ML20140B908

Cleveland Electric Illuminating Co 1996 Annual Rept

ML20140B908
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Site:	Beaver Valley
Issue date:	12/31/1996
From:	Andersen A CLEVELAND ELECTRIC ILLUMINATING CO.
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NUDOCS 9706060382
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l 1996 Annual Report 1

The Cleve anc Electric  !

Illuminating Company A Sl:13SIDIARY OF CENTERIOR ENERGY CORIORATION ,

l 9706060382 970530 PDR ADOCK 05000334-I PDR

ibOUf Cleveland Electric Tcble of contents The Company, a w holly owned subsidiary of Centerior Energy Corporation, was I Management's incorporated under the laws of the State of Ohio in 1892 and prosides electric Financial Analysis service to a 1,700-square mile area of northeastern Ohio. Although the principal city

1. Report of Independent in its service area is Cleseland, the Company derives about 779 of its total electric reta revenua m cuuomers outside the city. The Company's 3,282 employees Public Accountants serve about 741,000 customers.

9 Financial Statements and Notes This report includes discussions regarding the pending merger of Centerior Energy 26 Financial and Corporation and Ohio Edison Company to form FirstEnergy Corp. On March 27.

Statistical Review 1997, conunon uock share owners of both companies approsed the merger. Various 18 Iraestor Information aspects of the merger still remain subject to approval by certa:n regulatory agencies.

The merger is expected to be consummated in late 1997, at which time the Company would become a wholly owned subsidiary of FirstEnergy Corp.

Executive Offices The Cleveland Electric illuminating Company c/o Centerior Energy Corporation 6200 Oak Tree floulevard independence.01i Telephone: (216) 622-9800 Mall Address The Cleve'and Electric illuminating Company P.O. Ilox 5000 Cleveland. Oil 44101 General information about the Company and Centerior Energy Corporation is available on the Internet at Directors http://www.centerior.com Robert J. Farling, Chairman and Chief Executive Officer of the Company and Officers The Toledo Edison Company and-C,hairman and C,hief Executive Ofheer Rohcrt J. Farh.ne Chairman. President and Chief Executise 00icer of Centerior Energy Corporation President Afurray R. Edelman and Centerior Service Company. Vice President & Chief Financial Of6cer Terrence G. Liimert 1 Murray R Edelman, President of the Vice President Jacquita K. llauscrman Company, Vice Chairman of The Toledo Vice President Fred J. Lange. fr.

Edison Company and Executive Vice President of Centeiior Energy Corporation Vice President Gary R. Leidich and Centerior Service Company. Itegional Vice President - Eastern Jack A. K!ine Fred J. Lange, Jr., Vice President of the Regional Vice President - Central David W Whitchrad Company President of The Toledo Edison Treasurer David Af. BlanA Company and Senior Vice President of Controller E. Lyle l'cpin Centerior Energy Corporation and Centerior Sersice Company. Secretary Janis T. l'enlo ne cmrn rtnwavio n jn.m mu ne r.mer t.mmv amvae & rnmnt o" une'eawr

Mantgament's Financial Analysis ers, including the five largest. While this strategy has Outlook resulted in lower prices for these customers, in the long run, it is expected to maximize share owner value by Strategic Plan retaining our customer base in a changing industry. Prior to these renewals, 61% of our industrial base rate in early 1994, Centerior Energy Corporation (Centerior (nonfuel) revenues under contract was scheduled for Energy), along with The Cleveland Electric illuminating renewal before 1999. Following the renewals, the compa-Company (Company) and The Toledo Edison Company rable percentage is 18% At year-end 1996, 51% of our (Toledo Edison), created a strategic plan to achieve the twin goals of strengthening their financial conditions and industrial base rate revenues was under long-term contracts.

improving their competitive positions. The Company and Toledo Edison are the two wholly owned electric utility Our continued emphasis on economie development activi-subsidiaries of Centerior Energy. The plan's objectives ties is adding to our opportunities for revenue growth. In relate to the combined operations of all three companies. 1996, we gained commitments on 24 economic develop-To meet these goals, we seek to maximite share owner ment projects, representing almost $6 million in new and return on Centerior Energy common stock, achieve profit. retained annual base rate revenues and nearly 4,000 new able revenue growth, become a leader in customer satis. and retained jobs for Northeast Ohio.

faction, build a winning employee team and attain Under the strategic plan, Centerior Energy and its subsid-increasmgly competitive supply costs. During 1996, the iaries are structured in six straiegic business groups to third year of the eight9 ear plan, ut made strong gains better focus on competitiveness. During 1996, the Com-toward reaching some plan objectives but need significant improvement on others.

pany reduced employment from about 3,600 to 3,300.

Further reduction in our work force to about 3,100 is A major step taken to reach the twin goals was Centerior planned by year-end 1997. We also plan to reduce Energy's agreement to merge with Ohio Edison Company expenditures for operation and maintenance activities (Ohio Edison) to form a new holding company called (exclusive of fuel and purchased power expenses) and FirstEnergy Corp. (FirstEnergy). The proposed merger, capital projects from $593 million in 1996 to approxi-combined with good operating performance, a successful mately $560 million in 1997 by continuing to streamlire price increase and the accelerated paydown of debt, operations. We will continue to reduce our unit cost of resulted in a significant stock price gain, such that the fuel used for generating electricity, w hile safely improving total return to Centerior Energy common stock share the operating performance of our generation facilities.

owners during 1996 was 331 The merger is expected to better position the merged companies to meet coming Reducing h.xed financing costs is another pn.mjiry objec-competitise challenges. tive m strengthening our financial and competitive posi-tion. In 1996, we reduced our fixed obligations for debt, Revenue growth is a key objective of the plan, from

, preferred stock and generation facilities leases (partially pncing actions as well as market expansmn-offset by the new accounts receivable securitization) by in April 1996. The Public Utilities Commission of Ohio $145 million. See Notes 1(j) and 2. Interest expense and (PUCO) approved in full the $119 million price increases preferred dividends dropped $10 million. In the last three i requested by the Company and Toledo Edison ($84 mil- years, fixed obligations were reduced by $246 million.

lion and $35 million, respectively). Tl e primary purpose of the mereases was to provide additmnal revenues t in 1996, we reported earnings available for common stock recover all the costs of providing electnc semce, includ- of $78 million compared to $141 million in 1995. The mg deferred costs, and provide a fair return to Centenor decline in reported earnings is primarily attributable to Energy common stock share owners. The additional reve- the delay in implementing our price increase until late nues aho provided cash to accelerate the redemption of Ehile we began at the end of 1995 to charge debt and preferred stock. earnings for operating expenses and amortization of defer-rals uhich the price increase was designed to recover. The for the second year in a row, the Company's total price increase contributed approximately $33 million kilowatt-hour sales increased. Although kilowatt-hour (after tax) more cash to our earnings in 1996. The change i sales to our retail ecstomers decreased by 1% compared to in regulatory accounting measures resulted in an $85 mil- i 1995 results, our wholesale sales increased by 27% from lion decrease in reported earnings for 1996 versus 1995. In i 1995 as a result of the good availability of our generatin8 addition,1996 results included a noncash charge against j units and a more aggressive bulk power marketing elTort. earnings of $11 million after tax for the disposition of Adjusted for weather, kilowatt-hour sales to residential inventory. Excluding these factors, basic earnings from and commercial customers increased by 1% and 0.8% operations in 1996 were the same as in 1995; how ever, the respectively, from 1995. quality of reported earnings improved. The full benetit of Another key element of our resenue strategy is to offer our $84 million price increase, substantial reductions in long-term contracts to large industrial customers who operation and maintenance expenses and a continuing might otherwise consider changing power suppliers. Dur- decline in interest charges are expected to result in ing 1996, we renewed and extended for as long as ten imprmement in earnings and cash flow from operations in j years contracts with many of our large industrial custom- 1997. l 1

Panding Merg r with Ohio Edison FirstEnergy expects to reduce system-wide debt by at least $2.5 billion through the year 2000, yielding addi-On September 16,1996, Centerior Energy announced its tional long-term savings in the form of lower interest merger with Ohio Edison in a stock-for-stock transaction. expense.

Centerior Energy share owners will receive 0.525 of a share of FirstEnergy common stock for each share of The Company's share of the $1 billion of savings will Centerior Energy common stock owned, while Ohio permit the Company to reduce prices to its customers as Edison share owners will receive one share of FirstEnergy discussed below under FirstEnergy Rate Plan. Absent the common stock for each share of Ohio Edison common merger, the Company plans to achieve savings as well, but stock owned. Following the merger, FirstEnergy will at a lower level, which is expected to allow prices to be directly hold all of the issued and outstanding common fro /en at current levels until at lea;t 2002 despite infla-stock of the Company, Toledo Edison and Ohio Edison. tionary pressures.

,FirstEnergy plans to account for the merger as a purchase Various aspects of the merger are subject to the approval m accordance with generally accepted accounting princi- of the Federal Energy Regulatory Commission (FERC) ples. If FirstEnergy elects to apply, or " push down", the and other regulatory authorities. Common stock share efTects of purchase accounting to the financial statements ow ners of Centerior Energy and Ohio Edison are expected of the Company and Toledo Edison, the Company and to vote on approval of the merger agreement on Toledo Edison would record adjustments to: (1) reduce March 27,1997. The merger must be approved by the the carrying value of nuclear generating plant by allirmative votes of the share owners of at least two-thirds

$1.25 billion to fair value; (2) recognize goodwill of of the outstanding shares of Ohio Edison common stock

$865 nullion; (3) reduce common stock equity by and a majority of the outstanding shares of Centerior

$401 million; (4) reset retained earnings of the Company Energy common stock. The merger is expected to be and Toledo Edison to zero; and (5) reduce the related effective in late 1997, deferred federal income tax liability by $438 million.

These amounts reflect FirstEnergy's estimates of the pro forma combined adjustments for the Company and FirstEnergy Rate Plan Toledo Edison as of September 30, 1996. The actual adjustments to be recorded could be materially dilTerent On January 30,1997, the PUCO approved a Rate Reduc-from these estimates. FirstEnergy has not decided tion and Economic Development Plan (Plan) for the whether to push down the elTects of purchase accounting Company and Toledo Edison to be effective upon the to the financial statements of the Company and Toledo consummation of the Centerior Energy and Ohio Edison Edison if the merger with Ohio Edison is completed, nor merger. The Plan would be null and void if the merger is has FirstEnergy estimated the allocations between the not consummated. The rate order granting the April 1996

• c,o companies if push-down accounting is elected. price increase will remain in full force and efTect during the pendency of the merger or if the merger is not We believe that the merger will create a company that is consummated.

better positioned to compete in the electric utility industry than either Centerior Energy or Ohio Edison could on a The Plan calls for a base rate freeze through 2005 (except i stand-alone basis, enhancing long-term share owner value to comply with any signi6 cant changes in environmental, and providing customers with reliable service at more regulatory or tax laws), followed by an immediate l stable and competitive prices- $310 million (which represents a decrease of approxi- I mately 15% from current levels) base rate reduction in The combination of Centerior Energy and Ohio Edison is a natural alliance of two companies with adjoining service 2N (the gmnpany's share is expected to be $217 mil-areas who already share many major generating units. lion); , mtenm reductions beginning seven months after FirstEnergy expects to reduce costs, maximize etliciencies c nsummation of the merger of $3 per month increasing and increase management flexibility in order to enhance to $5 per month per residential customer by July 1,2001; revenues, cash flows and earnings and be a more elTective

$105 million for economic development and energy efh-ciency programs (the Company's share is expected to be competitor in the increasingly competitive electrie utility

$70 million); earnings caps for regulatory purposes for the industry.

Company and Toledo Edison; a commitment by First-f irstEnergy anticipates the merger will result in net Energy for a reduction, for regulatory accounting pur-savings for the combined companies of approximately poses,in nuclear and regulatory assets by the end of 2005 ,

$1 billion over ten 3 ears, in addition to the impact of cost of at least $2 billion more than it otherwise would be, reduction programs underway at both companies. The through revaluing facilities or accelerating depreciation additional savings, which probably could not be achieved and amortization: and a freeze in fuel cost factors until without the merger, will result primarily from the reduc- December 31,2005 subject to PUCO review at year-end tion of duplicative functions and positions, joint dispatch 2002 and annual inflation adjustments. The Plan permits of generating facilities and procurement etliciencies. the Company and Toledo Edison to dispose of generating FirstEnergy expects reductions in labor costs to comprise assets subject to notice and possible PUCO approval, and slightly over half the estimated savings. In addition, to enter into associated power purchase arrangements.

2

Total price savings for the Company's customers of about Company and Toledo Edison would be required to write

$280 million are anticipated over the term of the Plan, as off certain of their regulatory assets for financial reporting summarized below, excluding potential economic devel- purposes. The write-off amounts would be determined at opment benefits and assuming that the merger takes place that time. FirstEnerg) estimates the write-off amounts for on December 31, 1997. The total price savings for cus- the Company and Toledo Edison will total approximately tomers of the Company and Toledo Edison are expected $750 million. The Company's share of the write-off is to be about $391 million. expected to be about tuo-thirds of this amount. Under the year Amount an, s me or all of this write-off cannot be applied t ward the 52 billion regulatory commitment discussed tminions d dollars) above. For financial reporting purposes, nuclear generat-Um s is ing units are not expected to be impaired. If events cause im 27 either the Company or Toledo Edison or both companies l[ N to conclude they no longer meet the criteria for applying 2002 42 SFAS 71 for the remainder of their business. they would 2003 42 be required to write oft their remaining regulatory assets y j and measure all other assets for impairment. For a discus-g g sion of the criteria for complying with SFAS 71, see Note

• 7(a).

Under the Plan's earning 3 cap, the Company and Toledo Edison will be permitted to earn up to an 11.5% return on April 1996 Rate Order common stock equity for regulatory purposes during cal-In its April 1996 order, the PUCO granted price increases endar years prior to 2000,12% during calendar years 2000 and 2001, and 12.59% during calendar years 2001 through of $84 million and $35 million in annualized revenues to the Company and Toledo Edison. respectively. The Com-005. The regulatory return on equity is generally expected to be lower than the return on equity calculated pany and Toledo Edison intend to free /c rates at existing for financial reporting purposes due to the calculation k els until at least 2002, ahhough they are not precluded methodology dehned by the Plan and, as discussed in the from requesting further price increases. In the order, the PUCO provided for recovery of all regulatory assets in'the next paragraph, anticipated differences in accounting for approved rates, and the Company and Toledo Edison the Plan for financial reportmg versus regulatory purposes.

continue to comply with the provisions of SFAS 71.

Il for any calendar year the regulatory return on equity exceeds the specilied level, the excess will be credited to in connection with its order, the PUCO recommended customers, first through a reduction in Percentage of that the Company and Toledo Edison write down certain income Payment Plan (PIPP) arrearages and then as a assets for regulatory purposes by an aggregate of credit to base rates. PIPP is a deferred payment program $1.25 billion through 2001. If the merger is consum-for low-income residential customers. mated, the Company and Toledo Edison believe accelera-tion of $2 billion of costs under the Pl.m would fully The Plan requires, for regulatory purposes, a revaluation satisfy this recommendation. The Company and Toledo of or an accelerated reduction in the insestment in Edison agree with the concept of accelerating the recogni-nuclear plant and certain regulatory assets of the Com- tion of costs and the recovery of assets as such concept is pany and Toledo Edison (excluding amounts due from consistent with the strategic objective to become more customers for future federal income taxes) by at least competitive. However, the Company and Toledo Edison 52 billion by the end of 2005. FirstEnergy has not yet believe that such acceleration must also be consistent determined each company's estimated share of the $2 bil-with the reduction of debt and the opportunity for Center-lion. Only a portion of the $2 billion of accelerated costs is ior EnerFy common stock share ouners to receive a fair expected to be charged against the two companies' carn- return on their investment. Consideration of whether to ings for financial reporting purposes by 2005. implement a plan responsive to the PUCO's recommen-FirstEnergy believes that the Plan will not provide for the dation to revalue assets by $1.25 billion is pending the full recovery of costs and a fair return on investment erger unh Ohio Edison.

associated with the nuclear operations of the Company Notwithstanding the pending merger with Ohio Edison and Toledo Edison. Pursuant to the PUCO's order, and discussions with regulators concerning the cirect of FirstEnergy is required to submit to the PUCO staff the the Plan on the Company's nuclear generating assets, we regulatory accounting and cost recovery details for imple- believe it is reasonable to expect that rates will be set at menting the Plan. After approval of such details b3 the levels that will recover all current and anticipated costs PUCO staff, FirstEnerg) expects that the Company and associated with the Company's nuclear operations, Toledo Edison will discontinue the application of State- including all associated regulatory assets, and such rates ment of Financial Accounting Standards (SFAS) 71 for can be charged to and collected from customers. If there their nuclear operations if and w hen consummation of the is a change in our evaluation of the competitive environ-merger becomes probable. The remainder of their busi- ment, regulatory framework or other factors, or if the ness is expected to continue to comply with the provisions PUCO significantl3 reduces the value of the Company's of SFAS 71. At the time the merger is probable, the assets or reduces the approved return on common stock 3

equity of 12.59% and overall rate of return of 10.06% or Although competitive pressures are increasing, the tradi-both, for future regulatory purposes, the Company may be tional regulatory framework remains in place and is required to record material charges to carnings. expected to continue for the foreseeable future. We can-not predict when and to what extent retail wheeling or Merger of Toledo Edison into the Company other forms of competition will be allowed. We believe that pure competition (unrestricted retail wheeling for all in October 1996, the FERC authorized th: merger of customer classifications) is at least several years away and Toledo Edison into the Company. The merger agreement that any transition to pure competition will be in phases.

between Centerior Energy md Ohio Edison requires the The FERC and the PUCO have acknowledged the need approval of Ohio Edison i rior to consummation of the to provide at least partial recovery of stranded investment proposed merger of Toled ' Edison into the Company. as greater competition is permitted and. therefore, we Ohio Edison has not yet made a decision. See Note 16.

believe that there will be a mechanism developed for the recovery of at least some stranded insestment. Ilowever, Competition due to the uncertainty invohed, there is a risk in connec-tion with the introduction of retail wheeling that some of Structural changes .m the electric utih.ty mdustry from the Company's assets may not be fully recovered.

actions by both federal and state regulatory bodies are continuing to place downward pressure on prices and Competition from municipal electric suppliers for retail increase competition for customers. The Company's business in our service area is producing both favorable nuclear plant licenses have required open-access trans- and unfavorable results in our business. Through aggres-mission for its wholesale customers for 20 years. More site door-to-door campaigns, we have been successful in recently, the Federal Energy Policy Act of 1992 initiated limiting the number of conversions of our customers to broader access to utility transmission systems and, in Cleveland Public Power (CPP) under its ongoing expan-1996, the i ERC adopted rules relating to open-access sion plan. CPP is the largest municipal supplier in our transmission services. The open-access rules require utili- senice area. In 1996, we reached agreements to serve a ties to deliver power from other utilities or generation number of large Cleveland commercial customers, includ-sources to their wholesale customers at nondiscriminatory ing some previously served by CPP. We continue to pnces. pursue legal remedies to halt illegal municipal expansion in our service area.

A number of states have enacted transition legislation which provides for introduction of competition for retail The merger with Ohio Edison and the benefits of the Plan electric business and recovery of stranded investment, to our customers are expceted to better position us to deal Several groups in Ohio are studying the possible introduc- "ith the structural changes taking place in the industry tion of retail wheeling and stranded investment recovery. and to improve our competitive position uith respect to Retail wheeling occurs when a customer obtains power mumcipalization.

from a utility company other than its local utility. The term " stranded investment" generally refers to lised costs Nuclear Operations approved for recovery under traditional regulatory meth-ods that would become unrecoverable, or " stranded", as a D.e G, unpany has interests in three nuclear generating result of legislative changes which allow for widespread units - Davis-Besse Nuclear Pow er Station ( Davis-competition. The PUCO is sponsoring discussions among Besse) Perry Nuclear Power Plant Unit I (Perry Unit 1) a group of business, utility and consumer interests to and lleaver Valley Power Station Unit 2 (Beaver Valley explore ways of promoting competitive options without Unit 2). Toledo Edison operates Davis-Besse and the unduly harming the interests of utility company share Company operates Perry Unit 1.

owners or customers. The PUCO also has introduced two All three units were out of service temporarily for refuel-pilot projects, both intended as initial steps to introduce ing during 1996; thus, plant availability factors for Davis-competitive elements into the Ohio electrie utility Besse Perry Unit I and Beaver Valley Unit 2 were 85%

business.

769 and 70% respectively, for 1996. The 1994-1996 A bill to restructure the electric utility mdustry m Ohi availabilitt factors for the units were 91% 72% and 85%

has been mtroduced in the Oluo llouse of Representa- for Davis-Bem Pern Unit I and Beaver Vallev Unit 2.

tives. A bipartisan committee from both legislative houses respectively. The comparable industry averages for a threcocar period (as of August 31,1996) are 82% for has been formed to study the issue. Centerior Energy '

pressurized water reactors such as Davis-Besse and Bea-presented the Company's model for customer choice, wr VMley Unit 2 and 78% for boiling uater reactors such called Energy Choice, to the PUCO discussion group in as Pern Unit 1. Davis-Besse established a plant record August 1996. Under this model, full retail competition should be introduced by 2002, but two essential elements, wie its 509-das continuous run at or near full capacity~

~

recovery of stranded investment and levelization of tax before shutting dow n for its scheduled refueling outage in April 1996.

burdens among energy suppliers, must be resobed in the interim to assure share owners' recovery of and a fair A significant part of the strategic plan involves ongoing return on their in estments. elTorts to increase the availability and lower the cost of 4

production of our nuclear units. In 1996, we continued our material adverse elTect on our financial condition or progress toward increasing long-term unit availability results of operations.

uhile continuing to lower production costs. The goal of our nuclear improvement program is to replicate Davis- Common Stock Dividends 13csse's operational excellence and cost reduction gains at Centerior Energy's common stock dividend has been Perry Unit 1, while improving performance ratings. funded in recent 3 ears primarily by common stock divi-Our nuclear units may be impacted by activities or events dends paid by the Company. The declaration and pay-beyond our control. Operating nuclear units have exper. ment of future common stock dividends is at the ienced unplanned outages or extensions of scheduled discretion of the Company's Board of Directors, subject to outages because of equipment problems or new regulatory applicable legal restrictions. In 1994, Centerior Energy requirements. A major accident at n nuclear facility lowered its common stock dividend which reduced its anywhere in the world could cause the Nuclear Regula_ cash outflow by over $110 million annually. This action, tory Commission (NRC) to limit or prohibit the enera- in turn, reduced the common stock cash dividend demand tion or licensing of any domcatic nuclear unit. If one of on the Company. The Company used the increased our nuclear units is taken out of service for an extended retained cash to redeem debt and preferred stock more period for any reason, including an accident at such unit quickly than would otherwise be the case. In 1996, or any other nuclear f acility, we cannot predict whether Centerior Energy inerened its common stock cash divi-regulatory authorities would impose unfavorable rate dend demand on the Company to fund its common stock treatment. Such treatment could include taking our dividend and other corporate activities. See Capital alrected unit out of rate base, thereby not permitting us to Resources and 1.iquidity-Liquidity below.

recover our investment in and earn a teturn on it, or disallowing certain construction or maintenance costs. An Capital Resources and Liquidity extended outage coupled with unfavorable rate treatment 1994 1996 Cash Requirements could have a material adverse effect on our financial condition, cash flows and results of operations. Premature We need cash for normal corporate operations (including plant closings could also have a material adverse elTect on the payment of dividends), retirement of maturing securi-our financial condition, cash flows and results of opera- ties. and an ongoing program of constructing and improv-tions because the estimated cost to decommission a plant ing facilities to meet demand for electric service and to exceeds the current funding in the decommissioning trust. cmnply with government regulations. Our cash construc-tion expenditures tott. led $164 million in 1994, $148 mil-Huardous Waste Disposal Sites lion in 1995 and $104 mdlion in 1996. Our debt and preferred stock maturities and sinking fund requirements The Company has been named as a "potentially responsi- totaled $62 million in 1994, $282 million in 1995 and ble party" (PRP) for three sites listed on the Superfund $176 mdlion in 1996. In addition, we optionally redeemed National Priorities List (Superfund List) and is aware of $341 million of securities in the 1994-1996 period, includ-its potential involvement in the cleanup of several other ing P43 million of tax-exemp'. issues refunded in 1995.

sites. Allegations that the Company disposed of hazard- . .

ous waste at these sites, and the amount involved, are n July 1996. Centermr 1 unding Corporatmn (Centerior 1(unding), the Company s wholly owned subsidiary, often unsubstantiated and subject to dispute. l'ederal law issued $150 m,lhoni yn A AA-rated accounts receivable-provides that all PRPs for a particular site be held liable backed m, vestor certificates due m 2001 with an interest on a joint and several basis. If the Company were held liable for 10(Y5 of the cleanup costs of all the sites rate of 7.2% The Company's share of the net proceeds referred to above, the cost could be as high as $300 mil- fmm the accounts receivable securitization was used to lion. Ilowever, we believe that the actual cleanup costs redeem higher-cost securities and for general corporate will be substantially lower than $300 million. that the purpmes.

Company's share of any cleanup costs will be substan- As a result of these activities, the embedded cost of the tially less than 100% and that most of the other PRPs are Company's debt at the end of 1996 declined to 8.83%

financially able to contribute their share. The Company sersus 8.88% in 1995 and 8.96% in 1994.

j has accrued a liability totaling $7 million at December 31, The Company also uthized short-term borrowings to help 1996 based on estimates of the costs of cleanup and its meet its cash needs. The Company had $112 million of proportionate responsibility for such costs. We believe notes payable to alliliates at December 31,1996.

that the ultimate outcome of these matters will not have a The Company is a party to a $125 million revolving credit material adverse elTect on our financial condition, cash facility which was renewed in May 1996 for a oneocar '

flows or results of operations. term.'In 1996, portions of the nuclear fuel lease financing A new Statement of Position issued by the Accounting vehicles for the Company and Toledo Edison matured:

Standards Executive Committee of the American Insti- $84 million ofintermediate-term notes in September and tute of Certified Public Accountants, Inc. etTective .lanu- a $150 million letter of credit supporting short-term ary I,1997 provides guidance on the recognition and borrowing in October. These facilities were replaced by disclosure of en ironmental remediation liabilities. Adop- $100 million of intermediate-term notes and a $K)0 mil-tion of the statement in 1997 is not expected to have a lion two-year letter of credit. The net reduction in the 5

i I

facility size results from lower nuclear fuel financing The Company and Toledo Edi>,on have $273 million in requirements, financing vehicles to support their nuclear fuel leases, $83 million of which mature in 1997. Replacement financing 1997 and Beyond Cash Requireents for the maturing issues may not be needed in 1997. The Our anticipated 1997 cash requirements for construction Company is a party to a $125 million revolving credit are $110 milhon.1)cht and preferred stock maturities and facility which is expected to be renewed when it matures sinking fund requirements are $145 million. Of this in May 1997' amount, $70 million are for a tavexempt issue secured by Current credit ratings for the Company are as follows:

first mortgage bonds and subject to optional tender by the Standard Momly's owners on November 1,1997, which we expect to replace with a similar issue at a substantially lower interest rate.

$$$n 3;[,yQ "

We expect to meet remaining requirements with internal iht wrigare b nds fili Ita2 -

, cash generation and cash reserves. We also expect to be subordinate debt is + ita3 able to optionally redeem more debt and preferred stock Prererred uock 11 h2 in 1997 than we did in 1996.

Following the FirstEnergy merger announcement, both We expect to meet all of our 1998-2001 cash require _ rating agencies placed the Company's securities on credit ments with internal cash generation. Estimated cash watch with positive implications.

requirements for our construction program during this Federal law prohibits the Company from paying dividends period total $496 million. Debt and preferred stock matu-out of capital accounts. The Company has since 1993 rities and sinking fund requirements total $445 million for declared and paid preferred and common stock dividends the same period. If economical, additional securities may out of appropriated current net income included in be redeemed with funding expected to be provided retained earnings. At the times of such declarations and through internal cash generation.

payments, the Company had a deficit in its retained Consummation of the merger with Ohio Edison is earnings. At December 31, 1996, the Company had expected to reduce the Company's cash construction $130 miHion of appropriated retained earnings for the J requirements and improve its ability to redeem fixed payment of dividends.

obligations.

As part of a routine audit, the FERC is considering statements which it requested and received from the Liquidity Company and Toledo Edison supporting the payment of Net cash flow from operating activities in 1996 was dividends out of appropriated current net income included significantly increased from 1995 by implementation of in retained earnings while total retained earnings were a the price increase effective in April 1996. Most of the net deficit. At December 31,1996, the Company's retained proceeds from our accounts receivable securitization of earnings deficit was $276 million. The final disposition of

$65 million were used to redeem other higher-cost securi- this issue is a factor expected to be considered by ties, producing net savings in our overall cost of borrow- FirstEnergy in deciding whether to apply purchase ing. In 1996, we reduced our fixed obligations for debt, accounting to the Company and Toledo Edison, one effect preferred stock and generation facilities leases (partially of which would be to reset deficit retained earnings to offset by the new accounts receivable securitization) by zero. If the merger is not consummated or if FirstEnergy

$145 million. At year-end 1996, we had $30 million in determines not to apply purchase accounting to the two cash and temporary cash investments, down from $70 companies. the Company and Toledo Edison intend to million at year-end 1995. continue to support their position and pursue all available alternatives to aHow them to continue the declaration and Additional first mortgage bonds may be issued by the payment of dividends.

Company under its mortgage on the basis of property additions, cash or refundable first mortgage bonds. If the applicable interest coverage test is met, the Company Results of Operations may issue first mortgage bonds on the basis of property 1996 vs 1995 additions and, under certain circumstances, refundable bonds. At December 31,1996, the Company would have Factors contributing to the 1.2% increase in 1996 operat-ing revenues are as follows:

been permitted to issue approumately $666 million of gg, additional first mortgage bonds. If FirstEnergy elects to increase mccremeBnman, Rnenun orlunars apply purchase accounting to the Company if the merger rose gain 5y with Ohio Edison is completed, the Company's first Ku ll sales volume and Mn (41) mortgage bond capacity wou!d be adversely affected

• HIC'dIC RC'C""C" I4 l'ucl C ost Recovery Res ennes _ (9)

The Company also is able to raise funds through the sale *"U d "'""' R " C " ""

of preferred and preference stock. There are no restric-

,) d tions on the Company's ability to issue preferred or The increase in 1996 base rates revenues resuhed prima-preference stock. rily from the April 1996 rate order issued by the PUCO 6

for the Company as discussed under Outlook-April 1996 Interest charges and preferred dividend requirements Rate Order and in Note 7(b). Renegotiated contracts for decreased in 1996 because of the redemption of securities certain large industrial customers resulted in a decrease in and refundings at favorable terms in 1996 and 1995, base revenues which partially offset the efTect of the general price increase. For the second3 ear in a row, total 1995 vs.1994 kilowatt-hour sales increased. Total sales increased 1.3r70 because of a 27% increase in wholesale sales, the result of Factors contnbuting to the 4.2% increase in 1995 operat-the good availability of our generating units and a more ing revenues are as follows:

appressive bulk power marketing effort. Residential and ge gge,,c, ,n oxratine Revenues of1Ns commercial kilowatt-hour sales decreased 2.1570 and 0.6%,

KWil Lles Volume and W $ $2 respectively, primarily because of the cooler summer wholesale Resenues 11 weather in 1996. On a weather-normalized basis. residen- I uci cou Recoven Resenues 19 tial and commercial sales increased 1% and 0.8%, respec- mcenneous Resenues y) tively. Industrial kilowatt-hour sales decreased 0.2% Total O primarily because of fewer sales to large automotive Industrial kilowatt-hour sales increased 0.3% in 1995, but manufacturers. l.ower 1996 fuel cost recovery revenues sales grew 2.4% excluding reductions at two low-margin resulted f rom f avorable changes m the fuel cost factors. steel producers (representing 7.6% of. in

. dustrial reve-The uciphted average of these fuel cost factors decreased nues). Residential and commercial kilowatt-hour sales approximately 3%. Miscellaneous revenues increased in increased 2.8% and 3%, respectivelv, primarily because of 1996 primarily because of new revenues relatmg to a gg ,g gg g g 3 generating plant lease agreement m effect for four months nonweather-related growth in commercial kilowatt-hour during the year. The parties canceled the agreement sales. Other sales increased 36% because of a 58%

because the FERL msisted on terms which were not

_ nerease in wholesale sales due principally to the hot economic to the parties. summer and good availability of our generating units.

For 1996, operating revenues were 32% residential, 32% Weather accounted for approximately $24 million of the commercial, 29% industrial and 7% other, and kilowatt- $41 million increase in 1995 base rate revenues. Higher hour sales were 23% residential. 28% commercial. 37% 1995 fuel cost recovery revenues resulted from an increase industrial and 12% other. The average prices per kilowatt- in the fuel cost factors. The weighted average of these fuel hour for residential, commercial and industrial customers cost factors increased approximately 7%. Miscellaneous were Il.34,9.67 and 6.57 cents, respectively. revenues decreased in 1995 primarily because the 1994

. . . amount included the billings to other utility owners and Operatmg expenses mereased 4.4% .in 1996. The cessation lessees for overhead expenses related to the 1994 refueling of the Rate Stabilization Program deferrals and the com- and maintenance outage of the j. .omtly owned Perry mencement of their amortization in December 1995 mit I' resulted in the increase in the net amortitation of deferred operating expenses. See Note 7(d). Depreciation and For 1995, operating revenues were 32% residential, 32%

amortization expenses increased primarily because of a 57 commercial, 29% industrial and 7% other, and kilowatt-million net increase in depreciation related to changes in hour sales were 24% residential, 28% commercial. 38%

depreciation rates, as discussed in Note 1(c), and the industrial and 10% other. The average prices per kilow att-cessation of the accelerated amortization of unrestricted hour for residential, commercial and industrial customers imestment tax credits under the Rate Stabili/ation Pro- w ere 11.04. 9.47 and 6.54 cents, respectively. The changes gram. which was reported in 1995 as a $6 million reduc- from 1994 were not significant.

tion of depreciation. Other operation and maintenance Operating expenses increased 5.3% .in 1995. I.uel and expenses in 1996 m. eluded a $17 million one-time charge

. .. purchased power expenses increased as higher fuel for the disposilmn of imentory as part of a reengineering expense was partially ollset by lower purchased poacr of the supply chain process. Reengineering the suppiv - -

t expense. The higher fuel expense was attributable to chain process increases the use of technology, consoh- .

mereased generation and more amortization of previously dates warehousing and uses just-in-time purchase and deferred fuel costs than the amount amortized m. 1994.

delivery. Federal income taxes decreased as . result of The higher other operation and maintenance expenses lower pretax operating income.

resulted primarily from charges for an ongoing inventory A nonoperating loss resulted in 1996 primarily from costs reduction program and the recognition of costs associated related to the accounts receivable securiti/ation, as dis- with preliminary engineering studies. Federal income cussed in Note 1(j), and the Company's share of merger- taxes increased as a result of higher pretax operating related expenses. The deferral of carrying charges related income. Taxes, other than federal income taxes, increased to the Rate Stabilitation Program ended in November primarily due to property tax incicases resulting from 1995. The federal income tax credit for nonoperating plant additions, real estate valuation increases and a income increased in 1996 accordingly. nonrecurring tax credit recorded in 1994.

7

Rcport of Ind:p nd:nt of material misstatement. An audit includes esamining, Public Accountants on a test b1,is, aidence supporting the amounts and To the Share Owners and disclosures in the financial statements. An audit also lloard of Directors of includes assessing the accounting principles used and The Cleveland Electric liluminating Company: significant estimates made by management, as well as

%,e have audited the accompanying consolidated balance evaluating the overall financial statement presentation.

We believe that our aud.its provide a reasonable basis for sheet and consolidated statement of capitalization of The our opinion.

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

financial statements based on our audits.

We conducted our audits in accordance with generally #f /tadescr/ 22 accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable Cleveland, Ohio assurance about uhether the financial statements are free l'ebruary 14,1997 G

S

Income Statement w ci~1annimri, mamounn cv-vane ans si.susiarin l'or thegears ended Desember 3L 1996_ 199L 1994 (millions of dollars)

Operating Resenues 11292 $ 1.769 $L(fL8 Operating l'xpenses Fuel and purchased power (1) 408 413 391 Other operation and maintenance 426 418 394 Generation facilities rental expense, net __M 56 56 Total operation and maintenance 890 887 841 Depreciation and amortization 210 196 195 Taxes, other than federal income taxes 230 220 218 Amortization of deferred operating expenses, net 26 (36) (34)

Federal income taxes 75 94 82 1.431 1.371 1.302 Operating Income 359 398 396 Nonoperating income (I,oss)

Allowance for equity funds used during construction 2 2 4 Other income and deductions, net (10) 2 6 Deferred carrying charges '9 25 1 ederal income taxes-eredit (expense) 6 __..L2 ) __L4 )

(2) 31 31 income liefore Interest Charges 357 429 427 Interest Charges Debt interest 242 248 247 Allowance for borrowed funds used during construction (2) (3) (5) 240 245 242 Net Income 117 184 185 l' referred Diiidend Requirements 39 43 45 Earnings Aiailable for Common Stock 5 7H S 141 S 140 (1) Includes purchased power expense of $105 million. $102 million and $111 million in 1996,1995 and 1994 respectieely. for all purchases from Toledo Edison.

Retained Earnings For themrs ended Decemberlk I996 1495 I994 (millions of dollars)

Retained I'.arnings (Deficit) at lleginning of Year $1193) $126_2 ) $1280)

Additions Net income I17 184 185 Deductions Dividends declared:

Common stock _ (161) (74) (122)

Preferred stock _119) _L41) (45)

Net increase ( Decrease) _L83 ) 69 18 Retained Earnings (Deficit) at I:nd of Year s(2761 s(191) sf26?)

The accontranying notes are an integral part of these slatenients.

9

B lanca Shsst

_Degembqr 31.

.I996 _1995 (miuiom of dol!ars)

ASSETS l'roperty, I'lant and Equipment Utility plant in senice $6,938 56,872 Less: accumulated depreciation and amortization ._;L;L9 2.094 4,686 4,778 Construction work in progress 57 73 4,743 4,851 Nuclear fuel, net of amortization 113 122 Other property, less accumulated depreciation 54 __3 4.910 5 031 Current Assets Cash and temporary cash investments 30 70 Amounts due from customers and others, net _ 181 152 Amounts due from alliliates 6 5 Unbilled revenues 9 79 Materials and supplies, at average cost Owned 52 101 Under consignment 24 -

Tases applicable to succeeding years 182 184 ,

Other 14 7 498 598 Hegulatory and Other Assets Regulatory assets 1,350 1,398 Nuclear plant decommissioning trusts - 76 61 Other 44 64 1.470 1,52)

Total Assets 56 x78 $7.152 The acamipanying notes are an integral part of this stairment.

IO

The Cinciand Cles tric fliunnnating Contpany and Subsidiancs

_llggember 31.

1996 1995 (milhons of dollars)

CAPITALIZATION AND LIABILITIES Capitalization Common stock equity $ 1,045 51,127 Preferred stock With mandatory redemption provisions 186 215 Without mandatory redemption provisions 238 241 Long-term debt 2.441 _2&fs 3.910 4.249 Current Liabilities Current portion of long-term debt and preferred stock 145 177 Current portion of nuclear fuel lease obligations 52 55 Accounts payable 83 89 Accounts and notes payable to alliliates 171 64 Accrued taxes 316 296 Accrued interest 52 59 Other 59 56 878 796 Deferred Credits and Other I.iabilities Unamortiicd investment tax credits 176 18i Accuniulated deferred federal income taxes 1,306 1,298 Unamortized gain from 13ruce Mansfield Plant sale 296 311 Accumulated deferred rents for 13ruce Mansfield Plant 99 92 Nuclear fuel lease oblig.itions 74 86 Retirement benefits 73 65 Other 66 71 2.090 2.107 Total Capitalization and Liabilitics Rx7x 57.162 11

Cash Flows rnc cicrcians 1:tcci,1c rituminaanir cumvanc ans sussisia,1cs For the years ended December 31.

I996 1995 1994 (millions of dollars)

Cash Flows from Operating Actiiities (1)

Net income ._. $ 117 $ 184 $ 185 Adjustments to Reconcile Net income to Cash from Operating Activities:

Depreciation and amortization 210 196 195 Deferred federal income taxes 25 56 50 Unbilled revenues _ 5 (7) 27 Deferred fuel 7 9 (20)

Deferred carrying charges (29)

(25)

1. cased nuclear fuel amortization 46 71 55 Amortization of deferred operating expenses, net 26 (36) (34)

Allowance for equity funds used during construction (2) (2) (4)

Changes in amounts due from customers and others, net (4) (6) 10 Net proceeds from accounts receivable securitization 65 - -

Changes in materials and supplies 25 10 2 Changes in accounts payable (6) 1 (34)

Changes in working capital affecting operations 1I (17) 3 Other noncash items (7) -

4 Total Adjustments 401 246 229 Net Cash from Operating Activities 518 430 414 Cash Flows from Financing Aethities (2)

Notes payable to alliliates 107 (53) 58 First mortgage bond issues -

443 46 Maturities, redemptions and sinking funds (290) (460) (116)

Nuclear fuel lease obligations (52) (58)

(60)

Dividends paid (200) (117) (142)

Premiums, discounts and expenses (11)

( L) (1)

Net Cash from Financing Activities (436) _L2_ 6) (215)

Cash Flows from Imesting Actiiities (2)

Cash app!ied to construction (104) (148) (164)

Interest capitalized as allowance for borrowed funds used during ecnstruction (2) (3) (5)

Contributions to nuclear plant decommissioning trusts (12) (13) (14)

Other cash upplied (4) (6) (27)

Net Cash from Investing Activities _1lJ2) _.117_0) (210)

Net Change in Cash and Temporary Cash Imestments (40) 4 (11)

Cash and Temporary Cash Imestments at lleginning of Year 70 66 77 Cash and Temporarv Cash Imestments at Fnd of Year $ 30 $ 70 $ 66 (I) Interest paid Inet of amounts capitali:ed) $ 237 $ 214 $ 2ns Federaline<>nte taxes paid $ 30 $ 66 $ I5 (2) Increases in Nuclear Fuel and Nuclear Fuel Lease Obligations in the Balance Sheet resulting from the noncash capitali:ations under nuclearfuel agreements are eActudedfrom this statement.

The accompanying notes are an integralpart of this statement.

12

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

Stct3m3nt of Ccpitclizction uc cw.aans unica annnanne c.nanr ans susus,acics December 31.

1996 1995 CO\1NION S' LOCK I QtTIY: l l Common shares, without par value: 105 milhon authorized; 79.6 million outstanding in 1996 and 1995 S t 241 $ 1.241 Other paid-in capit.d 80 79  ;

Retained earninn (delicit) (276) (193)

Total Common Stock liquity 1.045 1.127 t 1996 Current Shares Call Price  ;

Outstanding fer Share PRLI ERRI.D S10CK:

Without par salue. 4.000/XXI preferred shares authorized Subject to mandatory redemption:

$ 7.35 Senes C 120JXK) $ 1011K) 12 13 88 00 Series L 12JXK) 1,011.48 12 15 9.125 Series N 150JWX) 100.00 15 30 91.50 Series O $ 3.572 1.000.00 54 64 88.00 Series R 50fKM) -

50 50 901K) Series S _ 74fKN) -

73 73  ;

216 245 1 ew. Current maturities _j0 30 Total Preferred Stock, with Mandatcy l Redemption Prosisions 186 215 Not subject to mandatory redemption:

$ 7.40 Series A 5001NK) 101.00 50 50 7.56 Series 11 450.(N K) 102.26 45 45 Adjustable Series L 474,000 100.00 46 49 42.40 Series T 200fXH) -

97 97 Total Preferred Stod, without Mandators' 1 Redemption Provisions 238 243 )

1 ONG-TERN 1 DEllT; f irst mortgage bonL:

7.625% due 2002 195 245 7.375% due 2003 100 100 1 9.500% due 2005 300 300 K.750% due 2005 75 75 10 880% due 2(K)6 -

50 9.250% duc 2009 50 50 8.375% due 2011 125 125 8.375% due 2012 75 75 9.375% due 2017 300 300 101KX)% due 2020 100 100 91K10% due 2023 ._ f0 150 1.470 _lR)

Tas-exempt issues secured by lirst mortgage Imnds:

71K10% due 2006-2009 64 64 61KKl% duc 2011" 6 6 61KX)% duc 2011** 2 2 6.200% due 2013 48 48 81XKF,'i> due 2013 79 79 3.500% due 2015** 40 40 61kK)% due 2017" 1 I 3.500% dae 2018" 73 73 i 61K)0% due 2020** 41 41 6.00lF4 due 2020" 9 9 9.750% duc 2022*" 70 70 6.850% due 2023 30 30 81K)0% due 2023 73 73 7.625% due 2025 54 54 7.750% duc 2025 45 45 7.700% duc 2025 44 44 679 679 ,

The aavmpanying notes are an integral part of this statt ment.

13

i St:tsmsnt of Ccpitclizction icomunu.el December 31.

1996 1995 (milhons of' dollar 9 IONG-'ll:lD1 Dl'.llT: (Continued)

Medium-terin notes secured by first mortgage bonds:

8.7(Kf%. duc 1996 -.

20 9.10(fL due 19"6 -

32 9.110% dee 1996 -

13 9 O(KFL due 1996 -

13 9.140% due 1996_ -

12 9,050% duc 1996 -

10 8 95(fL due 1996 -

40 9.450% due 1997__ 43 43 9.0(KFL duc 199H 5 5 l 8.870% due 1998 10 10 8.260% duc 1998 __ 2 2 b.330% duc 1998 25 25 l S.170% duc 1998 8.150'E duc 1998 11 11 )

8 8  !

8.160% due 1998 5 5 I 9.25(fL duc 1999 52 52 I 9.30(fL due 1999 _

25 25 l 7.67(fL duc 1999 3 3 ,

7.250% due 1999 12 12 l 7.850% due 1999 25 25 1 7.770% duc 1999 17 17  !

8.290% duc 1999 10 10 9.200% due 2001 15 15 7.420% due 2001 10 20 9.050% duc 2001 5 5 i 8.6h0% due 2001 15 15 i 8.540% due 2001 8.560% duc 2001 3 3 )

4 4 i 8.550% duc 2001 5 5 7.850% due 2002 5 5 8.130% duc 2002 28 28 7.750% due 2003 15 15 9,520% due 2021 8 8 366 __11(2 l lax-esempt notes:

6.500% duc 1996 -

3 1 5.500% due 1997 *

• 1 6.700% duc 2006 20 21 5.70(Fs, duc 2008 7 8 6.7(MfL due 2011 6 6 5.875% due 2012 14 14 47 52 llank loans secured by subordinate mortgage:

7,5(Kf'i due 1996 -

2 Unamortieed premium (discouni), net (6) (6) 2,556 2,813

1. css: Current maturities __113 147 Total Inng-Tenn Debt 2.441 _2&f6 TOTAL. cal' ITAL.17ATION u 910 s.: No

• Denotes debt of ten than $1 million.

"Iknotes variable rate inue with December 31. IV96 interest rate shown.

'* Miicett to optional tender izr the owners on Nos ember I,1997.

14

Not:s to tha Fin ncini Stat m:nts accounts receisable securitization for the Comrany and (1) Summary of Significant Accounting Toledo Edison.

Policies Centerior Sen ice Company (Sen ice Company ), a (a) General wholly owned subsidiary of Centerior Energy, provides The Company is an electric utility ser ing Northeast Ohio management. 6nancial, administrative. engineering, legal and a wholly owned subsidiary of Centerior Energy. The and other services at cost to the Company and other j Company's knancial statements have historically included alliliated companies. The Service Company billed the j Company $149 million,5141 million and $136 million in the accounts of the Company's u holly owned subsidiaries, )

which in the aggregate were not material. In 1995, the 1996,1995 and 1994, respectively, for such services. I Company formed a wholly owned subsidiary, Centerior (c) Revenues Funding, to serve as the transferor in connection with an Customers are billed on a monthly cycle basis for their accounts receivable securitization completed in 1996 as energy wnsum on e on rate dedules a mnaacts discussed in Note 1(j). In 1994, the Company transferred

. . authori/cd by the PUCO. An accrual is made at the end I its investments in three wholly owned subsidianes to of each month to record the estimated amount of unbilled t.enterior Energy at cost (526 milh.on) via property dm. .-

revenues for Likmatt-hours sold in the current month but i dends. All s.igmlicant intercompany items hase been eh.m-

. . not billed by the end of that month.

mated .m consolidatmn. -

A fuel factor is added to the base rates for electric service.

The (,ompans follows the Uniform System of Accounts prescribed by the l~El(C and adopted by the PUCO.

adm e gn to mer kom cuuomm We  !

Itate-regulated utilities are subject to SFAS 71 which

"* """*""I" "*' I""" '# '" "

. - adjusted semiannually in a PUCO proceeding. See Man-governs accounting for the effects of. certam types of rate -

agement's Financial Analy sis - Outlook-FirstEnergy regulation. Pursuant to SEAS 71, certain incurred costs "

j Rate Plan. i are def. erred for recovery in future rates. See Note 7(a). j The preparation of Unancial statements in conformity (d) Fuel Expense j with generally accepted accounting principles rcquires The cost of fossil fuel is charged to fuel expense based on management to make estimates and assumptions that in entory usage. The cost of nuclear fuel, including an affect the reported amounts of assets, liabilities, resenues interest component, is charged to fuel expense based on and expenses, and the disclosure of contingent assets and the rate of consumption. Estimated future nuclear fuel liabilities. The estimates are based on an analysis of the dispesal costs are being recosered through base rates.

best information available. Actual results could differ The Company defers the dilferences between actual fuel from those estimates

, costs and estimated fuel costs currently being recovered The Company is a member of the Central Area Power from customers through the fuel factor. This matches fuel Coordination Group (CAPCO). Other members are expenses with fuel-related revenues.

Toledo Edison, Duquesne 1.ight Company, Ohio Edison Owners of nuclear generating plants are assessed by the and its wholly owned subsidiary, Pennrylvania Power federal government for the cost of decontamination and Company. The members have constructed and operate decommissioning of nuclear enrichment facilities oper-generation and transmission facilities for their joint use. ated by the United States Department of Energ). The (b) Related Party Transactions aweuments are based upon the amount of enrichment se en u n wrs and cannot be imposed for Operating revenues, operating : s penses and interest

• • ' "" } """ # ' * *I""Y "*'

charges include those amounts fo transactions with allil-iated companies in the ordinars course of business

" "" D ' '" """'" #

we have ken rewM as a mgulam awet Unce the operations.

PUCO is allowing the Company to recover the assess-The Company's transactions with Toledo Edison are pri- ments through its fuel cost factors. See Note 7(a).

marily for firm power, interchange power, transmission line rentals and jointly o%ed power plant operations and (e) Depreciation and Decommissioning construction. See Notes 2 and 3. As discussed in The cost of property, plant and equipment is depreciated Note l(j). beginning in May 1996, Centerior Funding mer their estimated useful lb es on a straight-line basis.

began s:rving as the transferor in connection with the In its /.pril 1996 rate order, the PUCO apprmed changes IS

._ .. __ . _ _ _ .__ _ __m _ _ _ . _ . . _ _ _ _ _. _

f in depreciation rates for the Company. An increase in the The classification, Accumulated Depreciation and Amor- )

depreciation rate for nuclear property from 2.5% to 2.88% tization, in the llalance Sheet at December 31, 1996 increased annual depreciation expense approximately includes 585 million of decommissioning costs presiously

$13 million. A reduction in the composite depreciation expensed and the earnings on the external trust funding.

rate for nonnuclear property from 3.34% to 3.23% This amount exceeds the llalance Sheet amount of the .

j decreased annual depree:ation expense by a , proximately external Nuclear Plant Decommissioning Trusts because

, $3 million. The change. in depreciation rates were effec- the reserve began prior to the external trust funding. The tive in April 1996 and resulted in a 57 r.;illion net increase trust earnings are recorded as an increase to the trust l l in 1996 depreciation expense. assets and the related component of the decommissioning The Company accrues the estimated costs of decommis- reserve (included in Accumulated Depreciation and  !

, sioning its three nuclear generating units. The accruals Amortization).

are required to be funded in an external trust. The PUCO The statT of the Securities and Exchange Commission 1

I requires that the espense and payments to the external has questioned certain of the current accounting praedces  !

trusts be determined on a leveli/cd basis by dividing the of the electric utility industry, including those of the i unrecovered decommissionir.g costs in current dollats by Compan), regarding the recognition, measurement and

^

j the remaining years in the Scensing period of each unit. clascification of decommissioning costs for nuclear gener-This methodology requ5es that the nel carnings on the ating stations in the financial statements. In response to trusts be reinveued therein with the intent of having net these questions, the Financial Accounting Standards earnings olfat inflation. The PUCO requires that the lloard (I ASil) is reviewing the accounting for removal estimated coas of decommissioning and the funding level costs, including decommissioning. If current accounting be revioed at least every hve years. practices are changed, the annual provision for decom-In April 1996. pursuant to the PUCO rate order, the minioning could increase; the estimated cost for decom-Company decreased its annual decommissioning expense inini ning could be recorded as v. liability rather than as accruals to $12 million from the $13 million lesel in 1995. aaumulated depreciation; and trust fund income from The accruals are reflected in carrent rates. The accruals the external deconuninioning trusts could be reported as are based on adjustments to updated, site-specific studies investment income rather than as a reduction to decom- l for each of the units completed in 1993 and 1994. These missioning expense. The FASil issued an exposure draft i estimates reflect the DECON ;nethod of decommission, on the wbject on February 7,1996 and continues to ing (prompt decontamination), and the locations and cost review the subject.

characteristics specific to the units, and include costs (f) Property, Plant and Equipment

,ssociated with decontamination and dismantlement for ,,

puty, Nant and equ@ ment am nated at ongmal et each of the units. The estimate for Davis-liesse also '

less amounts disallowed by the PUCO. Construction costs meludes the cost of site restoration. The adjustments to the updated studies which reduced the annual accruals " " " P"} I"' #*#"I #"# "E" begmnmg m April 1996 were attributable to changed ene management an genna merheads and allow-assumptions on radioactive waste bun.a l cost estimates ance for funds used during construction ( AI UDC).

and the exclusion of site restoration costs for Perry Unit I Al UDC represents the estimated composite debt and and licaver Valley Unit 2. After the decommissioning of equh mt of fun 6 ud to hnana wnumedon. This these units in the f.uture, the two plant sites may be usable noncash allowance is credited to income. The Al UDC rate was 10.32% in 1996,10.33% in 1995 and 9.68% in for new power production facilities or other industnal 1994.

purposes.

The revised estimates for the units in current dollars and Maintenance and repairs for plant and equipment are in dollars at the time of license expiration, assuming a 4%

charged to expense as incurred. The cost of replacing annual inflation rate, are as follows: plant and equipment is charged to the utility plant t.icense accounts. The cost of property retired plus removal costs,

'ratmn I uture .

after deducting any salvage value, is charged to the Generatine Una nt~

n* or accumulated provision for depreciation.

Ib 6 Hesse 2017 5176 5 451 Perr) tInii 1 2u26 U2 482 Heaver VaHry Unn 2 2027 J4 2n3 Total y si in 16

(g) D5f:rrsd Grin from Sils of Utility PI:nt in July 1996 Centerior Funding completed a public sale  ;

. of $150 million of receivables-backed investor certificates The sale and leaseback transaction discussed m. Note 2 . . . s in a transaction that qualifies for sale accountmp treat- '

resulted in a nel gain for the sale of the liruce Mansfield  !

4 ment for financial reporting purposes. Costs associated '

G,enerating Plant (Mansfield Plant). The net gain was .

. with the sale totaling $5 nu.lh.on m 1996 are included m.

deferred and is being amorti/ed over the term of the Other income and Deductions, Net in the income State-a .

leases. The amortitation and the lease expense amounts ment. These costs are expected to be $11 m.lh.on i annually are reported m, the income Statement as G,eneration

. over the remaining period. ,

I.acilities Rental Expense, Net.

(h) Interest Charges (k) Materials and Supplies Debt Interest reported in the income Statement does not in December 1996, the Company sold substantially all of include interest on obligations for nuclear fuel under its materials and supplies and fossil fuel inventories for construction. That interest is capitalized. See Note 6. certain generating units and other storage locations to an independent entity at book value. The buyer now provides 1 osses and gains reatieed upon the reacquisition or all of these inventories under a consignment arrangement.

redemption of long-term debt are deferred, consistent in accordance with SFAS 49 accounting for product with the regulatory rate treatment. See Note 7(a). Such financing arrangements, the inventories continue to be losses and gains are either amortized over the remainder reported as assets in the llalance Sheet even though the -

of the original life of the debt issue retired or amortized buyer owns the inventories since the Company has guar-over the life of the new debt is>ue when the proceeds of a anteed to be a buyer of last resort.

new issue are used for the debt redemption. The amorti-7ations are included in debt interest expense.

(2) Utility Plant Sale and Leaseback (i) Federalincome Taxes Transactions The Company uses the dability method of accounting for g he Company and Toledo Edison are co-lessees of income taxes in accordance with SFAS 109. See Note 8.

1826% (150 agawatu) of 13eaver Valley Unit 2 and This method requires that deferred taxes be recorded for 6.5 % (51 megawatts), 45.9 % (358 megawatts) and all temporary differences between the book and tax bases R38% (355 mego,atts) of Units 1, 2 and 3 of the of assets and liabilities. The majority of these temporary Mansfield Plant, respectively. These leases extend difTerences are attributable to property-related basis dif- through 2017 and are the result of sale and leaseback ferences. Included in these basis dilTerences is the equity transactions completed in 1987.

component of AFUDC, which will increase future tax expense when it is recovered through rates. Since this Under these leases, the Company and Toledo Edison are component is not recognized for tax purposes, the Com- responsible for paying all taxes, insurance premiums, pany must record a liability for its tax obligation. The operation and maintenance expenses, and all other similar PUCO permits reemery of such taxes from customers costs for their interests in the units sold and leased back.

when they become payable. Therefore, the net amount They may incur additional costs in connection with capi-due from customers through rates has been recorded as a tal improvements to the units. The Company and Toledo regulatory asset and will be recovered over the lives of the Edison have options to buy the interests back at certain related assets. See Note 7(a), times at a premium and at the end of the leases for the fair market value at that :ime or to renew the leases. The inv;stment tax credits are deferred and amortized over leases.mclude cond. .itions f.or mandatory termination (and the lives of the applicable property as a reduction of possible repurchase of the leaschold interests) upon cer-depreciation expense.

tain events of default.

(j) Accounts Receivable Securitization As co-lessee with Toledo Edison, the Company is also in May 1996, the Company and Toledo Edison began to obligated for Toledo Edison's lease payments. If Toledo sell on a dai!y basis substantially all of their retail cus- Edison is unable to make its payments under the lleaver tomer accounts receivable and unbilled revenue receiv- Valley Unit 2 and Mansfield Plant leases, the Company ables to Centerior Funding pursuant to a five-year asset- would be obligated to make such payments. No such backed securitiration agreement. pay ments have been made on behalf of Toledo Edison.

17

Future minimum lease payments under the operating '

i,'i?l,L"dl, leases at December 31,1996 are summarized as follows:

()gf gifsg>r Accumutaica f or f or {knggngl'nu (% 5harel Nuclear i ush Depreciatioq the T oledo i tar Company I .dw n (mdhons or dollaro Seneu Pumped 5torage _ 351 I80nr5 ) 5 65 $ 24 (nn1hons of donarg 1.astlake Unit 5 411(6850) 161 -

! 1997 5 63 $ 102 t)as.Bcue 454 ($138) 711 2$0 Iw8 63 102 Perry limt 1 l 371 (3) 11) 1.774 392 1999 70 108 g un ng t,w MO 76 111 Common I acilines 2001 75  !!! ( Sage ;) 39; gy4 47) g ,379 3g9 Later Years Total l'uture Mmimum Lease R 70 yd ., j py Q

~

Py ments ti *i1 e no Depreciation for Eastlake Unit 5 has been accumulated with all other nonnuclear depreciable property rather than Rental expense is accrued on a straight line basis over the by specific units of deprec.iable property.

terms of the leases. The amount recorded in 1996,1995 and 1994 as annual rental expense for the Mansfield Plant (4) ConstruCflon and ContingencleS leases was $70 million. See Note I(g). Amounts charged

p to expense in excess of the lease payments are classihed as Accumulated Deferred Rents in the llalance Sheet. The estimated cost of the Company's construction pro-pram for the 1997-2001 period is $624 million, including The Company is buying 150 megawatts of Toledo Al UDC of $17 million and excluding nuclear fuel.

Edison's lleaver Valley Unit 2 leased capacity entitle-The Clean Air Act Amendments of 1990 (Clean Air ment. Purchased power expense for this transaction was Act) require, among other things, significant reductions in

$99 million, $98 million and $108 million in 1996.1995 the emission of sulfur dioxide and nitrogen oxides by and 1994, respectively. We anticipate that this purchase fossil-fueled generating units. Our strategy prosides for will continue indefinitely. The future minimum lease compliance primarily through greater use of low-sulfur payments through 2017 associated with !! caver Valley coal at some of our units and the use of emission Unit 2 aggregate $1.265 billion. allowances. Total capital expenditures from 1994 through 1996 in connection with Clean Air Act compliance (3) Property Owned with Other UtilitleS amounted to $32 million. The plan will require additional and investors capital expenditures over the 1997-2006 period of approx-imately $25 million for nitrogen oxide control equipment The Company owns, as a tenant in common with other and other plant process modifications. In addition, higher utilities and those insestors who are ow ner-participants in fuel and other operation and maintenance expenses will various sale and leaseback transactions (i.essors), certain he incurred. Recently proposed particulate and ozone generating units as listed below. Each owner owns an ambient standards have the potential to increase future undivided share in the entire unit. Each owner has the compliance costs.

right to a percentage of the penerating capability of each unit equal to its ownership share. Each utility owner is (b) Hazardous Waste Disposal Sites obligated to pay for only its respective share of the The Company is aware of its potential involvement in the construction costs and operating expenses. Each lessor cleanup of three sites listed on the Superfund List and has leased its capacity rights to a utility w hich is obligated several other sites. The Company has accrued a liability to pay for such Lessor's share of the construction costs totaling $7 million at December 31,1996 based on esti-and operating expenses, The Company's share of the mates of the costs of cleanup and its proportionate operating expenses of these generating units is included in responsibility for such costs. We believe that the ultimate the income Statement. The llalance Sheet classification outcome of these matters will not have a material adverse cf Property, Plant and Equipment at December 31,1996 elTect on our financial condition, cash nous or results of includes the following facilities owned by the Company as operations. See M anagement's l'inanci 1 Analysis -

a tenant in common with other utilities and Lessors: Outlook-lia/ardous Waste Disposal Sites.

18

l (5) Nucle:r Op rctions and 104 weeks. The amount and duration of extra expense

, Contingencies could substantially exceed the insurance coverage.

l I (c) Operating Nuclear Units (6) Nuclear Fuel The Company's three nuclear units may be impacted by Nuclear fuel is financed for the Company and foledo activities or events beyond our control. An extended Edison through leases with a special-purpose corporation.

outage of one of our nuclear units for any reason, coupled The total amount of financing currently available under with any unfavorable rate treatment, could have a mate. these lease arrangements is $273 million ($173 million rial adserse ellect on our financial condition, cash flows from intermediate-term notes and $100 million from bank ,

j and results of operations. See the discussion of these and credit arrangements ). The intermediate-term notes l

other risks in Management's Iinancial Analysis - Out. mature in the 1997 through 2000 period. The bank credit l look-Nuclear Operations. arrangements termincte in October 1998. The special-purpose corporation m ey not need alternate financing in I (b) Nuclear insurance 1997 to replacc $83 milhor. of maturing intermediate- I term notes. At December 31 1996. $129 million of The Pn.ce-Anderson Act h.mits the public liability of the nuclear fuel was I.manced for the C,ompany. The Com-owners of a nuclear power plant to the amount provided pany and 'l oledo Edison sescrally lease their respective by private insurance and an .mdustry assessment plan. In i

. portions of the nuclear fuel and are obligated to pay for l the event of a nuclear m.eident at any unit in the Um.ted ..

the fuel as it is consumed .m a reactor. The lease rates are i States resulting in losses in excess of the level of private based on various intermediate-term note rates, bank rates insurance (currently $200 milh,on), the Company's maxi-and commercial paper rates.

mum potential assessment under that plan would be

$85 million per incident. The assessment is limited to The aniounts financed include nuclear fuel in the Davis-

$11 million per year for each nuclear incident. These liesse, Perry Unit I and lleaver Valley Unit 2 reactors assessment limits assume the other CAPCO companies with remaining lease payments for the Cornpan) of l contribute their proportionate share of any assessment for $49 million, $51 million and $18 million, respectively, at the generating units that they have an ownership or December 31, 1996. The nuclear fuel amounts financed I leasehold interest in. and capitalized also included interest charges incurred by the lessors amounting to $3 million in 1996, $4 million in )

The utility owners and lessees of Davis-liesse. Perry and 1995 and $7 million in 1994. The estimated future lease lleaver Valley also have insurance coverage for damage to amortization pa3 ments for the C,ompany based on pro-property at these sites (.meluding leased fuel and cleanup . .

. jected consumption are $52 milh.on m 1997, $40 m.dh.on costs). L, overage amounted to $1.3 bilh.on for Davis-llesse .

m 1998,$38 million in 1999,$35 million in 2000 and $34 and $2.75 billion f.or each of the Perry and llcaver Valley sites as of January 1.1997. Damage to property could million in 2001.

exceed the insurance coverage by a substantial amount. If (7) Regulatory Matters it does, the Company's share of such excess amount could (a) Regulatory Accounting Requirements and have a material adverse etreet on its knancial condition, Regulatory Assets cash flows and results of operations. In addition. the Company can be assessed a maximum of $12 million The Company is sub.iect to the provisions of SFAS 71 and under these policies during a poliev year if the reserves has complied with its provisions. SFAS 71 provides, anmng other things, for the deferral of certain incurred available to the insurer are inadequate to pay claims arising out of an accident at ar.y nuclear facility covered costs that are probable of future recovery in rates. We by the insurer. inonitor changes in market and regulatory conditions and consider the cirects of such changes in assessing the The Company also has extra expense insurance coverage. continuing applicability of SI AS 71. Criteria that could it includes the incremental cost of any replacement power give rise to discontinuation of the application of SFAS 71 l purchased (over the costs which would base been include: (1) increasing competition which significantly incurred had the units been operating) and other inciden- restricts the Company's ability to charge prices which l tal expenses after the occurrence of certain types of allow it to recover operating costs. earn a fair return on accidents at our nuclear units. The amounts of the cover- invested capital and recover the amortization of regula-age are 100% of the estimated extra expense per week tory assets and (2) a significant change in the manner in

( during the 52-week period starting 21 weeks after an u hich rates are set by the PUCO from cost-based regula-accident and 80% of such estimate per week for the next tion to .some other form of regulation. Regulatory assets IP

I represent probable future revenues to the Company ano- and Toledo Edison to file a proposal to elTectuate the i ciated with certain incurred costs, which it will recover PUCO's recommendation and expressed a willingness to I from customers through the rate-making process, consider alternatives to its recommendation. The PUCO stated in its order that failure by the Conn .iny and Toledo EITective January 1,1996, the Company adopted SFAS 121 which imposes stricter criteria for carrying regulatory Edison to follow the recommendation could result in a assets than SFAS 71 by requiring that such assets be PUCO-ordered write-down of assets for regulatory pur-p ses. The PUCO approved a return on common stock probable of recovery at each balance sheet date. The criteria under SFAS 121 for plant assets require such equhy of 1239% and an overall rate of return of 10.06%

for both companics. Ilowever, the PUCO also indicated assets to be written down if the book value exceeds the the authoriecd return could be lowered by the PUCO if projected net future undiscounted cash flows.

the Company and Toledo Edison do not implement the Itepulatory assets in the llalance Sheet are as follows: recommendation. In August 1996, various intervenors ,

$ appealed the PUCO rate order to the Ohio Supreme oniihons of Court. The Company and Toledo Edison did not appeal d"""'d the order to the Ohio Supreme Court. In connection with i Amounts due from cuhtumers for future federal income taics net 5 634 5 osi the PUCO order discussed in Management's Financial Unanwniecd low on reatquired debt 58 61 Analysis - Outlook-FirstEnergy itate Plan, certain par-Pre phase-in deferrals' 320 331 .

Raic .%beauon Program deferrals 300 313 ties agreed to request a stay of their appeals until comple-Other 38 42 tion of the pending merger with Ohio Edison.

Total it"n siNx l

• Repreacnt deferrals of opetatirip espensch and carrying chargers for Perry Unit t and Hesser Valley Unit 2 in 1987 and 1988 which are (C) Assessment being amortued user the ines of the retaied propert>.

The Company and Toledo Edison agree with the concept As of December 31, 1996, customer rates provide for of accelerating the recognition of costs and recovery of recovery of all the above regulatory assets. The remaining assets as such concept is consistent with the strategic recovery periods for about $1.2 billion of the regulatory objective to become more competitive. Ilowever, the assets approximate 30 years. The remaining recovery Company and Toledo Edison believe that such accelera-periods for the rest of the regulatory assets generally range tion must also be consistent with the reduction of debt from about two to 20 3 ears. Regulatory liabilities in the and the opportunity for Centerior Energy common stock Halance Sheet at December 31,1996 and 1995 totaled share owners to receive a fair return on their investment.

$24 million and $17 million, respectively. Consideration of whether to implement a plan responsive to the PUCO's recommendation to revalue assets by (b) Rate Order $1.25 billion is pending the merger with Ohio Edison.

On April 11,1996, the PUCO issued an order for the We have evaluated the Company's markets, regulatory Company and Toledo Edison granting price increases conditions and ability to bill and collect the approved l aggregating $119 million in annualized revenues ($84 prices, and conclude that the Company continues to million for the Company and $35 million for Toledo comply with the provisions of SFAS 71 and its regulatory Edison). The PUCO rate order provided for recovery of assets remain probable of recovery. If there is a change in all costs to provide regulated services, including amortira- om evaluation of the competitive environment, regulatory tion of regulatory assets, in the approved prices. The ne" framework or other factors, or if the PUCO significantly prices were impicmented in late April 1996. The aserag reduces the value of the Company's assets or reduces the price increase for the Company's customers was 4.9% pmved return on common stock equity of 12.59% and with the actual percentage increase depending upon the overall rate of return of 10.06%, or both, for future customer class. Tha Company and Toledo Edison intend htory purposes, the Company may be required to to freeze prices through at least 2002, although they are record material charges to carnings. In particular, if we not precluded from requesting further price increases. determine that the Company no longer meets the criteria The PUCO also recommended that the Company and for SFAS 71, the Company would be required to record a Toledo Edison reduce the value of their assets for regula- before-tax charge to write oli the regulatory assets shown tory purposes by an aggregate $1.25 billion through 2001. above. In the more likely event that only a portion of This represents an incremental reduction beyond the operations (such as nuclear operations) no longer meets normallevel in nuclear plant and regulatory assets. Imple- the criteria of SFAS 71, a write-otT would be limited to ,

mentation of the price increases was not contingent upon regulatory assets that are not reflected in the Company's a revaluation of assets. The PUCO invited the Company cost-based prices established for the remaining regulated 2 11

operations, in addition, we would be required to evaluate Federal income tax, computed by multiplying income whether the changes in the competitive and regulatory before taxes by the 35% statutory rate,is reconciled to the enviromnent which led to discontinuing the application of amount of federal income tax recorded on the books as )

SFAS'71 to some or all of the Companyi operations follow s: l would aho result in a write-down of property, plant and .L9yt 1995 1994 equipment pursuant to SFAS 121. ""'"i""" # d"" '"

llaok Income liefore l'ederal Incorne Tax (IM $$n (Mt See M anagemen t's Financial A nalysis - Outlook- Tai on twk ti.come at siatutory Rate s 65 s 93 5 9s FirstEnergy Rate Plan for a discussion of a regulatory increase (Decrease) in Tas:

plan for the Company and Toledo Edison and its effect on Depreciation 8 8 6 Rate Stabilization Program -

(18) (18) their comph.ance with SFAS 71- other items _19 __ x J Total l ederal Income Tax f arense t 69 t "5 $n i (d) Rate Stabilization Program i The Rate Stabilization Program ! hat the PUCO approved The Companyjoins in the filing of a consolidated federal in October 1992 allowed the Company to defer and ine me tax return with its afliliated companies. The subsequently amorti/c and recover certain costs not being method of tax allocation reflects the benefits and burdens reemered in rates at that time. Recovery of both the costs realized by each company's participation in the consoli-no longer being deferred and the amortization of the dated tax return, approximating a separate return result 1992 1995 deferrals began in late April 1996 with the f r each company.

implementation of the price increase granted by the For tax reporting purposes, the Perry Nuclear Power PUCO as discussed above. The cost deferrals recorded in Plant Unit 2 (Perry Unit 2) abandonment was recognized 1995 and 1994 pursuant to the Rate Stabilitation Pro- in 1994 and resulted in a $204 million loss with a gram were $76 million and $70 million, respectively. The corresponding $71 riillion reduction in federalincome tax amortization of the deferrals began in December 1995. liability. Because of the alternative minimum tax The total amortization was $12 million and $1 million in ( AMT),540 million of the $71 million was realized in 1996 and 1995, respectively. 1994. The remaining $31 million will not ha realized until The regulatory accounting measures under the Rate Sta- 1999. Additionally, a repayment of approximately bilization Program also provided for the accelerated $29 milli n of previously allowed investment tax credits amortization of certain benefits during the 1992-1995 was recognized in 1994.

period. The total annual amount of such accelerated Under SFAS 109, temporary dilferences and carryfor-benelits was $28 million in both 1995 and 1994. wards resulted in deferred tax assets of $420 million and deferred tax liabilities of $1.726 billion at December 31, (8) Federalincome Tax 1996 and deferred tax assets of $425 million and deferred The components of federal income tax expense recorded tax liabilities of $1.723 billion at December 31, 1995. l in the income Statement were as follows: These are summarized as follows: I jy99 y j994 December 31.

(millions of dollars) 1996 1995 Operating tApenses: (milhons of Current 5 55 $49 $ $3 dollars)

Deferred 2n 45 29 Property. plant and equipment $1 A82 SI A68 Total Charged to Operating lapenses _ 75 94 _l2 Deferred carrying charges and operating espenses _ 134 139 r t til) (9) (17)

Deferred __f investment tax credits (95) 199)

_11 _21 Total 11 pense (Creda) to Nonoperating Sale and leaschack transactions (121) (123) income _(6 ) _; __4 Other 16x) (20)

Total i ederal Income Tax i spense M N $ Net deferred tax liability Uh (I ?9x The deferred federal income tax expense results from the For tax purposes, net operating loss (NOL) carn forwards j temporary dilTerences that arise from the difTerent years of approximately $74 million are available to reduce when certain expenses are recognized for tax purposes as future taxable income and will expire in 2009. The 35%

opposed to financial reporting purposes. Such temporary tax effect of the NOLs is $26 million. Additionally, AMT ditTerences relate principally to depreciation and deferred credits of $174 million that may be carried forward operating expenses and carrying charges. indefinitely are available to reduce future tax.

21

(9) R:firem:nt B:n:fds and Other Assets - Other in the Balance Sheet was $15 l (a) Retirement income Plan

• IIII"" ""d III

• III""' PC#II'#IF' l Plan assets consist primarily of investments in common Centerior Energy sponsors j.o intly with its subsidian. es a

. stock, bonds, guaranteed investment contracts, cash ,

noncontributing pension plan (Centerior Pension Plan) '

equivalent securities and real estate.

which covers all employee groups. The amount of retire-ment benchts generally depends upon the length of ser- (b) Other Postretirement Benefits vice. Under certain circumstances, ber.efits can begin as . .

. ,. . . Centerior E_nergy sponsors j. .omtly with its subsidianes a carly as age 55. The funding poacy is to comply with the '

postretirement beneh.t plan which provides all emplo)ce E.mployee Retirement income Security Act of 1974 groups certain health care, death and other postretirement guidelines.

beneh.ts other than pensions. The plan is contributory, Pension costs (credits) for Centerior Energy and its with retiree contributions adjusted annually. The plan is subsidiaries for 1994 through 1996 were comprised of the not funded. Under SFAS 106, the accounting standard for following components: postretirement benefits other than pensions, the expected nion doit ets of mh benefits are accrued during the employees' Service cosi for benchu carned luring the ) cars of service. '

period $ 13 $ 10 $ 13 l Interest cost un projected b:.ncut obhgauon _ 28 26 26 The components of the total postretirement benefit costs Actual return on plan assets (50) (53) (2)

Net amortization and deferral 2 9 f4) for 1994 through 1996 were as follows:

Net costs (credits) y g) W 19 % 1991 199_4 i (milhons of dollars) l Pension costs (credits) for the Company and its pro rata S#"j"' I"' h'"'h" '"*'d d"'i"8 'h'

$1 $l 5i share of the Service Company's costs were $(5) million Interest cost on accumulaica postretirement benefit obligation 12 II it for both 1996 and 1995. and $2 million for 1994. Amortization or transinon obhgation at Januar> I,1993 of $104 milhon over The following table presents a reconciliation of the funded 20 yea's r 5 5 5 status of the Centerior Pension Plan. The Company's share of the Centerior Pension Plan's total projected

^"$'[","d'"" 8 g

~

[@

~ ~

benefit obligation approximates 50%. Thest amounts included costs for the Company and its December 3L pro rata share of the Service Company's costs.

1996 1995 oniliions of The accumulated postretirement benefit obligation and dollars)

Actuarial present salue of bencht obligations: accrued postretirement benefit cost for the Company and Vested benelits $326 $3n4 its share of the Service Company's obligation are as Nonscsted benchts 16 i Accumulated benetit obhgation LfTect of future compensation lesels T43 $ 54 IO!!U* S December 31.

53 Total projected benetit obligation 395 360 1996 1995 Plan assets at fair market udae 421 394 (mdlions of l'unded status 26 21 dollars )

tJnrecognized net gain from vanance bemeen Accumulated postretirement benent obhyation assumptions and esperience (56) 04) attnbutable to:

t!nrecognized prior senice cost 14 15 Retired participana $(lux) $(124)

Transition asset at January 1.19M7 being amorti/cd I~ully eligible actise plan participants (3) (2) over 14 3 ears M) M6) Other acti e plan participants _CJ ) (19)

Net accrued pension habihty tuo m s) Aumu'ated postretirement beneht obligation _ (132) (145)

Unrecognized net gain from variance between A September 30 measurement date was used for 1996 and """ '" P' i""' ""d ' 'Pie " c' (31) (12)

O,namortized transition obhgation 74 79 1995 reporting. At December 31, 1996, the settlement Accrued postretirement beneht cost t ruu) < m )

(discount) rate and long-term rate of return on plan assets assumptions were 7.75% and 11% respectively. The The Balance Sheet classification of Retirement Benefits long-term rate of annual compensation increase assump, at December 31,1996 and 1995 includes only the Com-tion was 3.5% for 1997 and 4% thereafter. At Decem- p ny's accrued postretirement benefit cost of $73 million ber 31,1995, the settlement rate and long-term rate of nd $65 million, respectively, and excludes the Service return on plan assets assumptions were 8% and 11%, Company's portion since the Service Company's total respectively. The long-term rate of annual compensation accrued cost is carried on its books.

increase assumption was 3.5% for 1996 and 1997 and 4% A September 30 measurement date was used for 1996 and thereafter. At December 31,1996 and 1995, the Com- 1995 reporting. At December 31,1996 and 1995, the pany's net prepaid pension cost included in Regulatory settlement rate and the long-term rate of annual compen-22

i sation increase assumptions were the same as those dis- carnings. At December 31, 1996, the Company had I cussed for pension reporting in Note 9(a). At $130 million of appropriated retained earnings for December 31,1996, the assumed annual health care cost the payment of dividends. See Management's Financial trend rates (applicable to gross eligible charges) were Analysis - Capital Resources and Liquidity-Liquidity. j 7.5% for medical and 7% for dental in 1997. Both rates 1

, reduce gradually to a fixed rate of 4.75% by 2003. Ele- (c) Preferred and Preference Stock i ments of the obligation alTected by contribution caps are Amounts to be paid for preferred stock which must be significantly less sensitive to the health care cost trend redeemed during the next five years are $30 million in rate than other elements. If the assumed health care cost 1997,$15 million in 1998,$33 million in both 1999 and j trend rates were increased by one percentage point in 2000, and $80 million in 2001. I cach future year, the accumulated postretirement benefit The annual preferred stock mandatory redemption provi-obligation as of December 31, 1996 would increase by sions are as follows:

$3 million and the aggregate of the service and interest Shares To Price lie lleginning Per cost components of the annual postretirement benefit cost liedsymyd in shan would increase by 50.3 million. 5 735 series c iosxx) 19sa $ 100 88 On Series l 3Jxk) 1981 i jKM) 9.i25 Series N 150.0(K) 1993 100 (10) Guarantees 9i.30 senes o io.7i4 iv23 i3xx)  ;

The Company has guaranteed certain loan and lease $$$'[j[ $"$ [ '$ 3 Obligations of a coal supplier under a long-term coal

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

supply contract. At December 31, 1996, the principal amount of the loan and lease obligations guaranteed by in 1995, the Company purchased 1,000 shares of Serial

. the Company under the contract was $19 million. Preferred Stock, $90.00 Series S, which reduces the 2002 redemption requirement shown in the above table.

The prices under the contract which includes certain minimum payments are suflicient to satisfy the loan and The annualized preferred dividend requirement at lease obligations and mine closing costs over the life of December 31,1996 was $38 million.

the contract. If the contract is terminated early for any The preferred dividend rate on the Company's Series L  !

reason, the Company would attempt to reduce the termi- fluctuates based on prevailing interest rates and market i nation charges and would ask the PUCO to allow recov- conditions. The dividend rate for this issue was 7% in cry of such charges from customers through the fuel 1996.

factor. See Management's Financial Analysis - Outlook-Preference stock authorized for the Company is 3,000,000 Firstlinergy Rate Plan.

shares without par value. No preference shares are cur-(11) Capitalizaffon rently outstanding.

(a) Capital Stock Transactions With respect to dividend and liquidation rights, the Com-pany's preferred stock is prior to its preference stock and Preferred stock shares retired during the three years .

common stock, and its preference stock is prior to its ended December 31,1996 are h.sted in the follow.mg table.

common stock.

Em 1923 EL4 subject to standaiory Redemption: (d) Long-Term Debt and Other Borrowing 5 7.35 series C (10) (10: tio) Arrangements 88.00 Series L (3) (3) (3) long-term debt which matures or is subject to put t er e tib) 91.50 series o til) (11) - options during the next five years is as follows: $115 mil-Not h. o andatory Redemption:

Adjustable Serica L M) - -

$5 million in 2000 and $62 million in 2001.

Total emi ow) nmi The Company's mortgage constitutes a direct first lien on (b) Equity Distribution Restrictions substantially all property owned and franchises held by Federal law prohibits the Company from paying dividends the Company. Excluded from the lien, among other tMngs, are cash, securities, accounts receivable, fuel and out of capital accounts. The Company has since l993 supphes.

declared and paid preferred and common stock dividends out of appropriated current net income included in Certain credit agreements of the Company contain cove-retained earnings. At the times of such declarations and nants relating to fixed charge coverage ratios and limita-payments, the Company had a deficit in its retained tions on secured financing other than through first 2.1

. - . _ ____._ __ _ _ __ _ _ .-._._ _ _ _ _ m _ _ _ . . _ _ _ -.- ~

t i

mortgage bonds or cer't ain other transactions. The Com- **

pany was in compliance with all such covenants as of (minions or  :

December 31, 1996. The Company and Toledo Edison d"""N T3 of Securitiet have letters of credit in connection with the sale and *).dN;Nrnment

, $14 526 leaseback of Beaver Valley _ Unit 2 that expire in M unicipal -

14 Other 5 --

i June 1999. The letters of credit are in an aggregate i9 40 amount of approximately $225 million and are secured by 4"I'Y S'C""li 16 -

Total 5'M s4n a

! first enortgage bonds of the Company and Toledo Edison - - i

! , Maturities of Debt Securitics;  ;

l in the proportion of 40%, and 60%, respectively. Duc within one year $~ $1

Duc in one to hse scars lu 12 Due in six to 10 se'ars 4 13 i (12) Short Term Borrowing Arrangements Due aner lo y6 _1 _y i Total slo $4n Centerior Energy has a $125 million revolving credit -

The fair value of these trusts is estimated based on the facility through May 1997. Centerior Energy and the l qu ted market prices for the investment securities and

=

Service Company may borrow under the facility, with all appm mates se canpng value. & fair vabe of the  ;

borrowings jointly and severally guaranteed by the Com-

. Companyi preferred stock, with mandatory redemption pany and Toledo Edison. Centerior Energy plans to trans- -

provisions, and long-term debt is estimated based on the ,

fer any of .its borrowed funds to the Company and Toledo quoted market prices for the respecti e or similar issues or ,

Edison. The credit "greement is secured with first mort-on the basis of the discounted value of future cash flows.

gage bonds of the Company and Toledo Edison in the '

The discounted value used current dividend or interest proportion of 40% and 60% respectively. The credit rates (or other appropriate rates) for similar issues and agreement also provides the participating banks with a loans with the same remaining maturities. ,

subordinate mortgage security interest on the properties The estimated fa.ir values of all other financial instru-of the Company and Toledo Edison. The banks' fee is .

muas enroumate their carrying amounts in the Balance 0.625% per annum payable quarterly in addition to inter- Sheet at December 31,1996 and 1995 because of their est on any borrowings. There were no borrowings under short-term nature, the facility at December 31, 1996. Also, the Company  ;

and Toledo Edison may borrow from each other on a (14) Quarterly Results of Operations i short-term basis. At December 31, 1996, the Company (Unaudited) i had total short-term borrowings of $112 million from its The following is a tabulation of the unaudited quarterly l afliliates with a weighted average interest rate of 6.18%. results of operations for the two years ended '

December 31,1996.

Guarters i nded (13) FinancialInstruments r ;

y,7cu 3,, ignte___;n, gge,_ yn. oce. ;,,,

The estimated fair values at December 31.1996 and 1995 1996 of financial instruments that do not approximate their Operating Revenues $428 $434 5506 5422

""ng m me carrying amounts in the Balance Sheet are as follows: Ni c }e December 31. I:arnings Asailable for 1996 1995 Common Stock 7 15 49 6 Carrying I' air Carrying l' air 1995 Amount Value Amount Value Operating Revenues $410 $424 $526 $408 (millions of dollars) Operating income h5 91 145 77 Capitalintion and Liabilitiet Net income 34 38 40 23 Preferred Stod. with Mandatory I;arnings Avadable for Redemption Provisions 5 216 5 220 $ 245 $ 232 Common Sud 23 27 80 12 Long Term Debt _ 2.562 2.630 2.819 2.824 Mings for the quarter ended September 30,1996 were Noncash investments in the Nuclear Plant Decommis- decreased by $11 million as a result of a $17 million charge for the dhposition of materials and supplies inven-sioning Trusts are summarized in the following table. In tory. The sale and disposal of inventory was part of the 1996, the Company and Toledo Edison transferred the I reengineering of the supply chain process.

bulk of the.ir investment assets in existing trusts into I

Centerior Energy pooled trust funds for the two compa- (15) Pending Merger of Centerior Energy l nies, The December 31,1996 amounts in the table repre- and Ohio Edison l sent the Company's pro rata share of the fair value of On September 13, 1996, Centerior Energy and Ohio I such noncash investments. Edison entered into an agreement and plan of merger to l l

21

form a new holding company, FirstEnergy. Following the Toledo Edison to be charg:d against earnings, estimated merger, Firstilnergy will directly hold all of the issued and b3 FirstEnergy to total epproximately $750 million, will outstanding common stock of the Company, Toledo be determined based upon the plan's regulatory account-Edison and Ohio Edison. As a result of the merger, the ing and cost recovery details to be submitted by common stock share owners of Centerior Energy and FirstEnergy to the PUCO staff for approval. The Com-Ohio Edison will own all of the issued and outstanding pany's share of the write-otT is expected to be about shares of FirstEnergy common stock. Centerior Energy two-thirds of this amount.

share owners will receive 0.525 of a share of IirstEnerg'y If the merger is not consummated, the plan would be null common stock for each share of Centerior Energy com-and vo.d.i See Management's Financial Analysis - Out-mon stock owned. Ohio Edison share owners w.ll i rece.ne

.. look-Pending Merger with Ohio Edison and -FirstEnergy one share of 11rstEnergy common stock for each share of.

Rate Plan for a discussion of the proposed merger and the Ohio Edison common stock ow ned.

plan.

FirstEnergy plans to account for the merger as a purchase in accordance with generally accepted accounting princi. (16) Pending Merger of Toledo Edison plcs if I irstEnergy elects to apply, or " push down", the into the Company elTects of purchase accounting to the financial statements in March 1994, Centerior Energy announced a plan to of the Company and Toledo Edison, the Company and merge Toledo Edison into the Company. The merger Toledo Edison would record adjustments to: (1) reduce agreement between Centerior Energy and Ohio Edison the carrying value of nuclear generating plant by requires the approval of Ohio Edison prior to consumma-

$1.25 billion to fair value; (2) recognize goodwill of tion of the proposed merger of Toledo Edison into the

$865 million; (3) reduce common stock equity by Company. Ohio Edison has not yet made a decision. All

$401 million; (4) reset retained earnings of the Company necessary regulatory approvals base been obtained, except and Toledo Edison to /ero; and (5) reduce the related the NRC's approval. This application was withdraw n at deferred federal income tax liability by $438 million. the N RC's request pending Ohio Edison's decision These amounts reflect FirstEnergfs estimates of the pr whether to complete this merger. 1 forma combined adjustments for the Company and Toledo Edison as of September 30. 1996. The actual In June 1995, share owners of Toledo Edison's preferred adjustments to be recorded could be materially dilTerent stock approved the merger and share owners of the from these estimates. FirstEnergy has not decided Company's preferred stock approved the authoritation of whether to push down the effects of purchase accounting additional shares of preferred stock. If and when the to the linancial statements of the Company and Toledo merger becomes elTective, share ow ners of Toledo Fdison if the merger with Ohio Edison is completed, nor Edison's preferred stock will exchange their shares for ,

has FirstEnergy estimated the allocations between the preferred stock shares of the Company having substan- l two companies if push-down accounting is elected. tially the same terms. Debt holders of the merging com-

.. panies will become debt holders of the Company.

In addition to the approvals by the share owners of '

Centerior Energy and Ohio Edison common stock, vari- For the merging companies, the combined pro forma ous aspects of the merger are subject to the approval of operating revenues were $2.554 billion, $2.516 billion and the FERC and other regulatory authorities. A rate reduc- $2.422 billion and the combined pro forma net income tion and economic development plan for the Company was $174 million, $281 million and 5268 million for the and Toledo Edison has been approved by the PUCO. 3 ears 1996,1995 and 1994, respectively. The pro forma From the date of consummation of the merger through data is based on accounting for the merger on a method 2006, the plan provides for rate reductions, tro/en fuel similar to a pooling ofinterests. The pro forma data is not cost factors, economic development incentise prices, an necessarily indicative of the results of operations which energy-clliciency program, an carnings cap and an accel- would have been reported had the merger been in etreet crated reduction in nuclear and regulatory assets for during those 3 cars or u hich may be reported in the future.

regulatory purposes. The plan will require the Company The pro forma data does not reflect any potential effects l

and Toledo Edison to write olT certain regulatory assets at related to the consummatic.n of the Centerior Energy and the time the merger becomes probable, w hich is expected Ohio Edison merger. The pro forma data should be read l to be afte. obtaining the aforementioned approvals of the in conjunction with the audited financial statements of l- merger. The write-olf amounts for the Company and both the Company and Toledo Edison.

25

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1 Fin ncini cnd Statisticcl Rovi w I

Operating itetenues (millions of dollars)

Tual Total T otal Nicam Operatmg l

.Y e a r Reudernial Commercial Industn.il Other Retail w holesale f les tnc fleanny Revenues  !

l 1996 5562 571 524 88 1745 45 1790 -

51 790 1995 559 563 523 93 1738 31 1769 -

l 769 1994 531 541 508 98 1 678 20 1 698 -

1698 1993 539 536 510 98 1 683 68 1 751 -

1 751 1992 _ $17 531 530 101 1 679 64 1743 -

I743 1936 410 383 461 61 1315 8 1323 13 1336 Operating Espenses (millions of dollars) I Other Generation Amortuation of l licl & Oper atu m l acihties Depicciathu Tuxet Delerred l ederal Total Pun.hawd & Rental & Other Than Operatmg income Operatmg Year Power M.iinicnance I wenw. Nei Amortuanon iiT l spenses. Nei Tases I spenses j 1996 5408 426 56 210 230 26 75 51 431 l 1995 413 418 56 196 230 (36) 94 1 371 1991 391 394 56 195 218 (34) 82 1 302 1993 423 598(a) 56 182 221 27(b) 12 1 529 4 1992 434 410 55 179 226 (35) 89 1 358  !

19#6 372 388 --

103 144 -

97 I 104 inconne (l.oss) (millions of dollars)

I cderal income Oiher Dcferred locume ILou)

Income & Carry my l ases- liefore Operatmg AlL:DC - De luctions. Chaiyes, Credit interent Year income i qmiv Nei Net (la pense 1 Charges 1996 5359 2 (10) -

6 5 357 1995 398 2 2 29 (2) 429 1994 396 4 6 25 (4) 427 1993 222 4 (356)(c) (487)fb) 270 (347) i 1992 3h5 I 8 59 (5) 448 1

19#6 232 179 (7) -

65 469 income (loss) (millions of dollars) 1 armnps Preferred & ( Leu s Net Preference Asmiable for INbi Al L 'DC- Inccme Stock Common i eat Interest flebt iiuni Dnidends Stoc k 1996 5242 (2) I17 39 $ 78 1995 248 (3) 184 43 141 1994_. 247 (5) 185 45 140 1993 244 (4) (587) 45 (632) l 1992 243 '05 41 164 1986 232 (63) 300 40 260 l

(al includes early retirenovnt progrant espenses and other charges of $163 nulhon.

Ib) includcx wrue-off of phase-in d&rrah of $636 nidlion. consistung of $I17 nuliron of deferred operatmg e\pernes and $31Y million of deferred a arrying < hurges 26

i The clercland Elet tric illuminanny Company and SubsiJ: aries 4

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

Average Average Averaye Pnce Revenuc industrial A % 11 l'er Per Per Year Residenhal Comnwrcial Industrial  %'holeude Oiher Total Reddential Commercial & Other Total Customer k % Il Customer 1996 - 4 958 5908 7 977 2 155 522 21 520 663 71 7 741 7 451 11.34c $845.12 l l

1995 _ 5063 5946 7 994 1694 550 21 247 670 72 7 749 7 570 11.04 835.40 l 1994 _ 4 924 5 770 7 970 1 073 575 20 312 668 72 7 747 7 370 10.79 795.11 '

1993 _ 4 934 5 634 7 911 2 290 532 21 301 669 71 8 748 7 373 10.93 805.68 l 1992 _ 4 725 5 467 7 988 1989 533 20 702 670 71 8 749 7 071 10.94 773.77 19#6 _ 4 586 4 744 7 927 121 460 17 838 651 63 9 723 6 810 8.94 611.34 ,

lead (MW & %) 1:nergy (millions of KWil) Fuel Nct I thcienew scamnal Peak Caracay Ivad G""P""* G'"c'dd Pucwd 1 uct N in U Pir Year ( apabihiv l uad Matrin i ador I onil rd s N uclear Total Poact loial Per A% ll A%H 1996 3 922 3 938 (0.4 )% 60 6% 14 411 6 829 21 240 1(40 22 680 1.35c 10 357 1995 4 273 4 049 5.2 58.8 12 684 8 175 20 859 1673 22 532 1.42 10 504 1994 4 500 3 740 16.9 62 4 12 840 6 405 19 245 2 022 21 267 1.35 10 $38 1993 4 500 3 862 14.2 59.9 15 557 5 644 21 201 1 454 22 655 1.37 10 339 1992 4 704 3 605 23.4 63.0 12 715 7 521 20 236 1 649 21 885 1.47 10 456 1986 3 775 3 601 4.6 62.2 161 SI 12 16 163 2 984 19 147 1.78 10 464 Imestment (millions of dollars)

L onstruction Work in T otal liti hiv Accumulated Progreu N uclear Property. Utihty Plant in 1)epreciatmn & Net & Perry l'oel and Plant und Plant T otal Year Scruce Amonvat6on Plani l!rul 2 Oiher l quipment Additions Awein 1996 $6 938 2 252 4 686 57 167 $4 910 $111 $6 878 L

1995 6 872 2 094 4 778 73 180 5 031 155 7 152 1994 6 871 2 014 4 857 99 195 5 151 156 7 151 1993 6 734 1889 4 845 141 243 $ 229 175 7 159 1992 6 602 1728 4 874 501 261 5 636 156 8 123 l 1986 3 197 952 2 245 3 013 384 5 642 671 6 155 Capitalliation (millions of dollars & %) l l

Preferred & Preference Preterred StotL without Stock. wiih Mandatory Mandatory Redemption Year Common Nimk i uuilt Redemption Providom Promions lony-Term I)ebi Total 1996 $1 045 27 % 186 5% 238 6% 2 441 62 % $3 910 1995 1127 26 215 5 241 6 2 666 63 4 249 1994 1 058 26 246 6 241 6 2 543 62 4 088 1993 1 040 24 285 7 241 5 2 793 64 4 359 1992 1 865 39 314 6 144 3 2 515 52 4 838 1936 1 844 40 339 7 144 3 2 311 50 4 638 (c) includes wrne-oJJ ofl'erry Unit 2 of $DI nullion.

(JI Reduced by net energy used br the Feneca Pumped Storage Plant for pumping.

27

I r

INVESTOR INFORMATION 3 s

Share Owner Information Exchange Listings Bondholder Information  !

- Preferred Stock Series A. II, L, and Depositarv Shares,1993 Series A. are Share Owner Services

• First Mortgage Ilond Trustee and h.sted on the New York Stock Exchange.

Communications regarding stock transf.er l'ayn.ig Agent requirements, lost cenificates, dividends The Chase Manhattan Bank, N.A. l Dividend Reinvestment and Stock and changes of address should be directed Purchase Plan and Individual llondholder Services  !

to Share Ow ner Services at Centerior 4 Chase Metrotech Center, llox 3016 Retirement Account (CXalRA)

Energy Corporation. Correspondence Centerior Energy Corporation has a BrooWn NY I1245 j should be sent to the address indicated Dividend Reinvestment and Stock Telephone: (800) 355-2663 i below for the Stock Transfer Agent. Purchase Plan which provides Cleseland To reach Share Ow ner Services by Electric share ouners of record and other -  !

phone,ca1 imestors a convenient means of purchas- we base made forward-looking statements in f in Cleseland area: 447-2400 ing shares of Centerior common stock by this Annual Report with respect to the financial  :

Outside Cleseland area: (800) 433-7794 investing all or a part of their quarterly conJition. results of operations, strategic plan dividends as well as making cash invest. ant! business of the Company. Centerior Energy  ;

Please have your acount number ready ments. In addition, individnals may estab_ and To!edo Edison; and FirstEnergy following ,

when calling.

lish an Individual Retirement Account

• "# " " ' " " " " " " " " " #"*"" ""#b *"E" with Ohio Edison, which mvolve certain risks s StockTransfer Agent Ch nVes " entenW comim'H and uncenainties. Forward looking statements ,

stock through the Plan. Infonnation are statements about future performance or C,enterior Energy Corporation i relating to the Plan and the CX*1RA may result s, includmg any statements using the i Sharc Ow ner Services be obtained from Share Owner Services. "ords " believer "exlutT "ankipate" or simi.

P.O. Box 94661 lar words. For all of those statements, we claim  ;

Cleseland, Oli 44101-4661 the protection of the safe harbor for forward-Independent Public Accountants (

looking statements contained in the Private  :

Stock transfers may be presented at . Arthur Andersen LL.P Seemities Litigation Reform Act of 1995. f llarris Trust Company of New York Suite 1800 Factors that may cause actual results to differ 77 Water Street,5th 1 loor 200 Public Square materially from those contemplated by such for-  !

New York, NY 10005 Cleveland, Oil 44114 mard-looking statements include, among others.

l the following possibilities: t1) eqected cost Stock Registrar Environmental Report savings from the merger of Centerior Energy The Company will furnish to share own- nd muo Ehson are not f@ realized; ch  ;

KeyBank National Association regional competitive pressure in he electne 1 Corporate Trust Division f, without charge, a copy of a report on utility industry increases significantly, n) the P.O. Box 6477 tts envn'onmental performance. Requests effects of unanticipated events on the Cleveland. OH 44101 shoukt be directed to Share Ow ner Company % and Toledo Edison's expectations Sen ices. regarding cost recmery or on the carrying salue ,

investor Relations of regulatory assets and on the Companyi and Form 10 K Toledo raisoni ability to continue to comply '

Inquiries from security analysts and with the provisions of SFAS 7I (as defmed here- I institutional investors should be directed 'l.he Company w,di furm.s h to share own- -

to Ronald E. Seeholler, Manager-Investor ers, without charge, a copy of its most ipmem or vuiance, Imm me amounts die Relations, at Centerior Energy recent annual report to the Securities and closed; t.O cost s or difficulties Corporation, P.O. Dos 94661. Ihchange Commission. Requests should related to the integration of the businesses of Cleveland, OH 44101--4661 he directed to Share Owner Services. Ohio Edison and Centerior Energy are greater than expected. (5) state and federal regulatory or by telephone at (216) 447-3339. ~

initialises are implemented that further increase competition. threaten cost and im estment recov-cry or impact rate structures or disidends; and (6) national and regional economic conditions are lesi, favorable than expected. l i

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._..-_-7 The Cleveland Electric filuminating Company - -

HULK RATL l P.O. Ilos 5(XM) v.s lusTAot i

' Cleveland,Oli 44101 PAID CLLVLLAND.01110 Pf.RMIT NO. 409 1

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