (4) A corporate adm. .mistration group the strategic plan.

throughout the industry.

handling human resources, finance, law, ]

.. regulatory and govemme::ta! afMrs, he management of your company, I Where our largest customers are con-  !

share owner relations, and auditing, along with the Board of Directors, cerned, we are already operating in an .

. contmues to be focused on ach.ieve-environment vastly more competitive (5) A services group provid.mg mfor- ,

ment of our strategic plan, to monitor and challenging than anything seen mation systems, engineering, supph.es,

' progress toward achievement of that i

' in the past. Our largest industrial communications and other services to l plan in all parts of the organization, l customers, in particular, are becoming the other groups.

and to seek input from all informed mcreasmgly aggressive in negotia- (6) A business enterprises group pur- sources on how to accelerate our t tions, setting ambitious objectives with suing tevenue opportunities in non- progress. In January 1996, as part of respect to prices, contract duration, regulated lines of business and in new our ongoing search for the best ideas i and such issues as reliability, areas such as telecommunications.

I i

/088F

available, Centerior Board members ference has helped us keep pace with years, and if we can move forward at and senior executives participated in a the rapid change of the industry. increasing speed, we will have ample two-day strategic conference. Financial reason to be confident about the future.

analysts, regulators and recognized We continue to be grateful for the experts on various aspects of our suppoit of you, our share owners, and industry exchanged their viewpoints for the talents and contributions of and their visions of the future with Centerior's 6,800 employees. If in the Robert J. Farling years just ahead we can stay on the Chairman, President and each other and with the company's representatives. This interactive con, course we have set over the past two ChiefExecutive Oficer February 21,1996 And because customer needs are not competition with a long-established D

uniform across the hundreds of square Cleveland municipal system that has miles it serves, from the day ofits crea- ambitious expansion goals. In the past tion the Distribution Company has been few years, at least partly as a result of divided into three regions, each headed Centerior's own competitive initiatives, by a seasoned Centerior executive. this municipal system has fallen far short of achieving its goals. In 1996 the The Western Region, which covers the Central Region is focused on sustaining Toledo Edison service area, includes a the company's competitive momentum, remarkably large number of municipal accelerating the replacement of older D,istribut, ion eiectric companies and rurai eiectric ,quipmen,, and steppin, up the ,,,e.

associations. It is also adjacent to trimming program as a way of assuring Centerior's new Distribution Company the service territories of other large, reliable service.

is the electric utility serving the million aggressively competitive investor-customers of The Cleveland Electric owned utilities. The first objective of The Eastern Region, which extends Illuminating Company in northeast regional vice president John Paganie, to the Pennsylvania state line and is Ohio and The Toledo Edison Company accordingly, is to protect our market headed by regional vice president Jack in northwest Ohio, which are to share. Related goals include helping to Kline, is largely suburban and rural but do business under the new name attract and retain business for Greater also includes areas that are developing Centerior Electric. Toledo and building closer relation- rapidly and the city of Ashtabula. A ships with customers outside the major challenge is to expand the electric Because its core mission is, in the region's urban sector. system serving the region in such a words of President Fred J. Lange, Jr., way as to maintain high reliability to "get closer to the customer," the The Central Region is an established while not compromising the region's Distribution Company puts all the urban and suburban area with Ohio's essentially rural character.

elements of Centerior responsible for largest population center, Greater j serving and working with customers Cleveland, at its core. Part of the For the regions as for the Distribution into the same part of the organization challenge of running it, according Company as a whole, the challenge is for the first time. to regional vice president David threefold: to make quantum leaps for-Whitehead, involves door-to-door ward in the improvement of customer five

service, to support the sales and in a wide-open market even the best The Distribution Company's industrial, marketing function's efforts to increase competitors win some and lose some, commercial and residential marketing revenue at the rate called for by the but our ability to offer high quality and functions intend, in 1996, to introduce strategic plan, and simultaneously to high reliability is making it possible more than 40 new and innovative achieve significant reductions in for us to sign large customers to new products, services and pmgrams to costs. Economic development, which contracts. We have also helped attract meet the wing requirements of is the responsibility of the Distribution major new industrial customers to our customers. The programs will target Company's sales and marketing staff, service area (North Star Steel and markets as diverse as petrochemicals, is an important means of achieving Worthington Steel, for example), and restaurants and multi-family housing.

significant and sustained revenue we are challenging the departure of the growth. For example, industrial growth Medical Center and Chase Brass from creates jobs that bring in residential our system on the basis of substantial customers and later the commercial legal and regulatory precedents.

customers to support industrial and residential growth. More than a third of the Distribution Company's 150 person sales and Recent experience shows clearly that marketing staff joined our company substantial economic development is a recently from other industries. These realistic goal throughout the Centerior new people bring in-depth knowledge service area, which after a period of of the kinds of customers we serve and stagnation related to the decline of the a fresh perspective that is speeding so-called Rust Belt has become a national leader in job-creation. Small change within our organization.

Power l to medium-sized industrial customers, Both in customer support and in sales Generat. ion in particular, are achieving noteworthy and marketing, new technology is growth and assuming increased im- enhancing the company's ability to do We expect power generation to be the portance as a market segment. In 1995, a better job while spending less. New first part of the industry to be deregu- i 1

revenues from Centerior's smaller telecommunications equipment, for lated - and possibly to be deregulated industrial customers were 3.2% higher example, is expanding our ability to completely. We think it is necessary to than in the previous year, quickly determine the extent of an assume that this will happen in the not-outage when customers call to report very-distant future. We expect deregu-Centerior economic development efforts lation to transform power generation problems. Such equipment also greatly helped bring 34 new projects into reduces the number of customers who inm a commodity business; an elec- I existence in 1995, producing annual ge' busy signals when they try to report tricity futures market is, in fact, already revenues of about $23 million for the outages. Sales people have been starting to emerge.

I company in the process. ,

equipped with lap-top computers that Therefore we expect that Centenor giv them instant access to all One large customer, Cleveland's will f' m d itself competing with other available data about their customers Medical Center complex, has producers of electricity on the same d enable them to respond in minutes announced plans to begin taking its terms that have always dominated requests that in the past might have power from another supplier as of NWes compehon.  ;

ays r even weeks.

September, 1996. Another, Chase Price, and quality of service. f Brass, began doing so in October,1995. )

I l

six

This will be a vast change - the end ~ the facilities needed to meet demand What will be our margin on the revenue of at least one major element of the and thereby fulfill their obligations that running this unit brings in?

regulatory compact that has governed under the regulatory compact. To void the U.S. electric utility industry the compact without making provision What can we do to increase the .

. throughout this century. Under that for the recovery of those costs would profitability ofinis unn?

compact, the first and ' highest be grossly unjust to the millions of people who invested in utilities in The piimary focus, both in the near responsibility of every utility has term and fw the fweseeable future,

- always been to provide customers with good faith when the regulatory compact safe and reliable electricity while also was still fully in effect. Almost all will be on reliability and variable proposals for the deregulation of the costs. Aggressive cost reduction will assuring an adequate supply of power for economic growth. industry recognize the importance of be essential in an open, deregulated-market. It is, therefore, the central aim this issue and include mechanisms for Utilities, ' accordingly, were held ~the recovery of costs that otherwise of the Power Generatin Group's five-

, accountable for building enough would indeed be left " stranded." year plan.

power plants to keep pace with the Leidich sees the challenge as being at economic expansion of the regions Adequate provisions for stranded investment, however, won't change least as much a matter of organiza-they were given exclusive rights to the fact that power plants are likely tional culture as of financial manage-serve. The costs of new' plants were added to the rate base of the utilities to be competing in an open market. ment. Achieving the five-year plan's

' that built them. In paying their electric Centerior's Power Generation Group objectives will, he says, require the bills, customers gradually paid the has been created to take the corpora- gmup's employees to understand what tion's generating facilities into a future is needed for success in competitive ,

costs of plant construction.

that clearly is going to be far more markets, understand that our cora-Today everything is changing. Utilities competitive than the present or the Petitors are improving their reliability.

are learning to look at their power ' and cost control,' and understand their past. Like the other core strategic plants _ not simply as sources of ' business gmups,it will be accountable own responsibilities in a new way.

electricity, but as sources of cash. for the profits of what it manages. A fast transition to a new culture They are leaming to evaluate their characterized by participative manage-power plants, and manage them and Gary R. Leidich, the Power Generation ment, teamwork, accountability, and each make decisions about them, on the Group's president, says the challenge individual having a sense of ownership .

basis of rinancial performance and is to prepare for a new ball game when in the group's mission is essential, rehM".ty. Cost and reliability, rather no one knows with certainty what the than adequacy of supply, are now the rules are going to be. "Two things are The past few years provide a basis primary concerns 'of every company certain," he says. "First, customers are for optimism about the ability of the that owns generating plants. going to have more choice. Second, cMPwation's generating units to set price will be determined by the and achieve stretch goals in the areas The increasing importance of cost market." Centerior, like other utilities, f Perfemance and cost reduction.

explains the attention that is being will have to ask new questions about The performance of the Davis-Besse given nationally to an issue that has every electricity-producing facility it nuclear facility is at a world-class come to be known as " stranded owns and operates: level, as 1995's 100% availability rate investment." Across America, major makes clear. At the same time, Davis-utilities have accumulated large If we run this unit, how much revenue Besse's operation and maintenance amounts of debt incurred in building will come in? costs have been declining steadily,

.seven

I  ;

i going from $132 million in 1989 to These are challenging targets. For many years now the transmission

{

$78 million in 1995. During those same Achieving them is going to require systems of utilities across North l years the plant has achieved and sus- sacrifice along with major changes in America have been linked together tained world< lass levels of availability. how we purchase fuel and how our into two vast grids separated by the f

fossil plants are operated. It is likely to Rocky Mountains. Thanks to the The Perry nuclear facility is now in the require shutting down some units, existence of these grids, electricity can ;

carly years of a comparable im- changes in job assignments, and work 1

be " wheeled from places where it is j provement process. Its availability rate force reductions. In 1995 we made available in abundance to wherever it's i was an impressive 93% in 1995, and good first steps toward achieving our i needed most (because of a heat wave, j

its O&M spending has declined from targets. The task at hand is to make for example). Utilities buy and sell l

$182 million in 1993 to $128 million more progress every year. There is no power under long-term and very-short-in 1995. Both plants show that it is pos- way of knowing exactly how much term contracts, use the grid to move sible to achieve operational excellence time we have to prepare for open that power from seller to buyer, and while simultaneously reducing costs. competition. What's essential is to charge one another for the use of their build on the good start we made in transmission systems. l A project aimed at greatly reducing the 1995 and act as if open competition cost of the corporation's fossil-fuel were already here. In transmission as ii every other pan generating operations was launched in of the electric utility industry, the '

1995 and is to be completed by mid-likelihood of deregulation and increased L

1999. The initial planning of this '

competition has big implications and Fossil Operations Performance Improve-requires a vigorous response. All  ;

ment Project included an analysis of major utilities, Centerior included, l both fuel costs (which account for need to prepare now for the inevitable a more than 70% of our total fossil transformation of the wholesale power generation production costs) and market. They - we - have to be maintenance expenses.

savvy power traders and also have to be able to anticipate coming changes The study benchmarked the region's n the rules and structure of the trans- I best fossil plants, thereby showing the mission part of the industry. We have extent to which action is required to to be ready to react appropriately as the reduce Centerior's production costs. It Ta'ansu,ss, ion transformation or the industry unfoids.

showed also that our capacity factor (the ratio of how much electricity a

' Transmission,"in the parlance of our Thus Centerior's Transmission Group, plant generates in a year to how much industry, is the movement of large and its three primary areas of it could have generated if run at full amounts of electricity either within responsibility:

capacity) might be abruptly cut in half

,, 7 if open competition begins before sig-utility to another -- even from one First, to manage the daily operations of niGennt reductions have been achieved. the company's transmission system, region of the U.S. to another.The poles The team doing the study found that, t and wires that bring electricity down always assuring that we have enough become competitive, Centerior must electricity to meet demand, and that your street and to your home aren't cut the operating costs of its fossil the service we provide is reliable, transmission but distribution. Multiple operations and capital expenditures power lines extending cross-country atop associated with those same operations . . Second, to develop Centerior's trans-huge towers - that's transmission, well below current levels. mission policies ar,d monitor changes eight

I in the way transmission is managed generating additional sources of

• Advanced energy-related throughout the industry. revenue from no0-utility sources, technologies.

Third, to buy and sell eiectricity on the It ictends to fulfdl that mission by  !

wholesale market, always seeking ways acquirug and developing new to do so as advantageously as possible, businesses that are outside, but com-patible with, Centerior's traditional Murray R. Edelman, president of the role as a provider of electricity.

Transmission, Business Enterprises and Services Groups, said the creation increasingly, electric utilities are of the Transmission Group provides an looking beyond their traditional genera-1 instrument with which the corporation tion, transmission and distribution j can focus on emerging issues related to roles in quest of growth. Centerior transmission service and pricing. already has the things needed to do this successfully: people, equipment, and An open power market, whenever and financing. A skilled and committed Adm,inistrat, ion however it comes, will be a mixture of work force, an mfrastructure of power opportunities and challenges for plants and transmission and distribution established utilities like Centerior. A particularly interesting aspect of trans-systems, and the financial resources of a major corporation provide a solid SeMCes -

mission is its potential as a mechanism base for growth in new directions.

for the recovery of stranded invest. The Adm.mistration Group (headed by ments. Transmission fees are a possible '" # ** *

• I *"* *"I ""*'O Success in non-utility markets will way of recovering stranded investment an e es muP W Murray require entrepreneurial traits: aggres-even after the regulatory compact is Edelman as its presiden0 provide siveness, innovativeness, and willing-abandoned. Centerior Energy Corporation and the ness to take risks. It will require also

• "" *** E*"E* * * **Y the careful selection of target oppor-servi es: auditing, communications.

tunities, and the sharp focus necessary finance, human resources, information for maximizing opportunin.es.

systems, law, regulatory and govern-mental affairs, share owner relations, E

That's why the Enterprises Group was and supply. A number of these services  !

created. And that's why the group is concentrating its attention on areas that will be provided on a gradually more c mpetitive basis; eventually the core lie outside the established boundaries business groups are likely to have the of the electric utility business but Ption of using outside sources, are relevant to the skills, experience and resources of the Centerior team.

Among these areas are:

Enterprises Teie-mmunicatioas.

+ Custom energy production and The Enterprises Group is on a mission: distribution.

To increase share owner value by nine

M: nag:m:nt's Fin:n:lil An: lysis Another key part of our strategy is otTering long-term Outlook contracts to those large customers who could have incen-Strategic Plan fvst change power suppliers. In 1995, 68% of our mdustrial kilowatt-hour sales and 15% of our commercial We continued to make progress during the second year of kilowatt-hour sales were under long-term contracts. We our eight-year strategic plan, but we remain keenly aware are renegotiating contracts before they expire and in most of the magnitude of the problems that face us. The cases are retaining customers under new long-term strr,tegic plan was created to achieve two major goals: contracts.

strengthening our financial condition and improving our competitive position its objectives are to maximize share We are continuing efforts to reduce fixed financing costs owner return, achieve profitable revenue growth, become in order to strengthen our financial condition. During a leader in customer satisfaction, build a winning 1995, utilizing strong cash flow and refinancing at employee team and attain increasingly wmpetitive power favorable terms, we reduced interest expense and pre-supply costs. We are not yet positioned to compete in a ferred dividends by $8 million and outstanding debt and less regulated electric utility industry, but every major Preferred stock by $134 million, action being taken - strategic planning, revenue Our overall costs are high relative to many of our neigh-enhancement, cost reduction, improvement of work prac-boring utilities as a result of our substantial nuclear tices and application for increased prices - is part of a nvestment. The strategic plan calls for making us more comprehensive effort to succeed in an increasingly com.

competitive by continuing to reduce operating expenses petitive environment.

and capital expenditures, in 1995, to improve our focus on A primary objective of the strategic plan is continued and cost reduction and other strategic plan objectives, we significant revenue growth even as our markets become restructured into six business groups. The new organiza-more competitive. Retail revenues adjusted for weather tion includes groups to manage our generation, distribu-and fuel costs have grown about 1% annually since 1990, tion and transmission businesses; provide services and During 1995, we took aggressive steps to increase reve- administrative functions; and invest in nonregulated nues through enhanced marketing strategies. Also, our enterprises. This arrangement will also enhance each economic development efforts proved successful in group's ability to identify cost reductions by focusing on attracting major new customers and supporting the margins and improving work practices and customer ser-expansion of existing ones. Although we are not satisfied vice. We will also continue to aggressively pursue initia-with our growth rate, we expect that our marketing tives to reduce the heavy tax burden imposed upon us by activity will improve revenue growth, the state and local tax structure in Ohio.

The rate case we filed with The Public Utilities Commis-Rate Case and Regulatory Accounting sion of Ohio (PUCO) in April 1995 is a critical factor to

)

the success of the strategic plan. We do not see this rate in April 1995, our subsidiaries, The Cleveland Electric case as a continuation of business as usual but as an Illuminating Company (Cleveland Electric) and The important turning point which should, if we are successful Toledo Edison Company (Toledo Edison) (collectively, in accomplishing the objectives discussed below, bring an Operating Companies), filed requests with the PUCO for end to price increases for the foreseeable future. A suc- price increases aggregating $119 million anmally to be I cessful conclusion of the case would speed our transition effective in 1996. The price increases are ne:essary to to a more competitive company by providing additional recover cost increases and amortization of certain costs I cash to lower costs by accelerating the pay-down of debt deferred since 1992 pursuant to the Rate Stabilization and preferred stock. In our view, a successful conclusion Program discussed below and in Note 7. If their requests would include approval of the full price increase requested are approved, the Operating Companies intend to freeze with a regulatory commitment to maintain the established prices until at least 2002 with the expectation that price levels over an appropriate transition period. This increased sales and cost control measures will obviate the should be coupled with a means to accelerate recognition need for further price increases. If circumstances make it of regulatory assets (described in Note 7(a)) and nuclear impossible to earn a fair return for share owners over generating assets concurrent with our cost control and time, we would ask for a further increase - but only after revenue enhancement efforts in order to earn a fair return taking all appropriate actions to make such a request for share owners over time. unnecessary.

ten

-In December 1995, the PUCO ordered an investigation Competition

' into the financial conditions, rates and practices of the . .

. Maj.or structural changes are taking place m. the electric

. Operating Compan.ies.~

utility mdustry which are expected to place downward in its report on the Operating Companies' rate request,.

pressure on prices and to increase competition for cus-the PUCO Staff recommended approval of the $119 temers' business. The changes are coming from both million requested, subject to a commitment by the Oper- federal and state authorities. Many of the changes began ating Companies to significantly revalue their assets. In when the Energy Policy Act of 1992 permitted competi-

. lite January 1996, the Staff proposed that the Operating tion in the electric utility industry through broader access

Companies significantly revalue their nuclear plant and:

to a utility's transmission system. In March '1995, the

- regulatory assets within a five-year period. The Staffs . Federal Energy Regulatory Commission (FERC) issued asset revaluation proposal is inconsistent with the Ohio proposed rules relating to open access transmission ser- l statutes that define the rate-making process. The PUCO vices by public utilities, recovery of stranded investment is'not bound by the Staffs recommendations. A decision and other related matters. The open access transmission 3

by the PUCO is anticipated in the second quarter of 1996. rules require utilities to deliver power from other utilities The outcome of the rate case could affect the Operating r generation'.ources to their wholesale customers. In Companies' ability to meet the criteria of Statement of May 1995, the Operating Companies filed open access  !

- Financial Accounting Standards (SFAS) 71 for all or transmission tariffs with the FERC which used the pro-part of their operations which could result in the write-off Posed rules as a guideline. These tariffs are currently Pending.

of all or a part of the regulatory assets shown in Note 7(a). In our changing industry, other events independent Several groups in Ohio are studying the possible applica-of the outcome of the rate case could also result in write- tion of retail wheeling. Retail wheeling occurs when a offs or write-downs of assets. customer obtains power from a utility company other than See Note 7 for a full discussion and analysis of the rate its local utility. The PUCO is sponsoring informal discus-case, SFAS 71 and other financial accounting require. - sions among a group of business, utility and consumer

- ments and the potential implications of these accounting interests to explore ways of promoting competitive options requirements for o' ur results of operations and financial without unduly harming the interests of utility company position. share owners .or customers. Legislative proposals are being drafted for submission to the Ohio House of Repre-Rate StatWization Program sentatives and several utilities in the state have offered their own proposed transition plans for introduction of '

Under a Rate Stabilization Program approved by the retail whccling. The current retail wheeling efforts in Ohio PUCO in 1992, we agreed to freeze base rates until 1996 are CXPl oratory and we cannot predict when and to what and limit rate increases through 1998. In exchange, we extent retail wheeling will be implemented in Ohio.

were permitted to defer through 1995 and subsequently recover certain costs not currently recovered in rates and The term " stranded investment" generally refers to fixed to accelerate amortization of certain benefits. Deferral of costs approved for recovery under traditional regulatory those costs and amortization of those benefits were com- methods that would become unrecoverable, or pleted in November 1995 and aggregated $159 million in " stranded", as a result of wider competition. Although 1995. Recovery is expected to begin with the effective competitive pressures are increasing, the traditional regu-date of the PUCO's orders in the pending rate case. latory framework remains in place and is expected to Annual amortization of the deferred costs is $25 million continue for the foreseeable future. We cannot predict which began in December 1995. Consequently, carnings when and to what extent competition will be allowed. We in 1996 will be sharply lower than in 1995. Also contribut- believe that pure competition (unrestricted retail wheel-ing to lower earnings are the expectations that the ing for all customer classifications) is at least several

requested price increase will not be effective until the years away and that any transition to pure competition second quarter of 1996 and results from increased mar- will be in phases. The FERC and the PUCO have keting and cost reduction efforts will take time to achieve. acknowledged the need to provide at least partial recovery of stranded investment as greater competition is permit-ted and, therefore, we believe that there will be a mecha-nism developed for the recovery of stranded investment.

eleven a

Howsver, due to the uncertainty involved, th:re is a risk Valliy Power Station Unit 2 (Beaver Vallsy Unit 2) -

that some of our assets may not be fully recovered. and operate the first two. Davis-Besse and Beaver Valley Unit 2 both operated extremely well in 1995. Their In 1995, we continued to experience significant competi-average three-year unit availability factors at year-end tion from municipal electric systems. Cleveland Public 1995 of 90% and 87%, respectively, exceeded the industry Power (CPP), the largest municipal system in our service average of 81% for similar reactors. In 1995, the availabil.

area, continued to construct new distribution facilities extending into addition 4 portions of Cleveland. Their ty factor for Davis-Besse was 100%. The plant continues )

to have its best run ever operating at or near full capacity l progress has slowed signifkantly during the past year for 463 straight days through February 21,1996. I because of the discovery of a large number of safety i violations in the CPP system resulting in substantial cost In 1995, Perry Unit 1 improved its average three year unit

i. overruns.-In Toledo, the City Council responded to a availability factor to 62% with a 1995 availability factor of i petition drive by appropria6ng funds to complete a con- 93% Perry Unit 1 operated at or near capacity for 506 of l sultant's study on wis-tint to create a municipal electric $31 days since the end of its last refueling and mainte-

, l

' utility. This study is expected to be completed by mid- - nance outage in August 1994. Work on the comprehen-

-1996, sive course of action plan developed in 1993 to improve i the operating performance of Perry Unit.1 will be com- l In March 1995, one of Cleveland Electric's large com-pleted during the current refueling outage which began mercial customers which has provided annual net income January 27,1996.

of $6 million, Medical Center Co., signed a five year 3

contract with CPP for electric service beginning in Sep- A significant part of the strategic plan involves ongoing  !

tember 1996, when its contract with Cleveland Electric efforts to increase the availability and lower the cost of I terminates. In both our appeal to the Ohio Supreme production of our nuclear units. In 1995, we made great i Court and petition to the FERC,it is our position that the progress regarding unit availability while continuing to j purchase of power from CPP by this customer is in reality lower production costs. The goal of our nuclear improve-a direct purchase from another utility in violation of ment program is to replicate Davis-Besse's operational i Ohio's certified territory statute. In October 1995, Chase excellence and cost reduction gains at Perry Unit I while

' Brass & Copper Co. Inc. 'which has provided annual net improving performance ratings. l income of $2 million, terminated its service from Toledo Edison and began to receive its electric service from a We externally fund the estimated costs for the future consortium of other providers. Toledo Edison has filed decommissioning of our nuclear units. In 1993 and 1994, j- lawsuits contending that this ' arrangement violates the we increased our decommissioning expense accruals legal limits of sales and delivery of power by municipal because of revisions in our cost estimates. See Note 1(d),

electric systems outside their boundaries. We will con-Our nuclear units may be impacted by activities or events -

tinue to pursue all legal and regulatory remedies to these beyond our control. Operating nuclear units have exper-

. situations.

ienced unplanned outages or extensions of scheduled In 1995, our economic developm:nt efforts proved suc- outages because of equipment problems or new regulatory j cessful in attracting major new customers, such as North requirements. A major accident at a nuclear facility Star BHP Steel, Worthington Steel and Aluminum Com- anywhere in the world could cause the Nuc! car Regula-pany of- America, while supporting the expansion of tory Commission to limit or prohibit the operation or existing ones, for example, American Steel & Wire and licensing of any domestic nuclear unit. If one of our Ford Motor Company. We expect that our continued nuclear units is taken out of service for an extended period j

! emphasis on economic development along with a newly for any reason, including an accident at such unit or any developed market segment focus will be major ingredients other nuclear facility, we cannot predict whether regula-in providing improved revenue growth. tory authorities would impose unfavorable rate treatment. l l Such treatment could include taking our affected unit out 1

, khr Oprh f rate base, thereby not permitting us to recover our

investment in and earn a return on it, or disallowing

We have interests in three nuclear generating units - certain construction or maintenance costs. An extended j Davis-Besse Nuclear Power Station (Davis-Besse), Perry outage coupled with unfavorable rate treatment could J Nuclear Power Plant Unit I (Perry Unit 1) and Beaver have a material adverse effect on our financial condition i swive -

o _ _ _ _ . _ , . _ , ,

and results of operations. Premiture plant closings could $136 million in i994 and by $134 million in 1995. We also have a material adverse effect on our financial condi- intend to continue and to accelerate redemptions. l tion and results of operations because the estimated cost We need cash for normal corporate operations, retirement to decommission the plant exceeds the current funding in of maturing securities, and an ongoing program of con-  !

the decommissioning trust. structing and improving facilities to meet demand for electric service and w comply with government regula.

Hazardous Waste Disposal Sites tions. Our cash construction expenditures totaled $209 m lli n in 1993, $205 million in 1994 and $201 million in The Operating Companies have been named as "poten-1995. Our debt and preferred stock maturities and sinking tially responsible parties" (PRPs) for three sites listed on l fund requirements totaled $368 million in 1993, $120 the Superfund National Priorities List (Superfund List) milli n in 1994 and $377 million in 1995. In addition, we and are aware of their potential involvement in the ptionally redeemed approximately $470 million in the i cleanup of several other sites. Allegations that the Oper-Period 19931995. This amount includes $237 million of ating Companies disposed of hazardous waste at these tax-exempt issues refunded in 1995 resulting in approxi-sites, and the amount involved, are often unsubstantiated mat y$ m n mst sasgs. In May IW, and subject to dispute. Federal law provides that all PRPs Cleveland Electric issued $300 million of first mortgage for a particular site be held liable on a joint and several bonds due in 2005 with an interest rate of 9.50%. The basis. If the Operating Companies were held liable for embedded cost of the Operating Companies' debt at the 100% of the cleanup costs of all of the sites referred to end of 1995 was 8.98% versus 9.12% in 1994 and 9.06% in above, the cost could be as high as $500 million. How-1993. In 1995, the Operating Companies renewed for a ever, we believe that the actual cleanup costs will be f ur-year term approximately $225 million in bank letters substantially lower than $500 million, that the Operating f credit supporting the equity owner participants in the Companies' share of any cleanup costs will be substan-

• ""*#

• Y '* "8' **

• II tially less than 100% and that most of the other PRPs are financially able to contribute their share. The Operating 1996 and Beyond Cash Requirements Companies have accrued a liability totaling $12 million at December 31, 1995, based on estimates of the costs of Our 1996 cash requirements for construction are cleanup and their proportionate responsibility for such $128 million for Cleveland Electric and $74 million for costs. We believe that the ultimate outcome of these Toledo Edison and for debt and preferred stock matus ties matters will not have a material adverse effect on our and sinking fund requirements are $177 million for Cleve-fmancial condition or results of operations. land Electric and $58 million for Toledo Edison. We expect to meet these requirements with internal cash generation, cash reserves and about $150 million from the Merger of the Operating Companies sale of a AAA rated security backed by our accounts We continue to seek the necessary regulatory approvals to receivable.

complete the merger of the Operating Companies which We expect to meet all of our 1997 2000 cash require-we announced in 1994. The FERC has deferred action on ments with inte nal cash generation. Estimated cash the merger application until the merits of the Operating requirements for our construction program during this Companies' proposed open access transmission tariffs are period total $603 million for Cleveland Electric and $262 addressed in hearings.

m liion for Toledo Edison. Debt and preferred stock maturities and sinking fund requirements total $400 mil-Capital Resources and Liquidity lion and $233 million for Cleveland Electric and Toledo 19931995 Cash Requirements Edison, respectively, for the same period. If economical, additional securities may be redeemed under optional A key part of our strategic plan is to significantly reduce redemption provisions, with funding expected to be pro-the Operating Companies' level of debt and preferred vided through internal cash generation. Additional fund. 1 stock. In 1995, we were able to continue the reduction ing may be required to support investments in i pattern begun in 1994. These obligations were reduced by nonregulated business opportunities.

thineen

uquiety R:svits of Oper;tions 1 1

Additional first mortgage bonds may be issued by the 1995 vs.1994 1 Operating Companies under their respective mortgages on the basis of property additions, cash or refundable first Factors contributing to the 3.9% increase in 1995 operat-mortgage bonds. If the applicable interest coverage test is ing revenues are as follows:

met, each Operating Company may issue first mortgage "

bonds on the basis of property additions and, under-

' tnerease roecrease) in ooeratin, Revenues o$iak .

KwH sales volume and Mix sal certain circumstances, refundable bonds. At December Wholesale Revenues 13 l 31, 1995, Cleveland Electric and Toledo Edison would Fuel Cost Recovery Revenues 9

)

Miscellaneous Revenues have been permitted to issue approximately $379 million J) and $288 million of additional first mortgage bonds, Total g respectively. For the third year in a row, industrial kilowatt hour sales The Operating Companies also are able to raise funds increased. The increase in 1995 was 0.8%, but' sales grew I through the sale of debt and preferred and preference 2.2% excluding reductions at two low-margin steel pro-stock. Under its articles of incorporation, Toledo Edison ducers (representing 5% of industrial revenues). Residen-cannot issue preferred stock unless certain earnings cover- tial and commercial sales increased 3.5% and 2.8%,

age requirements are met. At December 31,1995, Toledo reSpectively, primarily because of the hot summer Edison would have been permitted to issue approximately weather, although there was about 1% nonweather-related

$158 million of additional preferred stock at an assumed gr wth in commercial sales. Other sales increased 26%

dividend rate of 10.5%. There are no restrictions on because of a 43% increase in wholesale sales due princi.

Cleveland Electric's ability to issue preferred or prefer. Pally to the hot summer and gooa availability of our ence stock or Toledo Edison's ability to issue preference generating units. Weather accounted for approximately stock. Centerior Energy may raise funds through the sale $38 million of the $61 million increase in 1995 base rate of common ~ stock under various employee and ., hare (n nfuel) revenues. Higher 1995 fuel cost recovery reve-owner plans. nues resulted from an increase in the fuel cost factor for Cleveland Electric. The weighted average of these fuel The Operating Companies have $307 million in financing cost factors increased 7% for Cleveland Electric but  !

vehicles available to support their nuclear fuel leases, decreased 6% for Toledo Edison.

portions of which mature this year. See Note 6. We plan to renew a $125 million revolving credit facility which For 1995, operating revenues were 32% residential,30% i matures in May 1996. See Note 12. At the end of 1995, commercial, 31% industrial and 7% other and kilowatt-  ;

we had $179 million in cash and temporary investments. hour sales were 23% residential,25% commercial,40%

l industrial and 12% other. The average prices per kilowatt-The foregoing financing resources are expected to be hour for residential, commercial and industrial customers sufficient for the Operating Companies' needs over the were $.11, $.10 and $.06, respectively.

next several years. However, the availability and cost of capital to meet external financing needs also depend upon Operating expenses increased 4.5% in 1995. Fuel and

~

such factors as financial market conditions and their purchased power expenses increased as higher fuel credit ratings. Current credit ratings for the Operating expense was partially offset by lower purchased power Companies are as follows: expense. The higher fuel expense.was attributable to l Standard Moody's increased generation and more amortization of previously c rooIion seN Sc. deferred fuel costs than the amount amortized in 1994. 1 Fim mortsage bonds BB Ba2 e e pera@n ad maham expenses Subordinated debt for Cleveland Electric _. B+ Ba3 resulted primarily from charges for an ongoing inventory Subordinated debt for Toledo Edison B+ B1 reduction program and the recognition of costs associated Preferred stock B b2 with preliminary engineering studies. Federal income taxes increased as a result of higher pretax operating income. Taxes, other than federal income taxes, increased primarily due to property tax increases resulting from plant additions, real estate valuation increases and a nonrecurring tax credit recorded in 1994.

fourtws i

e 1994 vs.1993 For 1994, operating revenues were 31% residential,30%

. . commercial, 31% industrial and 8% other and kilowatt-4 Factors contributing to the 2.1% decrease in 1994 operat-hour sales were 24% residential,25% commercial,41%

ing revenues are as follows:

industrial and 10% other. The average prices per kilowatt-Milh.ons i Increase (Decrease) in Operatina Revenues of Dollars hour for residential, commercial and industrial customers I

KwH sales volume and Mix s to were $ 11, $.10 and $.06, respectively. The changes from .

.. Wholesale Revenues (47) 1993 were not significant.

Fuel Cost Recovery Revenues (22)

Miscellaneous Revenues __ fi .

yot,i g) Operating ' expenses were 15% lower m. 1994. Operation and maintenance expenses for 1993 included $218 million We experienced good retail kilowatt-hour sales growth in of net benefit expenses related to an early retirement  !

the industrial and commercial categories in 1994; the program, called the Voluntary - Transition Program sales growth for the residential category was lessened by (VTP), and other charges totaling $54 million. A smaller weather conditions, particularly during the summer. The work force and ongoing cost reduction measures also revenue decrease resulted primarily from milder weather lowered operation and maintenance expenses. More conditions in 1994 and 39% lower wholesale sales. nuclear generation and less coal-fired generation

' Weather reduced base rate revenues approximately $15 accounted for a large part of the lower fuel and purchased million from the 1993 arrtount. Although total sales power expenses in 1994. Depreciation and amortization decreased by 1.9%, industrial sales increased 3.3% on the expenses increased primarily because of higher nuclear strength of increased sales to large automotive manufac- plant decommissioning expenses as discussed'in Note turers and the broad-based, smaller industrial customer 1(d). Deferred operating expenses were greater primarily group. This growth substantiated an economic resurgence because of the write-off of $172 million of phase-in  ;

in our service area, particularly in Northwestern Ohio. deferred operating expenses in 1993 as discussed in Note Residential and commercial sales increased 0.1% and

_ 7(e). The 1993 deferrals also included $84 million of 2.4%, respectively. Other sales decreased by 28% because postretirement benefit curtailment cost deferrals related of the lower sales to. wholesale customers attributable to to the VTP. See Note 9(b). Federal income taxes expiration of a wholesale power agreement, softer whole- increased as a result of higher pretax operating income.

j~

sale market conditions and limited power availability for bulk power transactions at certain times because of gener- As discussed in Note 4(b), $583 million of our Perry i

ating plant oittages. Lower 1994 fuel cost recovery reve- - Unit 2 investment was written off in 1993. Also, as ,

nues resulted from favorable changes in the fuel cost discussed in Note 7, phase-in deferred carrying charges of factors. The weighted averages of these factors dropped $705 million were written off in 1993. The change in the by 5% and 6% for Cleveland Electric and Toledo Edison, federal income tax credit amounts for 'nonoperating -

respectively. income was attributable to these write-offs.  ;

i i

i f

O

M:nagem:nt's St:t m:nt accountants are carrying out their responsibilities. The ,

cf R:sponsibility for Board is also responsible for making changes in manage- l Financial Statements ment or independent public accountants ir needed. l The management of Centerior Energy Corporation is responsible for the consolidated financial statements in The Board has appointed an Audit Committee, comprised this Annual Report. The statements were prepared in entirely of outside directors, which met two times in 1995.

l accordance with generally accepted accounting principles. The Committee recommends annually to the Board the Under these principles, some of the recorded amounts are firm ofindependent public accountants to be retained for estimates which are based on an analysis of the best the ensuing year and reviews the audit approach used by information available. the accountants and the results of their audits. It also i oversees the adequacy and effectiveness of our internal We maintain a system of internal accounting controls accounting controls and ensures that our accounting sys-designed to assure that the financial records are substan-tem produces financial statements which fairly present tially complete and accurate. The controls also are our financial position.

designed to help protect the assets and their related records. We structure our control procedures such that .

their costs do not exceed their benefits. h ,

Our internal audit program monitors the internal account- Tenence G Linnut ing controls. This program gives us the opportunity to Sent r Wu Pusident, assess the adequacy and effectiveness of existing controls Gef Hnancial Ofur and to identify and institute changes where needed. In and Gennal Counsel addition, an audit of our financial statements is conducted -

by Arthur Andersen LLP, independent public account-ants, whose report appears below.

[

E. Lyle Pepin Our Board of Directors is responsible for determining Controller and whether management and the independent public ChiefAccounting ofcer Report of Independent disclosures in the financial statements. An audit also Public Accountants includes assessing the accounting principles used and i

To the Share Owners and significant estimates made by management, as well as Board of Directors of evaluating the overall financial statement presentation.

Centerior Energy Corporation: We believe that our audits provide a reasonable basis for our opinion.

We have audited the accompanying consolidated balance In our opinion, the financial statements referred to above sheet and consolidated statement of preferred stock of .

, , present fairly, .m all material respects, the financial posi-Ccnten.or Energy Corporation (an Ohio corporation) and tion of Centerior Energy Corporation and subsidiaries as subsidiaries as of December 31,1995 and 1994, and the

. of December 31,1995 and 1994, and the results of their .

! related consolidated statements of income, retained earn-operations and their cash flows for each of the three years ings and cash flows for each of the three years in the .

in the period ended December 31, 1995, .in conformity period ended December 31,1995. These financial state- . . . .

with generally accepted accounting pnnciples.

ments are the responsibility of the Company's manage-i ment. Our responsibility is to express an opinion on these As discussed further in Note 9, a change was made in the financial statements based on our audits. method of accounting for postretirement benefits other We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable [dy dMeg k[

assurance about whether the financial statements are free of material misstatement. An audit includes examining, Cleveland, Ohio on a test basis, evidence supporting the amounts and Februarv 21,1996 l

sixteen

lO50fn3 $ tat:nCOf Ce terior Energy Corporation and Subsidiaries For the years ended December 31.

1995 1994 1993 (millions of dollars.

except per share amounts)

Operating Revenues $2.516 $2.421 $2.474 Operating Expenses Fuel and purchased power 465 442 474 Other operation and maintenance 617 595 652 Generation facilities rental expense, net 160 160 159 Early retirement program expenses and other - -

272 Total operation and maintenance 1,242 1,197 1,557 Depreciation and amortization 281 278 258 Taxes, other than federal income taxes 322 309 312 Deferred operating expenses, net (53) (55) 23 Federal income taxes 135 114 11 1.927 1.843 2.161 Operating Income _.18.2 $76 313 Nonoperating Income (Loss)

Allowance for equity funds used during construction 3 5 5 Other income and deductions, net 6 8 (6)

Write-off of Perry Unit 2 - -

(583)

Deferred car,ing charges, net 43 40 (649)

F:deral income taxes - credit (expense) (5) (6) 396 47 47 (835)

Income (Loss) Before Interest Charges and Preferred Dividends _fds 625 (522)

Interest Charges and Preferred Dividends Debt mterest 358 361 359 Allowance for borrowed funds used during construction (3) (6) (5)

Preferred dividend requirements of subsidiaries 61 M 67 416 ... . 421 421 Net Income (Loss) 1,112 W j (24),)

4 Average Number of Common Shares Outstanding (millions) R 147 8 144.9 Earnings (Loss) Per Common Share $ 1.49 LQ), g,MJ,)

Dividends Declared Per Common Share W 1,,,,,,,$, ),,L,QQ Retained Earnings For the years ended December 31.

1995 1994 1993 (millions of dollars)

Retained Earnings (Dencit) at Beginning of Year $f438) $f523) $ 652 Additions Net income (loss) 220 204 (943)

Deductions Common stock dividends (118) (118) (231)

Other, primarily preferred stock redemption expenses of subsidiaries -

(1) (1)

Net Increase (Decrease) 102 __81 (1.175) l Retained Earnings (Dencit) at End of Year g),),p,) g,g),) W)

The accompanying notes are an integralpart of these statements.

seventeen

B:lznso Sh;ct December 31.

1995 1994 (millions of dollars)

ASSETS Property, Plant and Equipment Utility plant in service $ 9,768 $ 9,770 Less: accumulated depreciation and amortization

_ 3.036 2.906 6,732 6,864 Construction work in progress 101 129 6,833 6,993 Nuclear fuel, net of amortization 200 293 Other property, less accumulated depreciation 50 101

._1J.21 7.336 Current Assets Cash and temporary cash investments ___ 179 186 Amounts due from customers and others, net 223 211 Unbilled revenues 100 93 Materials and supplies, at average cost 120 139 Fossil fuel inventory, at average cost 31 29 Taxes applicable to succeeding years 255 252 Other 18 16 926 9M Regulatory and Other Assets Amounts due from customers for future federal income taxes, net 1,067 1,046 Unamortized loss from Beaver Valley Unit 2 sale 96 101 Unamortized loss on reacquired debt 89 86 Carrying charges and operating expenses 1,053 957 Nuclear plant decommissioning trusts 114 82

. Other

.. 163 157 2.582 2.429 Total Assets g g The accompanying notes are an integralpart of this statement.

I 6

eighteen

Centerior Energy Corporation and Subsidiaries December 31.

1995 1994 (millions of dollars)

CAPITALIZATION AND LIABILITIES Capitalization Common shares, without par value (stated value of $357 million for both 1995 and 1994):

180 million authorized; 148 million (excluding 2.7 million shares in Treasury) outstanding in both 1995 and 1994 $ 2,320 $ 2,320 Retained earnings (deficit) Q,36) (438)

Common stock equity 1,984 1,882 Preferred stock With mandatory redemption provisions 220 253 Without mandatory redemption provisions 451 451 Long-term debt 3.734 3 697 6.389 6.283 Current Liabilities Current portion of long term debt and preferred stock 235 373 Current portion of nuclear fuellease obligations ' 95 83 Accounts payable 153 144 Accrued taxes 374 384 Accrued interest 83 90 Other 87 75

.1,027 1.149 Deferred Credits and Other Liabilities Unamortized investment tax credits 263 279 Accumulated deferred federal income taxes 1,875 1,778 Unamortized gain from Bruce Mansfield Plant sale 499 525 Accumulated deferred rents for Bruce Mansfield Plant and Beaver Valley Unit 2 145 139 Nuclear fuel lease obligations 137~ 219 Retirement benefits 179 176 Other 129 143

__ 1221 3.259 Total Capitalization and Liabilities M M i

nineteen

C:sh Flows cansartor enaru cairorarion ans sussisiarias ,

I For the years ended 1 December 31.

1995 1994 1993 (millions of dollars)

Cash Flows from Operating Activities (1)

Net income (Loss) $ 220 $ . 204 $ (943)

Adjustments to Reconcile Net income (Loss) to Cash from Operating Activities:

Depreciation and amortization 281 278 258 Deferred federal income taxes 72 95 (452)

Unbilled revenues Deferred fuel (7) 31 (10) 6 (17) 5 Deferred carrying charges, net (43) (40) 649 Leased nuclear fuel amortization 125 98 86 Deferred operating expenses, net (53) (55) 23 Allowance for equity funds used during construction (3) (5) (5)

Noncash early retirement program expenses, net - -

208 Write-off of Perry Unit 2 - -

583 Changes in amounts due from customers and others, net Changes in inventories (12) 10 1 17 -

26 Changes in accounts payable 9 (44) 45 Changes in working capital affecting operations (10) -

25 Other noncash items 9 14 18 Total Adjustments

__39.1 365 1.460 Net Cash from Operating Activities

_. fill M9 517 Ccsh Flows from Financing Activities (2)

Bank loans, commercial paper and other short-term debt -

First mortgage bond issues (50)

$42 77 300 Secured medium-term note issues - -

128 Term bank loans and other long-term debt issues - -

40 Preferred stock issues - -

100 Common stock issues -

12 71 Reacquired common stock - -

1 Maturities, redemptions and sinking funds (683) (214) (434)

Nuclear fuel lease obligations (102) (110) (106)

Common stock dividends paid (118) (118) (231)

Premiums, discounts and expenses

__(11) (1) _ _(13)

Net Cash from Financing Activities (378) (354) (194)

Cash Flows from Investing Activities (2)

Cash applied to construction (201) (205) (209)

Interest capitalized as allowance for borrowed funds used during construction (3) (6)

Contributions to nuclear plant decommissioning trusts (5)

(24) (26) (9)

Other cash received (applied)

. (12) (17) 32 Net Cash from Investing Actisities (240) (254) (191)

Net Change in Cash and Temporary Cash Investments (7) (39) . 132 Ccsh and Temporary Cash Investments at Beginning of Year 186 225 93 Ccsh and Temporary Cash Investments at End of Year $ 179 $ 186 Q (1) Interest paid (net of amounts capitalized) $ 306 $ 300 $ 295 income taxes paid $ 89 $ 6 $ $0 (2) Increases in Nuclear Fuel and Nuclear Fuel Lease Obligations in the Balance Sheet resulting from the noncash capitali:ations under nuclearfuel agreements are excludedfrom this statement.

The accompanying notes are an integralpart of this statement.

1 tweray

Stat:st1:s1t cf Praf:rred *tock. cansertor enerxy corpororton ans sussisiartas Current 1995 Shares Call Price December 31.

Outstanding Per Share Jj_9j, 3 CLEVELAND ELECTRIC (millions of dollars)

Without par value,4,000,000 preferred shares authorized Subject to mandatory redemption:

$ 7.35 Series C 130,000 $ 101.00 $ 13 $ 14 88.00 Series E 15,000 1,015.30 15 18 Adjustable Series M - - - 10 9.125 Series N 300,000 101.00 30 41 91.50 Series Q 64,286 1,000.00 64 75 88.00 Series R 50,000 - 50 50 90.00 Series S 74,000 -

_)) 74 245 282 Less: Current maturities _ 20 _ J6

_2.11 .246 Not subject to mandatory redemption:

$ 7.40 Series A 500,000 101.00 50 50 7.56 Series B 450,000 102.26 45 45 Adjustable Series L 500,000 100.00 49 49 42.40 Series T 200,000 - 97 97

_2_41 _241 TOLEDO EDISON

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

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

$100 par $9.375 66,850 101.48 7 8 25 par 2.81 - - -

_1Q 7 18 Less: Current maturities ._2 _ 11 5 7 Not subject to mandatory redemption:

$100 par $ 4.25 160,000 104.625 16 16 4.56 50,000 101.00 5 5 4.25 100,000 102.00 10 10 8.32 100,000 102.46 10 10 7.76 150,000 102.437 15 15 7.80 150,000 101.65 15 15 10.00 190,000 101.00 19 19 25 par 2.21 1,000,000 25.25 25 25 2.365 1,400,000 27.75 35 35 Series A Adjustable __ 1,200,000 25.00 30 30 Series B Adjustable __ 1,200,000 25.75 _2D _1Q

_lM _210 CENTERIOR ENERGY Without par value, 5,000,000 preferred shares authorized, none outstanding - -

Total Preferred Stock, with Mandatory Redemption Provisions 122p, M Total Preferred Stock, without Mandatory Redemption Provisions igj, j 14j, The accompanying not-s are an integral part of this statement.

rwenry-one

i i

N;t:s t3 th3 Fin:nci:1 St:t:m:nts (b) R: venues (1) Summary of Significant Accounting Customers are billed on a monthly cycle basis for their Policles energy consumption based on rate schedules or contracts authorized by the PUCO or on ardinances of individual (a) General municipalities. An accrual is made at the end of each Centerior Energy is a holding company with two electric m nth to record the estimated amount of unbilled reve. i utility subsidiaries, Cleveland Electric and Toledo Edison, nues f r kil watt-hours sold in the current month but not I billed by the end of that month.

with service areas in Northern Ohio. The consolidated financial statements also include the accounts of Center- A fuel factor is added to the base rates for electric service.

ior Energy's wholly owned subsidiary, Centerior Service This factor is designed to recover from customers the l

Company (Service Company), and its three other wholly costs of fuel and most purchased power. It is reviewed and owned subsidiaries, which in the aggregate are not mate- adjusted semiannually in a PUCO proceeding. I rial. The Service Company provides management, finan- I cial, administrative, engineering, legal and other services (c) Fuel Expense  ;

at cost to Centerior Energy, the Operating Companies The cost of fossil fuel is charged to fuel expense based on and the other subsidiaries. The Operating Companies inventory usage. The cost of nuclear fuel, including an operate as separate companies, each serving the custom- interest component, is charged to fuel expense based on ers in its service area. The preferred stock, first mortgage the rate of consumption. Estimated future nuclear fuel bonds and other debt obligations of the Operating Com- disposal costs are being recovered through base rates.

panies are outstanding securities of the issuing utility. All The Operating Companies defer the differences between ,

significant intercompany items have been eliminated in actual fuel costs and estimated fuel costs currently being I consolidation.

recovered from customers through the fuel factor. This Centerior Energy and the Operating Companies follow matches fuel expenses with fuel-related revenues.

the Uniform System of Accounts prescribed by the Owners of nuclear generating plants are assessed by the l

FERC and adopted by the PUCO. Rate-regulated utili- federal government for the cost of decontamination and ties are subject to SFAS 71 which governs accounting for decommissioning of nuclear enrichment facilities oper-the efTects of certain types of rate regulation. Pursuant to ated by the United States Department of Energy. The SFAS 71, certain incurred costs are deferred for recovery assessments are based upon the amount of enrichment in future rates. See Note 7. The Service Company follows services used in prior years and cannot be imposed for the Uniform System of Accounts for Mutual Service more than 15 years (to 2007). The Operating Companies Companies prescribed by the Securities and Exchange have accrued the liability for their share of the total Commission (SEC) under the Public Utility lloiding assessments. These costs have been recorded in a deferred Company Act of 1935. charge account since the PUCO is allowing the Operating Companies to recover the assessments through their fuel The preparation of financial statements in conformity cost factors.

with generally accepted accounting principles requires management to make estimates and assumptions that (d) Depreciation and Decommissioning affect the reported amounts of assets, liabilities, revenues The cost of property, plant and equipment is depreciated and expenses, and the disclosure of contingent assets and over their estimated useful lives on a straight line basis.

liabilities. The estimates are based on an analysis of the The annual straight-line depreciation provision for non-best information available. Actual results could differ nuclear property expressed as a percent of average depre-from those estimates.

ciable utility plant in service was 3.5% in 1995,3.4% in The Operating Companies are members of the Central 1994 and 3.5% in 1993. The annual straight-line deprecia-Area Power Coordination Group (CAPCO). Other tion rate for nuclear property is 2.5%. In conjunction with members are Duquesne Light Company, Ohio Edison the Operating Companies' pending rate case, we have Company and its wholly owned subsidiary, Pennsylvania asked the PUCO to approve an increase of this deprecia-Power Company. The members have constructed and tion rate to approximately 3%.

operate generation and transmission facilities for their The Operating Companies accrue the estimated costs of joint use, decommissioning their three nuclear generating units.

twenty-two

b The accruals are required to be funded in an external the recognition, . measurement and classification. of trust. The PUCO requires that the expense and payments decommissioning costs for nuclear generating stations in to the external trusts be determined on a levelized basis the financial statements. In response to these questions, I

by dividing the unrecovered decommissioning costs in the Financial Accounting Standards Board (FASB) is current dollars by the remaining years in the licensing reviewing the accounting for removal costs, including period of each unit.'This methodology requires that the decommissioning. If current accounting practices are

- net earnings on the trusts be reinvested therein with the changed, the annual provision for decommissioning could intent of having net earnings offset inflation. The PUCO increase; the estimated cost for decommissioning could be requires that the estimated costs of decommissioning and recorded as a liability rather than as accumulated depreci-the funding level be reviewed at least every five years. ation; and trust fund income from the external decommis-si ning trusts could be reported as investment income

- In 1994, the Operating Companies increased their annual rather than as a reduction to decommissioning expense.

decommissioning expense accruals to $24 million from The FASB issued an exposure draft on the subject on the $12 million level in 1993. The accruals are reflected in

• *'I '

current rates. The increased accruals in 1994 were derived from updated, site-specific studies for each of the units. (e) Property, Plant and Equipment  :

The revised estimates reflect the DECON method of ..

. . . . Property, plant and equipment are stated at ongmal cost decommissiomng (prompt decontamination), and the .

less amounts disallowed by the PUCO. Construction costs locations and cost characteristics specific to the um.ts, and . .

. include related payroll taxes, retirement benefits, fn.nge include costs associated with decontamination, dismantle-

. benefits, management ard general overheads and allow-ment and site restoration. '

ion (AFUDC).

The' revised estimates for the units in 1993 and 1992 AFUDC represents the estimated composite debt and dollars and in dollars at the time of license expiration, equity cost of funds used to finance construction. This

- assuming a 4% annual inflation rate, are as follows: noncash allowance is credited to income. The AFUDC digag  % rates averaged 11.5% in 1995,9.8% in 1994 and 9.9% in Generatma Umt hear Amount Amount 1993, (millions of '

dollars) Maintenance and repairs for plant and equipment are Davis-Besse 2017' $346(1) $ 862 .

Perry Unit i 2026 256(1) 908 charged to expense as incurred. The cost of replacing Beaver Valley Unit 2 2027 111(2) _4.D plant and equipment is charged to the utility plant h*l AMI AL121 accounts. The cost of property retired plus removal costs, (1) Dollar amounts in 1993 dollars.

after deducting any salvage value, is charged to the , i (2) Dollar amount in 1992 dollars. accumulated provision for depreciation.

The updated estimates reflect substantial increases fmm the (f) Deferred Gain and Loss from Sales of Utility prior PUCO-r-niW aggregate estimates of $257 million Plant

'in 1987 and 1986 dollars. . 1 The sale and leaseback transactions discussed in' Note 2  ;

The classification, Accumulated Depreciation and Amor- resulted in a net gain for the sale of the Bruce Mansfield  !

tization, in' the Balance Sheet at December 31, 1995 Generating Plant (Mansfield Plant) and a net loss for the  !

includes $130 million of decommissioning costs previ- sale of Beaver Valley Unit 2. The net gain and net loss l ously expensed and the earnings on the external trust were deferred and are being amortized over the terms of '

funding. This amount exceeds the Balance Sheet amount leases. See Note 7(a). These amortizations and the lease of the external Nuclear Plant Decommissioning Trusts expense amounts are repoited in the income Statement as because the reserve began prior to the external trust Generation Facilities Rental Expense, Net.

funding. The trust earnings are recorded as an increase to the trust assets and the related component of the decom- (g) Interest Charges missioning reserve (included in Accumulated Deprecia- Debt Interest reported in the Income Statement does not tion and Amortization). include interest on obligations for nuclear fuel under construction. That interest is capitalized. See Note 6.

The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry, Losses and gains realized upon the reacquisition or including those of the Operating Companies, regarding redemption of long term debt are deferred, consistent rwenty-three

with the regul: tory r:te treatm:nt. See Note 7(a). Such The 1:as s include conditions for mandatory termination i losses and gains are either amortized over the remainder (and possible repurchase of the leasehold interest) for of the original life of the debt issue retired or amortized events of default, over the life of the new debt issue when the proceeds of a new issue are used for the debt redemption. The amorti- Future minimum lease payments under the operating leases at December 31,1995 are summarized as follows:

zctions are included in debt interest expense, Y,, car Amount (h) Federalincome Taxes ("My' We use the liability method of accounting for income 1996 s iss taxes in accordance with SFAS 109. See Note 8. This 1997 165 method requires that deferred taxes be recorded for all ins 165  !

temporary differences between the book and tax bases of tw9 17s 2000 187 assets and liabilities. The majority of these temporary differences are attributable to property-related basis dif- l ferences. Included in these basis differences is the equity Total Future Minimum Lease Payments M j component of AFUDC, which will increase future tax . . .

.. Rental expense is accrued on a straight-line basis over the expense when it is recovered through rates. Since th.is terms of the leases. The amount recorded in 1995,1994 component is not recognized for tax purposes, we must and 1993 as annual rental expense for the Mansfield Plant record a liability for our tax obligation. The PUCO .. i leases was $115 million. The amounts recorded in 1995, '

permits recovery of such taxes from customers when they 1994 and 1993 as annual rental expense for the Beaver i become payable. Therefore, the net amount due from Valley Unit 2 lease were $63 million, $64 million and $63 I customers throur,h rates has been recorded as a deferred . .

milh.on, respectively. Amounts charged to expense in charge and will be recovered over the lives of the related

, 97 g p , g;g ,

assets. See Note 7(a).

lated Deferred Rents in the Balance Sheet.

Investment tax credits are deferred and amortized over l the lives of the applicable property as a reduction of Toledo Edison is selling 150 megawatts of its Beaver '

depreciation expense. See Note 7(d) for a discussion of Valley Unit 2 leased capacity entitlement to Cleveland the amortization of certain unrestricted excess deferred Electric. We anticipate that this sale will continue  !

taxes and unrestricted investment tax credits under the indefinitely.

Rate Stabilization Program.

(3) Property Owned with Other Utilities (2) Utility Plant Sale and Leaseback and Investors Transactions .

The Operating Companies own, as tenants in common The Operating Companies are co lessees of 18.26% (150 I with other utilities and those investors who are owner.

megawatts) of Beaver Valley Unit 2 and 6.5% ($1 mega- participants in various sale and leaseback transactions watts),45.9% (358 megawatts) and 44.38% (355 raega- (Lessors), certain generating units as listed below. Each watts) of Units 1, 2 and 3 of the Mansfield Plant, owner owns an undivided share in the entire unit. Each respectively. These leases extend through 2017 and are owner has the right to a percentage of the generating the result of sale and leaseback transactions completed in capability of each unit equal to its ownership share. Each  ;

1987.

utility owner is obligated to pay for only its respective l Under these leases, the Operating Companies are respon- share of the construction costs and operating expenses, j sible for paying all taxes, insurance premiums, operation Each Lessor has leased its capacity rights to a utility I

and maintenance expenses and all other similar costs for which is obligated to pay for such Lessor's share of the their interests in the units sold and leased back. They may construction costs and operating expenses. The Operating incur additional costs in connection with capital improve- Companies' share of the operating expenses of these ments to the units. The Operating Companies have generating units is included in the Income Statement. I options to buy the interests back at the end of the leases The Balance Sheet classification of Property, Plant and 4 for the fair market value at that time or renew the leases. Equipment at December 31,1995 includes the following i

i l

twnty-four

facilities owned by the Operating Companies as tenants in (c) Hxrdous Wist) Disposal Sit:s common with other utilities and Lessors:

The Operating Companies are aware of their potential

((aT"n#a4 involvement in the cleanup of three sites listed on the  !

gawatt$ (hclus ve f AccumulatedSuperfund List and several other sites. The Operating Gematina Unit (% Share) Nuclear Fuel) Deoreciation Companies have accrued a liability totaling $12 million at  ;

Seneca Pumped Storage _, 351 (80.00%) $ 65 $ 22 December 31, 1995 based on estimates of the costs of I Pe ni 2, 55 C canup and their proportionate responsibility for such Beaver Valley Unit 2 and costs. We believe that the ultimate outcome of these tI2$ matters will not have a material adverse effect on our 214 (26.12) JR _M2 u,i g g financial condition or results of operations. See Manage-ment's Financial Analysis-Outlook-Hazardous Waste l

Depreciation for Eastlake Unit 5 has been accumulated Disposal Sites.

with all other nonnuclear depreciable property rather than 1 (5) Nuclear Operations and by specific units of depreciable property. l ContingenCles I (a) Operating Nuclear Units (4) Construction and Contingencies ,

Our three nuclear units may be impacted by activities or (a) Construction Program events beyond our control. An extended outage of one of our nuclear units for any reason, coupled with any unfa-The estimated cost of our construction program for the vorable rate treatment, could have 'a material adverse 1996-2000 period is $1.107 billion, including AFUDC of effect on our financial condition and results of operations.

$40 million and excluding nuclear fuel.

See the discussion of these and other risks in Management's Financial Analysis-Outlook-Nuclear The Clean Air Act Amendments of 1990 (Clean Air Operations.

Act) requires, among other things, significant reductions in the emission of sulfur dioxide and n trogen oxides by (b) Nuclear Insurance fossil-fueled generating units. Our stra egy provides for The Pn.ce-Anderson Act limits the public liability of the comph.ance pnmarily through greater uae of low-sulfur

• ncr8 I 8 nuclear P *er P antl to the amount provideo.

coal at some of our units and the un of emission by private insurance and an industry assessment plan. In allowances. Total capital expenditures from 1991 through

. . . the event of a nuclear incident at any unit in the United 1995 m. connection with Clean Air Act compliance States resulting in losses in excess of the level of private amounted to $50 million. The plan will require additional capital expenditures over the 1996-2005 period of approx- *"" (*##" * "' * ** ""* ""

. . tial assessment under that plan would be $155 million per imately $90 million for nitrogen oxide control equipment .

and other plant process modifications. In addition, higher m . utA asseumut is Hmhed to $20 mWon per year rca nu erinc n ese auenmut Hmh assume fuel and other operation and maintenance expenses will be incurred. Cleveland Electric may need to install sulfur the other CAPCO companies contribute their proportion-emission control technology at one of its generating plants

" * * ' * ""Y""*"*"'

after 2005 which could require additional expenditures at The utility owners and lessees of Davis-Besse, Perry and that time. Beaver Valley also have insurance coverage for damage to property at these sites (including leased fuel and cleanup (b) Perry Unit 2 costs). Coverage amounted to $2.75 billion for each site as of January 1,1996. Damage to property could exceed Perry Unit 2, including its share of the facilities common the insurance coverage by a substantial amount. If it does, with Perry Unit 1, was approximately 50% complete when our share of such excess amount could have a material construction was suspended in 1985 pending considera- adverse effect on our financial condition and results of tion of various options. We wrote off our investment in operations. In addition, we can be assessed a maximum of Perry Unit 2 at December 31,1993 after we determined $42 million under these policies during a policy year if the that it would not be completed or sold. The write-off reserves available to the insurer are inadequate to pay totaled $583 million ($425 million after taxes) for our claims arising out of an accident at any nuclear facility 64.76% ownership share of the unit. covered by the insurer.

twenty.five

We also have extra expense insurance coverage, it conditions and consider the eft: cts of such changes in includes the incremental cost of any replacement power assessing the continuing applicability of SFAS 71. Crite-purchased (over the costs which would have been ria that could give rise to discontinuation of the applica-incurred had the units been operating) and other inciden- tion of SFAS 71 include: (1) increasing competition tal expenses after the occurrence of certain types of which significantly restricts the Operating Companies' accidents at our nuclear units. The amounts of the cover- ability to charge prices which allow us to recover operat-age are 100% of the estimated extra expense per week ing costs, earn a fair return on invested capital and recover during the $2-week period starting 21 weeks after an the amortization of regulatory assets and (2) a significant accident and 80% of such estimate per week for the next change in the manner in which rates are set by the PUCO 104 weeks. The amount and duration of extra expense from cost-based regulation to some other form of regula-could substantially exceed the insurance coverage. tion. Regulatory assets represent probable future revenues to the Operating Companies associated with certain (6) Nuclear Fuel incurred costs, which they will recover from customers Nuclear fuel is financed for the Operating Companies through the rate-making process.

through leases with a special-purpose corporation. The EITective January 1,1996, the Operating Companies total amount of fmancing currently available under these adopted SFAS 121 which imposes stricter criteria for lease arrangements is $307 million ($157 million from curying regulatory assets than SFAS 71 by requiring that intermediate-term notes and $150 million from bank such assets be probable of recovery at each balance sheet credit arrangemerts). The intermediate-term notes date. The criteria under SFAS 121 for plant assets require mature in 1996 and 1997 ($84 million in September 1996 such assets to be written down only if the book value and $73 million in September 1997). The bank credit exceeds the projected net future cash flows.

arrangements terminate in October 1996. The special-purpose corporation plans to obtain alternate financing in Regulatory assets in the Balance Sheet are as follows:  !

3 1996 to replace the $234 million of financing expiring in $**,'99h 1996. At December 31,1995, $236 million of nuclear fuel (millions or was financed. The Operating Companies severally lease Amounts due from. customers for future rederal their respective portions of the nuclear fuel and are income taxes, ne $1,067 $1,046 obligated to pay for the fuel as it is consumed in a reactor.  %

U N $ $",8*l;*'adbtd ,, v* y U it 2 **1 -

I The lease rates are based on various intermediate term Pre-phase-in deferrals' 553 570 Rate Stabilization Program deferrals 500 387 note rates, bank rates and commercial paper rates. .g.o tal MM The amounts financed include nuclear fuel in the Davis-

• Represent deferrals of operating expenses and carryiog charges for Perry Unit I and Beaver Valley Unit 2 in 1987 and 1988 which are Besse, Perry Unit I and Beaver Valley Unit 2 reactors beins amortized over the lives of the related property.

with remaining lease payments of $79 million, $55 million and $35 million, respectively, at December 31,1995. The As f December 31, 1995, customer rates provide for nuclear fuel amounts financed and capitalized also re very f all the above regulatory assets, except those included interest charges incurred by the lessors amount-related to the Rate Stabilization Program discussed ing to $5 million in 1995, $11 million in 1994 and below. The remaining recovery periods for all of the

$14 million in 1993. The estimated future lease amortiza, regulatory assets listed above range from 16 to 33 years.

tion payments based on projected consumption are (b) Rate Case

$96 million in 1996,$82 million in 1997,$68 million in in April 1995, the Operating Companies filed requests 1998, $65 million in 1999 and $62 million in 2000.

with the PUCO for price increases aggregating $119 (7) Regulatory Matters million annually to be effective in 1996. The price increases are necessary to recover cost increases and (a) Regulatory Accounting Requirements and amortization of certain costs deferred since 1992 pursuant Regulatory Assets to the Rate Stabilization Program. If their requests are The Operating Companies are subject to the provisions of approved, the Operating Companies intend to freeze SFAS 71 and have complied with its provisions. SFAS 71 prices until at least 2002 with the expectation that provides, among other things, for the deferral of certain increased sales and cost control measures will preclude incurred costs that are probable of future recovery in the need for further price increases. If circumstances rates. We monitor changes in market and regulatory make it impossible to earn a fair return for share owners twenty-sh

ovGr time, we would ask for a further increase, but only regulated operations. In addition, we would be required to after taking all appropriate actions to make such a request evaluate whether the changes in the competitive and unnecessary. regulatory environment which led to discontinuing the In November 1995, the PUCO Staff issued its report application of SFAS 71 to a portion of our operations addressing the Operating Companies' rate case. The Staff w uld also result in a write-down of property, plant and recommended that the PUCO grant the full $119 million equipment pursuant to SFAS 121.

price increase requested. However, the Staff also recom- We believe application of SFAS 121 in that event will not mended that the price increase be conditioned upon the result in a write-off of regulatory assets unless the PUCO Operating Companies' commitment "to a significant denies recovery of such assets or if we conclude, as a revaluation of their asset bases over some finite period of result of the outcome of our pending rate case or some i time." other event, that recovery is not probable for some or all In December 1995, the PUCO ordered an investigation f the regulatory assets. Furthermore, a write-down under into the financial condition, rates and practices of the SFAS 121 of property, plant and equipment is not )

Operating Companies to identify outcomes and remedies CXPected, other than those routinely applied during the rate case (d) Rate Stabilization Program Process.

The Rate Stabilization Program that the PUCO approved In late January 1996, the Staff proposed an incremental in October 1992 allowed the Operating Companies to reduction (currently, $1.25 billion) beyond the normal defer and subsequently amortize and recover certain costs level in nuclear plant and regulatory assets within five not currently recovered in rates and to accelerate amorti-years. The Staff proposed that the Operating Companies zation of certain benefits during the 1992-1995 period.

have flexibility to determine how to achieve this incre- Recovery of the deferrals will begin with the effective date mental asset revaluation, but no additional price increases of the PUCO's orders in the pending rate case. The to recover the accelerated asset revaluation were pro- regulatory assets recorded included the deferral of post-posed. Any incremental revaluation of assets would be for in-service interest carrying charges, depreciation expense regulatory purposes and would cause prices and revenues and property taxes on assets placed in service after Febru-after the five-year period to be lower than they otherwise ary 29,1988, the deferral of incremental expenses result-would be in conjunction with any rate case following such ing from the adoption of SFAS 1% (see Note 9(b)), and revaluation. The StalTs asset revaluation proposal repre- the deferral by Toledo Edison of the operating expenses sents a substantial change in the form of rate-making equivalent to an accumulated excess rent reserve for traditionally followed by the PUCO and is inconsistent Beaver Valley Unit 2 (which resulted from the April 1992 with the Ohio statutes that define the rate-making pro- refinancing of Secured Lease Obligation Bonds issued by cess. The PUCO is not bound by the recommendations of a special purpose corporation). The cost deferrals the Staff. A decision by the PUCO is anticipated in the recorded in 1995,1994 and 1993 pursuant to these provi-second quarter of 1996. sions were $113 million, $112 million and $191 million, respectively. The regulatory accounting measures also (c) Assessment of Potential Outcomes provided for the accelerated amortization of certain We continually assess the effects of competition and the unrestricted excess deferred tax and unrestricted invest- l changing industry and regulatory environment on opera-ment tax credit balances and an excess interim spent fuel I tions, our ability to recover regulatory assets and our storage accrual balance for Davis-Besse. The total annual ability to continue application of SFAS 71. If, as a result amount of such accelerated benefits was $46. million in of the pending rate case or other events, we determine 1995,1994 and 1993, that the Operating Companies no longer meet the criteria for SFAS 71, we would be required to record a before tax (e) Phase in Deferrals charge to write off the regulatory assets shown above and In 1993, upon completing a comprehensive study which evaluate whether property, plant and equipment should be led to our strategic plan, we concluded that projected I written down. la the more likely event that only a portion revenues would not provide for recovery of deferrals of operations (such as nuclear operations) no longer recorded pursuant to phase-in plans approved by the meets ti" rite'ria of SFAS 71, a write-off would be PUCO in 1989 and, consequently, that the deferrals limited to . tory assets, if any, that are not reflected would have to be written off. Such deferrals were sched-in our cost-based prices established for the remaining uled to be recovered in 1994 through 1998. The total twenty-seven

l t i i phase-in deferred operating expenses and carrying charges Under SFAS 109; temporary differences and carryfor.

written off at December 31,1993 were $172 million and wards resulted in deferred tax assets of $604 million and l $705 million, respectively (totaling $598 million after deferred tax liabilities of $2.479 billion at December 31, taxes). 1995 and deferred tax assets of $596 million and deferred tax liabilities of $2.374 billion at December 31, 1994.

(8) Federalincome Tax These are summarized as follows:

mber 3 The components of federal income tax expense (credit) ,9 recorded in the income Statement were as follows: (millions of 1995 1994 1993 douan)

Property, plant and equipment $2,095 $2,035 (millions of dollars)

Operating Expenses: Deferred carrying charges and operating expenses __ 224 215 Current Net operating loss carryforwards (113) (144)

$ 88 $ 70 $ 99 ]

Deferred _4,,2 _Af _g1) Investment tax credits (145) (156)

Total Charged to Operating Expenses _, _Q1 _,[.].1 11 Sale and leaseback transactions (127) (128) j Other (59) (44)

Cu e t (20) (45) (34)

Net deferred tax liability g7,5gg Deferred _ 21 ,,,,,H _QQ4,,)

Total Expense (Credit) to Nonoperating For tax purposes, net operating loss (NOL) carryforwards income ._1 __.6 9 Q91) of approximately $322 million are available to reduce Total Federal lncome Tax Expense (Credit) . M M g) future taxable income and will expire in 2005 through 2009. The 35% tax effect of the NOLs is The deferred federal income tax expense results from the

$113 milli n. Additionally, AMT credits of $213 million temporary ditTerences that arise from the difTerent years that may be carried forward indefinitely are available to certain expenses are recognized for tax purposes as reduce future tax.

opposed to financial reporting purposes. Such temporary differences atrecting operating expenses relate principally to depreciation and deferred operating expenses whereas (9) Retirement Benefits those afTecting nonoperating income principally relate to (a) Retirement income Plan deferred carrying charges and the 1993 write-offs.

We sponsor a noncontributing pension plan which covers i Federal income tax, computed by multiplying the income all employee groups. The amount of retirement benefits before taxes and preferred dividend requirements of sub-CPMs upon th lenge of seMec. Wer sidiaries by the 35% statutory rate, is reconciled to the 8* "* 5*"Y. ,

• • **""****"***' nents can gin as early as age amount of federal income tax recorded on the books as

55. Our funding policy is to comply with the Employee fgg, l n91 s 1993 Retirement Income Security Act of 1974 guidelines.

l (millions of doHars)

Book Income (Loss) Defore Federal in 1993, we offered the VTP, an early retirement pro-Income Tax g g g g) * '

l Tax (Credit) on Book Income (Loss) at I Statutory Rate $147 $137 $ (442) of pension plan accruals to cover enhanced VTP benefits Increase (Decrease) in Tax: offset by a credit of $81 million resulting from a settle-Write-off of Perry Unit 2 - - 46 Write-off of phase-in deferrals - -

28 ment of pension obligations through lump sum payments Depreciation 7 3 (6) to almost all the VTP retirees.  !

Rate Stabituation Program (27) (27) (30) l Other items .,,,M _2 17 Pension and VTP costs (credits) for 1993 through 1995 i

Total Federal Income Tax Expense (Credit) . g g $ 087) l were comprised of the following components. ,

For tax reporting purposes, the Perry Unit 2 abandonment g g g was recognized in 1994 and resulted in a $327 million loss (millions or donars) l

. . . Pension Costs (Credits):

I with a corresponding $114 m.lh.i on reduction m federal Service cost for benents earned during the income tax liability. Because of the alternative minimum feriod $ 10 $ 13 $ 15 26 26 37 tax (AMT), $65 milh.on of the $114 million was realized Interest Actual cost return on projected on plan assets benefit obligation ~(2) (53)

(65)

Net amortization and deferral _,_ ,2 (.11) _,1 in 1994. The remaining $49 million will not be realized Net pension costs (credits) (8) 3 (9) until 1999. Addit.ionally, a repayment of approximately VTP cost - -

205

$29 million of previously allowed investment tax credits settlement gain - -

_.(n) l was recognized in 1994. Net costs (credits) g) WM l twenry-eight l

Thi following table presents a reconciliation of the funded The compon:nts of the total postretirement ben; fit costs status of the plan. for 1993 through 1995 were as follows:

E E 129.2 December 31. (mHHons of doHan)

L921 122d Service cost for benefits earned during the (miUions of period $2 $2 $3 dollars)

Interest cost on accumulated postretirement Actuarial present value of benefit obligations: benefit obligation 18 18 16 Vested benefits $304 $278 Amortization of transition obligation at Nonvested benefits _2 _2 January 1,1993 of $167 million Accumulated benc6t obligation 306 280 over 20 years 7 8 8 Effect of future compensation levels M 11 Amortization of gain (1) - -

Total projected benefit obligation 360 317 VTP curtailment cost (includes $16 million Plan assets at fair market value 22d _3fil transition obligation adjustment)  :::: _= 3d Funded status 34 45 Unrecognized net gain from variance Total costs M MM between assumptions and experience (68) (79)

Unrecognized prior service cost 15 10 In 1995,1994 and 1993, we deferred incremental SFAS Transition asset at January 1.1987 being amortized 106 expenses (in excess of the amounts paid) of Net a rued pension liability included in $4 milli n, $6 million and $96 million, respectively, pur-Retirement Benefits in the Balance Sheet _._ M) M) suant to a provision of the Rate Stabilization Program.

See Note 7(d).

The accumulated postretirement benefit obligation and A September 30 measurement date was used for 1995 and accrued postretirement benefit cost are as follows:

1994 reporting. At December 31, 1995, the settlement (discount) rate and long-term rate of return on plan December 31.

assets assumptions were 8% and 11%, respectively. The hijo,N long term rate of annual compensation increase douan) assumption was 3.5% in 1996 and 1997 and 4% thereafter. Accumulated postretirement benefit obligation attributable to:

At December 31,1994, the settlement rate and long-term Retired participants $(200)$(203) rate of return on plan assets assumptions were 8.5% and Fully eligible active plan participants (3) (t) 10%, respectively. The long-term rate of annual compen. Other active plan participants _.121) (.21) sation increase assumption was 3.5% for 1995 and 1996 Accumulated postretirement benefit obligation (231) (225)

Unree gnized net gain from variance between and 4% thereafter.

assumptions and experience (21) (23)

Unamortized transition obligation __l21 111 Plan assets consist primarily of investments in common '

^*g j,7,',[,",;{,*3, [3,{,efShe t gg) gg),)

stock, bonds, guaranteed investment contracts, cash equivalent securities and real estate. A September 30 measurement date was used for 1995 and 1994 reporting. At December 31,1995 and 1994, the settlement rate and the long-term rate of annual compen-(b) Other Portretirement Benefits sation increase assumptions were the same as those dis-cussed for pension reporting in Note 9(a). At We sponsor a postretirement benefit plan which provides December 31,1995, the assumed annual health care cost all employee groups certain health care, death and other trend rates (applicable to gross eligible charges) were 8%

postretirement benefits other than pensions. The plan is for medical and 7.5% for dental in 1996. Both rates reduce contributory, with retiree contributions adjusted annually, gradually to a fixed rate of 4.75% by 2003. Elements of The plan is not funded. We adopted SFAS 106, the the obligation affected by contribution caps are signifi-accounting standard for postretirement benefits other than cantly less sensitive to the health care cost trend rate than pensions, effective January 1,1993. The standard requires other elements. If the assumed health care cost trend the accrual of the expected costs of such benefits during rates were increased by one percentage point in each the employees' years of service. Prior to 1993, the costs of future year, the accumulated postretirement benefit obli-these benefits were expensed as paid, which was consis- gation as of December 31,1995 would increase by $6 mil-tent with rate making practices. lion and the aggregate of the service and interest cost l

twenty-nine

components of the annual postretirement benefit cost Shares of common stock required for our stock plans in could increase by $0.5 million. 1995 were acquired in the open market.

The Board of Directors has authorized the purchase in the (10) Guarantees open market of up to 1,500,000 shares of our common Cleveland Electric has guaranteed certain loan and lease stock until June 30, 1996. As of Decc.nber 31, 1995, obligations of two coal suppliers under two long term coal 225,500 shares had been purchased at a total cost of supply contracts. Toledo Edison is a party to one of thesc $4 million. Such shares are being held as treasury stock.

contracts. At December 31,1995, the principal amount of the loan and lease obligations guaranteed by the Operat- The number of common stock shares reserved for issue ing Companies under both contracts was $53 million. In under the Employee Savings Plan and the Employee addition, under the contract to which Toledo Edison is not Purchase Plan was 1,702,849 and 423,797, respectively, at December 31,1995.

a party, Cleveland Electric may be responsible for mine closing costs when the contract is terminated. At Decem- Under an Equity Compensation Plan (Plan) adopted in ber 31,1995, the unfunded costs of closing this mine as 1994, options to purchase shares of common stock and estimated by the supplier were $32 million. awards of restricted common stock were granted to man-asement employees. In 1995, options were issued for The prices under both contracts which include certain 285,000 shares at an exercise price of $14.58. In 1994, minimum payments are sufficient to satisfy the loan and

- Ptions were issued for 264,900 shares at an exercise price 1

lease obligations and mine closing costs over the lives of f $13.20 but options for 9,500 shares were surrendered in the contracts. If either contract is terminated early for any 1995. The options expire 10 years from the date of the reason, the Operating Companies would attempt to grant and vest over four years. The number of shares reduce the termination charges and would ask the PUCO available for issuance under the Plan each year is deter-to allow recovery of such charges from customers through mined by formula, generally 0.5% of outstanding shares.

the fuel factor of the respective Operating Company, Shares of common stock required for the Plan may be (11) Capitallraflon either issued as new shares, issued from treasury stock or acquired in the open market specifically for distribution (a) Capital Stock Transactions 'and Common under the Plan.

Shares Reserved for leaue in 1995, the FASB issued SFAS 123, a new accounting Shares sold, retired and purchased for treasury during the standard for stock-based compensation, effective for 1996.

three years ended December 31, 1995 are listed in the The standard encourages accounting for stock based following table. compensation awards based on their fair value at the grant 994 g (thousands of shares) date with the resulting cost recorded as an expense.

Centerior Energy Common Stock: Entities electing not to record the cost are required to Dividend Reinvestment and Stock Purchase Plan -

683 3.542 disclose in the notes to the financial statements what the Employee Savings Plan - 259 544 impact on net income and earnings per share would have Employee Purchase Plan - 46 _.jl .

Total Common Stock Sales 988 4,138 been had they followed the suggested accounting. We Treasury Shares _H) -

2ft expect to adopt the disclosure method of implementing Net increase (Decrease) J) ,,2l1 jdfd SFAS 123, which will have no impact on our results of Preferred Stock of Subsidiaries Subject to operations.

Mandatory Redemption:

Cleveland Electric Retirements

$ 7.35 Series C -(10) (10) (10) (b) Equity Distribution Restrictions 88.00 Series E (3) (3) (3)

Adjustable Series M (100) (100) (100) The Operating Companies can make cash available for 9.125 Series N (111) (189) (150) the funding of Centerior Energy's common stock divi-91.50 Series Q (11) - -

90.00 Senes S (1) - - dends by paying dividends on their respective common

. Toledo Edison Retirements stock, which is held solely by Centerior Energy. Federal

$100 par $9.375 (17) (17) (17) .

25 par 2.81 (400) (800) (800) law prohibits the Operating Compam.es from paying dm. .-

Preferred Stock of Subsidiaries Not dends out of capital accounts. However, the Operatirg Pi Companies may pay preferred and common stock divi-hic clandcetne S le

$42.40 Series T  : -

._2gg dends out of appropriated retained earnings and current Net (Decrease) g) gg) J1l2) earnings. At December 31,1995, Cleveland Electric and thirty :

Toledo Edison had $212 million and $183 million, (d) Long Term Debt and Other Borrowing respectively, of appropriated retained earnings for the Arrangements payment of dividends. However, Toledo Edison is .

Long-term debt,less current maturities, for the Operat.ing prohibited from paying a common stock 6 nend by a Companies was as follows:

provision in its mongage that essentially ; quires such 3,,,,,

dividends to be paid out of the total balance of retained or Average earnings, which currently 'is a deficit. '$e' R a*t December 31 December 31.

Year of Maturitv 1995 ,122L 1994 (c) Preferred and Preference Stock (millions of dollars)

Amounts to be paid for preferred stock which must be First mortgage bonds:

0U redeemed during the next five years are $32 million in 1996, $32 million in 1997, $16 million in 1998, 3

,9 ggg

997 2000

']

• 10.88 8-24 3

$ 21 24

$35 million in 1999 and $33 million in 2000. 1997 6.125 31 31 1998 10.00 t i 4 4 The annual mandatory redemption provisions are as y2000 follows: 2001 2005 8.38 %2 671 Shares To Price 2006-2010 7.99 122 122 Be Beginning Per 2011 2015 7.25 381 480 Redeemed in h 2016-2020 8.24 690 635 Cleveland Electric Preferred: 2021 2025 8.25 615 472 5 7.35 Series C 10,000 1984 $ 100 2,933 2.565 88.00 Series E 3,000 1981 1,000 Secured medium-term notes 9.125 Series N 150.000 1993 100 due 19974021' 8.50 613 766 91.50 Series Q 10,714 1995 1,000 Term bank loans - -

63 88.00 Series R 50,000 200l* 1,000 Notes duc 1997" 8.75 8 25 90.00 Series S 18,750 1999 1,000 Debentures due 2002 _

8.70 135 135 Toledo Edison Preferred: Pollution control notes due

$100 par $9.375 16,650 1985 100 1997-2012 6.64 53 151 Other - net -

(8) (8)

• All outstanding shares to be redeemed on December I,2001. Total Long-Term Debt ,, g g In 1995, Cleveland Electric purchased 1,000 shares of

• Secured by Srst mortgage bonds.

Serial Preferred Stock, $90.00 Series S, which will reduce a Secured by subordinated mortgage collateral.

the 2002 redemption requirement shown in the above Long-term debt matures during the next five years as

table, follows: $203 million in 1996, $90 million in 1997, The annualized preferred dividend requirement for the $113 million in 1998, $273 million in 1999 and $41 mil-Operating Companies at December 31, 1995 was li n in 2000.

$59 million. The mortgages of the Operating Companies constitute The preferred dividend rates on Cleveland Electric's direct first liens on substantially all property owned and franchises held by them. Excluded from the liens, among Series L and M and Toledo Edison's Series A and B ther things, are cash, securities, accounts receivable, fluctuate based on prevailing interest rates and market fuel, supplies and, in the case of Toledo Edison, automo-conditions. The dividend rates for these issues averaged tive equipment.

7.23%,7.02%,7.75% and 8.58%, respectively, in 1995, Certain credit agreements of the Operating Companies Preference stock authorized for the Operating Companies c ntam c venants relaung to M darge coverage ranos are 3,000,000 shares without par value for Cleveland and limitations on secured financing other than through Electric and 5,000,000 shares with a $25 par value for Toledo Edison. No preference shares are currently out- * "8*8* * * "" "' #""** " ""*

1995, the Operating Companies replaced letters of credit standing for either company.

in connection with the sale and leaseback of Beaver With respect to dividend and liquidation rights, each Valley Unit 2 that were due to expire with new letters of Operating Company's preferred stock is prior to its prefer- credit expiring in June 1999. The letters of credit are in an ence stock and common stock, and each Operating Com- aggregate amount of approximately $225 million and are pany's preference stock is prior to its common stock. secured by first mortgage bonds of Cleveland Electric and tMrty-one

Toledo Edison in the proportion of 40% and 60%, respec- The fair value of these trusts is estimated based on the tively At December 31,1995, the Operating Companies quoted market prices for the investment securities. As a had outstanding $54 million of bank loans and notes result of adopting the new accounting standard for certain secured by subordinated mortgage collateral. investments in debt and equity securities, SFAS 115, in 1994, the carrying amount of these trusts approximates (12) Short Term Borrowing Arrangements fair value. The fair value of the Operatin'g Companies' Centerior Energy has a $125 million revolving credit Preferred stock, with mandatory redemption provisions, facility through May 1996. Centerior Energy and the and long-term debt is estimated based on the quoted Service Company may borrow under the facility, with all market prices for the respective or similar issues or on the borrowings jointly and severally guaranteed by the Oper. basis of the discounted value of future cash flows. The ating Companies. Centerior Energy plans to transfer any discounted value used current dividend or interest rates of its borrowed funds to the Operating Companies. The (or other appropriate rates) for similar issues and loans credit agreement is secured with first mortgage bonds of with the same remaining maturities.

Cleveland Electric and Toledo Edison in the proportion of The estimated fair values of all other financial instru.

40% and 60%, respectively. The banks' fee is 0.625% per ments approximate their cartying amounts in the Balance annum payable quarterly in addition to interest on any Sheet at December 31,1995 and 1994 because of their borrowings. There were no borrowings under the facility short-term nature.

at December 31, 1995. Also, the Operating Companies may borrow from each other on a short-term basis. (14) Quarterly Results of Operations (Unaudited)

(13) FinancialInstrumente The following is a tabulation of the unaudited quarterly The estimated fair values at December 31,1995 and 1994 results of operations for the two years ended of financial instruments that do not approximate their December 31,1995.

carrying amounts in the Balance Sheet are as follows: Ouarters Ended March 31. June 30. Scot. 30. Dec. 31.

December 31. (millions of dollars, 1995 1994 except per share amounts)

Carrying Fair Carrying Fair 1995 Amount Vglys Amount Value Operating Revenues $588 $607 $740 $581 (millions of dollars)

Capitalization and Liabilities: Operating Income $130 $137 $205 $118 Preferred Stock, with Mandatory Net Income $ 38 $ 44 $109 $ 29 Redemption Provisions Average Common Shares

,1,ncluding

( current portion) _ $ 252 $ 239 $ 300 $ 264 (millions) 148.0 148.0 148.0 148.0 Long Term Debt (including Earnings Per Common current portion) 3,945 3.961 4,031 3,628 Share $.26 $.30 $,74 $.20 Dividends Paid Per Noncash investments in the Nuclear Plant Decommis- Common Share $ .20 t .20 $.20 $.20 sioning Trusts are summarized in the following table. 1994 December 31. Operating Revenues $588 $596 $667 $570 1995 1994 Operating income $l29 $134 $186 $129

( ns of Net Income $ 35 $ 42 $ 92 $ 35 Avenge Common Shams Type of Secum. .ies:

(millions) 147.4 147.9 148.0 148.0 Federal Government $47 $46 Earnings Per Common Municipal 2 1 Share $.24 $.28 $.62 $ .24 Total E E Dividends Paid Per gg; Common Share $.20 $.20 $.20 $.20 Due within one year $I $19 Due in one to five years 22 16 Due in six to 10 years 24 17 Due after 10 years 2 2 Total E E surry.rwo

Executives Of Centerior Energy Corporation Chairman, President and Senior Vice President, Chief Executive Officer Robert J. Farling (59) Chief Financial Officer Executive Vice President Murray R. Edelman (56) and General Counsel Terrence G. Linnert (49)

Senior Ynce President Fred J. Lange, h: (46) Controller E. Lyle Pepin (54)

Senior Vice President Gary R. Leidich (45) Treasurer David M. Blank (47)

Secretary Janis T Percio (43)

Executives Of Centerior Service Company Chairman, President and Senior Vice President-Chief Executive Officer Corporate Administration Group, (and Chairman & CEO of Chief Financial Officer Cleveland Electric and General Counsel Terrence G. linnert (49) and Toledo Edison) Robert J. Farling (59) 3 y;  ; ,

Executive Vice President; Nuclear and President-Transmission, Services Vice President-and Business Enterprises Groups Nuclear-Perry Donald C. Shelton (62)

(and Vice Chairman y.  ;

of Toledo Edison Business Services Jacquita K. Hauserman (53) and President of Cleveland Electric) Murray R. Edelman (56) Vice President-Senior Vice President; President-Centerior Vice President-Electric Company Nuclear-Davis-Besse John P. Sterz (50)

(and President Vice President-of Toledo Edison) Fud J. Longe, Jr. (46)

Engineering & Planning Stanley E Stwed(43)

Senior Vice President; Vice President-President-Power Sales & Marketing Al R. Temple (50)

Generation Group Gary R. Leidich (45)

Controller E. Lyle Pepin (54)

Treasurer David M. Blank (47)

Secretary Janis T Percio(43)

Nwnber in parentheses indicates age.

thirty-three

Fin:nII:l cnd Statistirl R:vi;w l

l Operating Revenues (millions of dollars)

Steam Total i Total Total Heating Operating j Year Residenti ! Commercial Industrial Other Retail Wholesale Electric & Gas Revenues l 1995 $797 747 777 136 2 457 59 2 516 --

$2 516 1994 758 722 758 137 2 375 46 2 421 --

2 421 i 1993 768 716 754 143 2 381 93 2 474 -

2 474 1992 732 706 766 143 2 347 91 2 438 -

2 438 1991 777 723 783 188 2 471 89 2 560 -

2 560 1985 567 485 668 73 1793 26 I 819 19 1 838 l l

l Operating Expenses (millions of dollars) l l Other Generation Deferred Fuel & Operation Facilities Depreciation Taxes. Operating Federal Total l

l Purchased & Rental & Other Than Expenses. Income Operating l Year Power Maintenance Expense. Net Amortiration FIT Net Taxes Expenses  ;

1 j 1995 $465 617 160 281 322 ($3) 135 $1927 1994 442 595 160 278 309 (55) 114 1843 ,

1993 474 924(a) 159 258 312 23(b) 1I 2 161  !

l 1992 473 623 161 256 318 (52) 122 1901 l 1991 500 633 168 243(c) 305 (6) 138 1 981 l l 1985 521 451 -

141 181 -

155 1 449 l l

l Income (Loss) (millions of dollars)

Federal income Other Deferred income (Loss) i income & Carrying Taxes-- Before

!- Operating AFUDC- Deductions, Charges. Credit Interest Debt Year income Equity Net Net (Expense) Charges Interest 1995 $$89 3 6 43 (5) 636 358 1994 578 5 8 40 (6) 625 361 1993 313 5 (589)(d) (649)(b) 398 (522) 359

! 1992 537 2 9 100 (7) 641 365 1991 '579 9 6 110 (30) 674 381 1985 389 268 5 --

87 749 367 l

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

Return on Preferred & Average Average l AFUDC- Sto$k inco Ou si nding oYc Dividends Book Year Debt Dividends ( Loss) (milhons) Earninf (Loss Equity Declared Value l

I 1995 $ (3) 61 $ 220 148.0 $ 1.49 11.4 % $ .80 $13.40 l 1994 (6) 66 204 147.8 1.38 11.1 .80 12.71 1993 (5) 67 (943) 144.9 (6.51) (40.3) 1.60 12.14 1992 (1) 65 212 141.7 1.50 7.4 1.60 20.22 1991 (5) 61 237 139.1 1,71 8.4 1.60 20.37 l 1985 (102) 83 401 121.9(e) 3.29(e) 15.7 2.20(e) 21.50(e) l NOTE: 1983 data is the result of combining and restating data for the Operating Companies.

(a) includes early retirement program expenses and other charges of $172 million.

(b) includes write-of ofphase In deferrals of $877 million, consisting of $172 million of deferred operating expenses and $703 million of deferred carrying charges.

(c) The Operating Companies adopted a change in accounting for nuclear plant depreciation, changing from the units-of-production method to the straight.line method at a 2.3% rate.

1 1

thirty-four l l

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

Average Average Industrial KW i er r e Yeer Residential Commercial Industrial Wholesale Other - Total - Residential Commercial & Other Total Customer KWH Customer 1995_._, 7 227 7 694 12 168 2 626 10$0 30 765 930 99 11 _ 1 040 . 7 791 11.02c $858.66 1994._ _ 6 980 7 481 12 069 1 842 1074 29 446 925 98 11 1 034 7 556 10.86 820.89 1993 _, 6 974 73%- 11 687 3 027 1022 30 016 924 97 12 1 033 7 546 11.01 830.99 1992 __._, 6 666 - ' 7 086 11 551 2 814 1 011 29 128 925 97 13 - 1035 7 227 10.98 793.68 1?91___. 6 981 7 176 11559 2 690 1048 29 454 922 96 13 1 031 7 410 11.16 827.10 1985 _ 6 309 5 952 11410 716 865 25 252 893 87 12 992 6 900 8.98 622.08 Load (MW & %) Energy (millions of KWH) Fuel Capacity Load Co pany Generated Purchased Se Peak Fuel Cost Year ' Capability Load Margin Factor Fossiltf) Nuclear Total Power Total Per KWil KWH 1995 5 924 5 779 2.4% 60.0% 17 260 14 936 32 196 338 32 534 1.38e 10 447 1994 ' 6 226 5 291- 15.0 63.9 18 000 11824 29 824 922 30 746 1,35 10 454

.1993 6 226 5 397 13.3 61.6 21 105 10 435 31 540 273 31 813 1.39 10 276 1992 6 463 5 091 21.2 63.4 17 371 13 814 31 185 (122) 31 063 1.45 10 395 1991 6 460 5 361 17.0 62.9 17 971 13 454~ 31 425 40 31 465 1.48 10 442 1985 4 539 4 512 0.6 69.1 21 457 1964 23 421 3 668. 27 089 1.85 10 313 Investment (millions of dollars)

Nk in Total Utility Accumulated Progress Nuclear Property. Utility Plant in Depreciation & Net & Perry Fuel and Plant and Plant Total Yetr Service Amortization Plant Unit 2 Other Equipment Additions Assets 1995 $9 768 3 036 6 732 101 302 $7135 $210 - $10 643 -

1994 9 770 2 906 6 864 129 343 7 336 197 10 691  ;

1993 9 571 2 677 6 894 181 385 7 460 218 10 710 1992 9 449 -2 488. 6 961 781 424 8 166 200 12 071 1991 8 888 2 274 6 614 853 503 7 970 204 11 829 1985 4 481 1265 3 216 4 261 564 8 041 994 8 992 Capitalization (millions of dollars & %) .

Preferred & Preference Preferred Stock, without Stock. with Mandatory Mandatory Redemption

. Year ' Common Stock Equity Redemption Provisions Provisions Long. Term Debt Total 1995 $1984 31% 220 3% 451 7% 3 734 59% $6 389

- 1994 1882 30 253 4 451 7 3 697 59 6 283 1993 1 785 27 313 5 451 7 4 019 61 6 568 f-1992 2 889 39 364 5 354 5 3 694 51 7 301 1991 2 855 38 332 4 427 6 3 841 '52 '7 455

. 1981 2 710 39 468 7 374 5 3 439 49 6 991 (d) includes write-of of Perry Unit 2 of $383 million.

(e) Average shares outstanding and related per share computations reflect the Cleveland Electric 1.11-for-one exchange ratio and the Toledo Edison one-for-one exchange rattofor Centerior Energy shares at the date of afiliation. April 29, I986.

4

' (f) Reduced by net energy used by the Seneca Pumped Storage Plantfor pumping.

thirty-pve

, - . , .. - .. _ , - , - - - , , = - . . .- - - .._ . -

Board Of Directors Richardit Anderson (66) President and Hilliam F. Conway (65) President of Sister May Marthe Reinhard, SND (66)

Chief Executive Ofncer of The Andersons William E Conway & Associates,Inc., Director of Development for the Sisters of Inc., a grain, farm supply and retailing a management consulting firm. Retired Notre Dame of Cleveland, Ohio.1986 nrm.1986 Executive Vice President-Nuclear of Robert C. Savage (58) President and Arimna Public Service Company, an Albert C. Bersticker(6/) Chairman Chief Executive Ofncer of Savage &

electric utility.1994 and Chief Executive Of0cer of Ferro Associates, Inc., an insurance, financial Corporation, a producer of specialty Wayne R. Embry (58) President and planning and estate planning firm.1990 chemical materials for manufactured Chief Operating Officer of the Cleveland Hilliam J. Hilliams (67) Retired Chairman Pducts. p Cavahen, a professional basketball team.

of Huntington National Bank.1986 Leigh Carter * (70) Retired President hardboard, fiberglass and carpeting and Chief Operating Ofncer of The materials for the automotive industry.1991 Robert M. G"' "

BFGoodrich Company, a producer of Chairman Emeritus chemicals, plastics and aerospace products. RobertJ. Farling (59) Chairman, Retired Chairman of Tremco, Incorporated. President and Chief Executive Officer of John P. Milliamson a manufacturer of specialty chemical the Company and Centerior Service Chairman Emeritus products and a wholly owned subsidiary Company.1988 of The BFGoodrich Company.1986 Richard A. Miller (69) Retired In memoriam George H. Kault, a Thomas A. Commes (53) President and Chairman and Chief Executive Ofncer director of the Company since 1987, Chief Operating Officer of The Sherwin- of the Company and Centerior Service died last August. Mr. Kaull was a Williams Company, a manufacturer of Company.1986 valuable member of the Board who paints and painting supplies.1987 w tMeuly fw tk knent of Frank E. Mosier (65) Retired Vice ur Company, our share owners and Chairman of the Advisory Board of BP America Inc., a producer and refiner of ur cust men. e c n nue to min his energy and leadership.

petroleum products.1986 Number in parentheses indicates age.

Date indicatesfirst year in which elected to Board.

• In accordance with the Company s director retirement policy, Mr. Carter is not eligible to standfor re-election to the Board in 1996.

Committees Of The Board Environmental Capital and Community Erecutive iluman Audit Erpenditures Responsibility and Nominating Finance Resources Nuclear T.A. Commes, A.C. Bersticker, Sr. M.M. Reinhard, RJ. Farling, R.A. Miller, EE. Mosier, R.P. Anderson, Chairman Chairman Chairman Chairman Chairman Chairman Chairman R.P. Anderson W.E Conway W.R. Embry L Carter L Carter W.R. Embry A.C. Bersticker L Carter R.A. Miller R.A. Miller T.A. Commes T.A. Commes R.C. Savage W.E Conway W.R. Embry EE. Mosier EE. Mosbr R.A. Miller R.J. Farling W.J. Williams R.J. Farling Sr. M.M. Reinhard R.C. Savage WJ. Wuliams EE. Mosier Sr. M.M. Reinhard R.C. Savage W.J. Williams thirry-six

i 4

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BUSINESS REPLY MAIL

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] POSTAGE WILL BE PAID BY ADDRESSEE -

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CENTERIOR ENERGY CORPORATION j l PO BOX 94661 '

CLEVELAND OH 44101-9886 1

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! SHARE OWNER SERVICES s==mmmmmmmmmmms CENTERIOR ENERGY CORPORATION """'""'

PO BOX 94661

CLEVELAND OH 44101-9886  !

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l C:mplete this card if you hold Centerior stock certificates or participate in 4 C:nterior's Dividend Reinvestment Plan and wish to discontinue duplicate mallings  !

c: ming to this address.

1 Name (Please Pnnt) , ,

I a l

Street 1 City State Zip Code f l Eliminate Continue l Millings to Mailings to l Account (s) No. Account No. ,

(Account number appears on your dmdend check stub or DRP statement of account) f Signature of share owner (s) l Do not retum this card if you receive only one copy of each mailing in your household.

! Complete this card if you own Centerior stock through a broker and wish to be on cur malling list to receive Quarteriy Reports to Share Owners, as released.

! Name (Please Pnnt)

Street City State Zip Code t

l Signature of share owner (s)

This card must be completed and returned even if you, as a beneficial share owner are alt ady on our malling list for Quarterly Reports. Do D91 return this card if you hold C1nterior stock certificates or participate in our Dividend Reinvestment Plan.

I i

l l

l To Share Owners who hold'Cinferior Energy stock certificates or participate in i our Dividend Reinvestment Plan: 1 If you receive duplicate copies of Company I mailings in your household and have no !  !

i need for the extra copies, you will help us ! l economize by completing and returning the i l card on the upper right. l l

l Your instructions will eliminate all duplicate ;

j mailings except dividend checks, proxy i material and tax information. l Your help is appreciated. l l

If you have questions, please call Share  !

Owner Services at 800-433-7794 or at I 447-2400 in the Cleveland area, t s i l-I To Share Owners who own Centerior f  ;

Energy stock through a broker:

[

) If your stock is held by your broker and you I.

l want to receive our Quarterly Reports to  !-

Share Owners, as released, complete and return the card on the lower right. t l

i' Even if you are already on our mailing list, t you must complete and return the card to l continue receiving Quarterly Reports.

[

1 F

I If you have questions, please call Share  ;

Owner Services at 800-433 7794 or at l 447-2400 in the Cleveland area. p j l

1 i t.

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Sh re Owner Information Executive Offices investor Relations Common Stock Centerior Energy Corporation Inquiries from security analysts and Listed on the New York, Chicago and 6200 Oak Tree Boulevard institutional investors should be directed Pacific Stock Exchanges. Options are Independence, Oli to Ronald E. Seeholier, Manager - traded on The Pacific Stock Exchange.

Telephone: (216) 447 3100 investor Relations, at the Company's New York Stock Exchange symbol-CX.

FAX: (216) 447-3240 mail address or by telephone at Newspaper abbreviation - CentEn or l (216) 447-3339. CentrEngy.

M:ll Address Centerior Energy Corporation Dividend Reinvestment and Stock Annual Meeting P.O. Box 94661 Purchase Plan and Individual The 1996 annual meeting of the share Cleveland, OH 441014661 Retirement Account (CX*1RA) owners of the Company will be held on Generzl information about the Company The Company has a Dividend Rein- April 23,1996. Owners of common stock is available on the Internet at vestment and Stock Purchase Plan which as of February 28,1996, the record date htpp: // www.centerior.com Provides share owners of record and for the meeting, will be eligible to vote on customers of the Company's subsidiaries matters brought up for share owners' Tr;n:for Agent a convenient means of purchasing shares consideration.

Centerior Energy Corporation of Company common stock by investing Share Owner Services all or a part of their quarterly dividends Environmental Report P.O. Box 94661 as well as making cash investments. In The Company will furnish to share Cleveland, OH 44101-4661 addition, individuals may establish an owners, without charge, a copy of a individual retirement account (IRA) report on its environmental performance.

Stock transfers may be presented at which invests in Company common Requests should be directed to Share Society Trust Company of New York stock through the Plan. Information Owner Services.

5 Hanover Square,10th Floor relating to the Plan and the CX* IRA may New York, NY 100(M be obtained from Skr- Owner Services. Form 10-K The Company will furnish to share Regi:trar CXelRA Custodlan owners, without charge, a copy of its Society National Bank All communications about an existing most recent annual report to the Securities Corporate Trust Division CX*1RA should be directed to the and Exchange Commission. Requests P.O. Box 6477 Custodian at the address or telephone should be directed to Share Owner Cleveland, OH 44101 numbers listed below: Services.

Independent Public Accountants Society National Bank Custodian, CX*1RA Audio Cassettes Arthur Andersen LLP P.O. Box 6477 Share owners with impaired vision may 1717 East Ninth Street .

Cleveland, OH 44101 obtam audio cassettes of the Company's Cleveland, OH 44114 Quarterly Reports and Annual Report.

In Cleveland area 813-5745 To obtain a cassette, simply write or Share Owner Services Outside Cleveland area call Share Owner Services. There is no Communications regarding stock transfer requirements, lost certificates, dividends (800)S42-779.

I cnd changes of address should be directed j

to Share Owner Services. To reach Share owner Services by phone. call: Centerior Energy Corp >rarion wasformedin April i986 upum the affiliation cf The Cleveland Electric In Cleveland area 447 2400 m tituminating Company and The ToleJo Edison The Cteveland Company. With assets of about $1) billion,

'g Outside Cleveland area (800) 433-7794

[lR company Centerior Energy is one of the largest electric utility systems in the nation. The Centerior company operating companies have a combined service Please have your account number ready area of 4.200 square miles in Norrhern Ohio with w hen talling. an estimased populasion of 2.5 mittion people.

Ohlo Centerior Enere is an equat oppmunity emptoyee thirry.seven

Centerior Energy Corporation PRESORTED FIRST-CLASS MAIL l PO. Box 94661 U.S. POSTAGE PAIO Cleveland, OH 44101-4661 CLEVELAND OH PERMIT NO. L40'3 l

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DUQUESNE LIGHT COMPANY MAN 4GER-BU NUCLEAR SAFETY DEPT Mall DRDP BV-A PO BOX 4 SHIPPINGPORT PA 15D?? l N