ML20138A399
| ML20138A399 | |
| Person / Time | |
|---|---|
| Site: | Davis Besse, Perry  |
| Issue date: | 12/31/1996 |
| From: | Farling R CENTERIOR ENERGY |
| To: | |
| Shared Package | |
| ML20138A405 | List: |
| References | |
| NUDOCS 9704280074 | |
| Download: ML20138A399 (212) | |
Text
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CENTERIOR 1
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1 1996 Annual Report t
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l 9704280074 970423 ADOCK 05000346s PDR j I PDR .. ,2
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Prof'e Basic earnings per common Centerior Energy Corporation is a full service share from operations
- li of electricity and energy-related services.
Its strategic business groups generate, transmit and distribute electricity through two operating 8 -- ~
subsidiaries, The Cleveland Electric illuminating Company and The Toledo Edison Company.
s so - - -
Centerior serves more than 1 million customers across a 4,200-square-mile service area in s .2s Northeast and Northwest Ohio. The Company's common stock is traded on the New York Stock
,y Exchange under the symbol "CX".
1994 1995 1996 c.cwo maev .ccoum% p,= ,== on.+n. "*'8" With 6,200 employees, Centerior is one of the largest employers in northern Ohio. The Company is the single largest taxpayer in the State of Ohio, contributing 2 percent of all taxes administered by Total earnings $1.38 $1.49 $.82 g3 Regulatory accounting (.70) (.70) .19 Price increase - -
(.32) On September 16,1996. the Company announced One-time charges - -
.15 its intent to merge with Ohio Edison Company, a Basic earnings per ne g ng e ectdc uthy, to Mrm a new company common share $.68 S.79 $.84 named FirstEnergy Corp.
tall amounts a,e pe, cormnon shneen e
Table of contents 2 Letter to Share Owners 26 Management's Statement of Responsibility for '
7 What :s New Power? Financial Statements
- Distribution 26 Report of Independent Public Accountants 11 Generation 27 Financial Statements and Notes 14 Transmission 45 Executives of Centerior Energy Corporation and 15 Enterprises Centerior Service Company 16 Business Services 46 Financial and Statistical Review 17 Administration 48 Board of Directors 19 Management's Financial Analysis 49 Share Owner Information the c,wr 1%s,.x,uch uin,m our me n u-r as rronmx aampauxw rn,,,, s a,,, nru ica p,,v,.,
Financial Summary
~, 1996 1995 'k Change Earnings Per Share of Common Stock $ .82 $ 1.49 (45)
- Dividends Declared Per Share of Common Stock $ .80 $ .80 -
Book Wlue Per Share of Common Stock at Year End $ 13.42 $ 13.40 -
Closing Common Stock Price at Year End $ 10 h4 $ 87/8 21 Common Sk>ck Share Owners at Year End 122.820 137,396 (11)
Common Stock Shares Outstanding at Year End (millions) _ 148 148 -
Operating Revenues (millions) $ 2,553 $ 2,516 1 Operating Expenses (millions) $ 2,037 $ 1,927 6 i
Net income (millions) $ 121 $ 220 (45)
Return on Aserage Common Stock Equity 6.1% 11.4'1 (46)
Kilowatt-hour Sales (Millions)
Residential 7,103 7,227 (2)
Commercial 7,698 7,694 -
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industrial 12,278 12,168 1 Wholesale 2,804 2.626 7 Other 1,011 1.050 (4)
Total 30,894 30,765 -
Employees at Year End 6,204 6,821 (9)
Quarterly Range of Common Stock Prices 1996 liigh law 199S liigh low Ist Quarter $ 95/8 $ 75x / 1st Quarter $10 $ 811/16 2nd Quarter 8 6 h4 2nd Quarter 97/8 85/8 3rd Quarter 9 in 63/4 3rd Quarter 11 9W 4th Quarter 103/4 91/8 4th Quarter iiI/4 8W I
Across the country, s.m frorn New llampshire . ' pt, It's been an exciting, eventful year. I am pleased to . .
to California. -
report to you the successful completion of our rate ..
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case and our proposed merger with Ohio Edison i tions that restrained Company to form FirstEnergy Corp. More importantly, ,,
mmpennon mnong g, good operating performance, the successful rate case, ,
the accelerated paydown of debt and the proposed "I # " "* ' "" E '"E ' .
. . Already in limited merger resulted m. a sigmficant stock price gain, which , , .
produced a total return for our common stock share #*E#" *#"'" * #'
E "" " * '"" "D' '
owners of 33 percent during 1996.The stock price .
retail customers rose from 58 7/8 to $10 3/4 at year end, w hile the dividend was maintained at an annual rate of ggfy ,, j farfmy
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80 cents per share.
In the future, the Our earnings were lower in 1996 than in 1995 - $121 experiments will be expanded and retail competition million, or 82 cents per share, this y ear, compared with will become a reality in Ohio, giving retail consumers
$220 million, or $1.49 per share, in 1995 - because of a variety of electricity providers from w hich to choose.
the impact of regulatory accounting measures and one-time charges. Iloweser, we continue to make in short, there will be deregulation of the industry and " retail w heeling" of power - all resulting in progress in improving our overall financ. ial pos. .inon. , ..
intense compeutmn.
liasic carnings from operations - results excluding the impact of ceasing certain regulatory accounting We cannot predict when these changes will occur nor measures, the one-time charges, and higher revenues the impact they will hase on our ability to recover from the $119 million price increase - were up 5 cents our investments. Ilowever, your Company's floard per share in 1996. (See tabic at thefmnt of this report.) of Directors and top management have spent the last A changing Centerior Energy several years preparing for this competitive vision of the future. The merger with Ohio Edison to form As you might expect, gisen the esents of 1996 and FirstEnergy is perhaps the most dramatic and impor- .
their influence on our future, this annual report is tant action we've taken. The benefits to our share own-about change - a changing industry and a changing ers from this merger are significant. Ilut equally Centerior Energy. Change is making Centerior '
important, the merger uould help ensure our enterprise stronger for its share owners, customers and will mose strongly and purposefully into this new employees. competitive environment, with more resources and more opportunities for our Company and our employees to succeed than if we remained an independent entity, i
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l Two patns of strategic change FirstEnergy, the best choice )
Our newly launched advertising campaign talks about Simply put, FirstEnergy represents the best opportunity "New Power to You " The slogan is directed toward we hase to accelerate our success in achieving compet- '
our retail customers, but it also applies to our itiveness and enhanced share owner value. It will also
,, Company. There's a "New Power" at Centerior proside our customers with reliable service at more
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Energy - the power to compete, stable and competitive prices and our employees in 1994, we adopted our Strategic Plan to serve as a with more opportunities than if we and Ohio Edison remained separate companies.
road map to enhanced competitiveness. Each year we establish measurable objectives that continue us on The combination of Centerior and Ohio Edison is our path of successfully executing the Strategic Plan a natural alliance of two companies with adjoining and becoming a stronger, more competitive utility. service areas who already share many major generating l
l Achieving this ultimate objective is the single greatest units, including two nuclear pow er plants. The new challenge this Company has faced. It is an objective company will be the Ilth largest investor-owned that has been carefully considered in light of our share electric utility in the United States, with combined owners, customers, the communities we serve and assets of more than $18 billion, a customer base of our employees. 2.1 million, annual revenues of roughly $5 billion and We made meaningful progress m. 1996 toward our annual electrie sales of 64 billion kilowatt-hours. Our overall Plan obj.ectives. On some measures - such service territory will stretch across all of northern Ohio and a portion of western Pennsylvania.
as debt reduction - we are now ahead of schedule.
In other areas - revenue grow th, for example - our The merger is anticipated to produce substantial efforts lag behind our interim objectives. savings for the combined companies, estimated at i approximately $1 billion over 10 years. I The year 1996 brought us to this important juncture, i One course, the preferred choice, leads to the The benefits expected to be achieved from the i
l combination with Ohio Edison. The other calls merger include: I for us to stay the course of independecx . competitive rates for our customers that will provide us with new sales opportunities:
Monthly price performance
- improved coordination, control and operation of sii OO major generating plants and transmission facilities; f I
- enhanced cash flow; I 10 00 -
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- accelerated debt reduction; l ;
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- elimination of duplicatise activities;
- reduced operating expenses and cost of capital;
~[ { ' elimination or deferral of certain capital s expenditures; 7.00 - - --
3 6 00 -l-l l -!-- i Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 1996 11 1997
- nonects coosmo once or centenor common stock at i and omst day of traeng or each month i
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+ deselopment of opportunities for sales of Dercloping inore cornpctitire and efficient energy related products and senices; and operations, Our core operations - those that relate to the generation, transmission and distribution of
. enhanced puichasing capabilities for goods electricity - are the areas of our keenest focus in and senices.
preparing for change. This focus led to the creation in addition to apprmal by share owners, the merger .
m late 1995 of separate Strategic Ilusiness G,roups -
remains subject to a number of,reputatory resiews. (SilGs) directly responsible for these core operations.
We cleared a sery important hurdle in January 1997 as well as f.or the corpirate senices that support them ,
when The Public Utilities Commission of OSio .. .
and for the .dentmeanon i of. new business opportuni-(PUCO) approsed FirstEnergy's rate reduction and ties. The scar 1996 was our first full year under this economic desclopment plan for customers of our structure, and the results are helping to move the two operating subsidiaries,The Clescland Electrie (,.ompany toward .its goals and produce value f.or the Illuminating Company and The Toledo Edison .
new l..trstE.nergy enterprise.
Company. The plan, which becomes effective only if the merger is consummated, will result in significant For example, our (;eneration Group's aggressise savings for our cus- business plan is designed to enhance the competitive-tomers and enhance ness of our fossil-lired and nuclear power plants. The
[ our pmition as the plan establishes clear performance goals for escry cergy supplier of peneration facility in the areas of safety and regula-choice as we enter a tion, production and plant performance, and cost
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more competitive era. reduction. As a result, our generating units are r ,
performing well, while the total cost of operating
%,e expect the our plants declined in 1996 by $74 million.
merger to be g Our Distribution Group, meanw hile, is focusing on completed by the
" cnd of 1997. delisering better seniec to our customers, achiesing operational excellence, and retaining and growing our core electric business, among other initiatises.
1996 progress Our Transmission Group is moving aggressively to sell bulk power on the wholesale power market as a As enthusiastic as we are about our future as part resuh of new fedaal mies that make such transactions of FirstEnergy, we are also pleased with continuing e sier, while our Enterprises Group entered into a actions taken within Centerior in 1996 to prepare for teleconununications alliance with one of the largest the future and enhance share ou ner salue. It's becom- -
and most respected corporations in the world, AT&T.
ing increasingly clear that our Company brings tremendous value to the new FirstEnergy.
As outlined in our 1994 Strategic Plan, enhancing share ow ner value is drisen by four imperatives:
deseloping more competitise and etlicient operations, building profitable resenues and reducing fixed costs, w hile improving customer service.
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? We renewed and extended for as3long as 10 ears Ob ^
- contracts with many of our large industrial customers, j
l including the six largest. As t. result, at the end of 1996 1 % -
f more than half our indon.d base resenues was un
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long-term contracts. While this strategy has resulted in 37 low er prices for these customers. in the long run it is expected to maximize share ow ner salue by retaining
<# our customer base in a changing industry.
'- ' , Reducefixed costs. To become more competitise.
we base also been focusing on reducing fixed costs The ilusiness Sersices Group is helping The the year 1996 w as our third consecutise 3 ear of .
Company reduce costs u hile improsing the internal sersices it significant reduMion of debt, lease and preferred prosides to the other SHGs. stock obliyNiu . The Company reduced these obligations by a net of $227 million in 1996.
Our Administration Group insures that whileInterest each ofexpense and preferred disidends were lower the SilGs pursues its respective sision,our we maintain by 526 million, or 13 cents per share. S.ince our
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corporate perspectise of creating salue for our share Strategic Plan was adopted. we have reduced our ow ners. The Group brought our price increaset. request ised obligations by 5523 million. By continuing on to a succewful conclusion in 1996 and continues this track, we to expect to achiese our stand-alone goal help impros e the Company 's financial condition .
of a total reductmn of.$1.3 billion by the scar 2(XML through tax and debt reduction. The Group also ~
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.l.he merger may allow us to exceed that amount, represents the Company in prostisely shaping the industry.
Cumulative totalinterest and Build rerenues. In April, the PUCO granted preferred dividend reductions 40 ---
Cleseland Electrie and Toledo Edison the full Si19 -
million price increase for which we filed in 1995. This P"{
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was the first price increase for either of our operating units since 1991. The rate order represents a crucial g
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petitise future because it is helping generate cash to A-
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' retire debt, allow ing for recosery of deferred costs* V: $
and improsine the quality of earnings. And it puts the
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Company in a position to reduce prices in the f. i uture. o -- U m (' A 4
9 Centerior'N marketing and economic deselopment ~
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ef forts secare major new customers for our electricity.
createjobs and help ensure a sibrant economic outlook for our sets ice area. ()uring 1996, we also importantly,1996 made strides marked our first full fiscal y ear in our ongoing cifort to secure multi-year contracts since weforstopped deferring certain costs and began sersice with the Compan) \ major industrial ers.
custom amorti/ing the accumulated balance. Although this results in low er earnings, the quality of earnings is
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Poised for success better because they are more cash-based. h is cash nues to face powerful and complex that allows us to retire debt, to improve service andCenterior cor .
challenges. As we said to you m last year s report, to invest prudently in growing our business. And it is it is not going to be easy. Iloweser, we are sery cash that makes us more competitive.The Company's enthusiastic about the opportunity presented by the performance on this measure is strong and will FirstEnergy merger, and we are also encouraged i
imprme even further. F,ree cash flow - cash after inter-
) est expense. preferred dividends, capital expenditures, by developments within Centerior: by continuing -
operation and maintenance expenses, and taxes progress;
- has by the attainment of steps, both small and grown moderately arge, a ng e pa to cmnpenens and h smcc 1993. Ilut in the spirit of change that is esident throughout our 1997 it is expected l "fE""I'"' "'
to increase substan-f p tially due to a full Many other examples of change follow in the pages of
, ' this annual report. As we assertively address the future year of the price I
increase and addi-and move the Company forward, we are continually tional operating and grMefd for the hard work of all of our employees, the interest cost savings. privilege of serving our customers and, as always, the support of you, our share ow ners.
During 1996. we
- reduced our work Thh was a watershed year for share owner value.
force by 9 percent, We increased your stock price. We maintained your
- g. from 6,821 to 6,2N. dividend. And either as part of the FirstEnergy family of companies or as a stand-alone company, we face the We met and exceeded our reduction target of 5(K) for future poised for success, the year. Separation expenses associated with the employment reduction had a negative effect on Sincerely, earnings in 1996, but our smaller work force will ,
significantly reduce future costs. Eliminating jobs is neser easy or pleasant. Ilowever, it is sital if we are to continue as a viable enterprise and provide diverse Robert J. Farling employment opportunities in the future.
Chairman, President and Chief Executive Of6cer February 24,1997 Improring custanter scrrice, We advanced a number of initiatives in 1996 to enhance our delivery of service to customers and improve their perception of the Company. For instance, we're clearing more tree ,
branches frotu our lines and imprming the speed and effectiveness of our responses to customer telephone
- inquiries. We're also automating part of our distribution system to reduce the length of service interruptions. As a result of our pending merger with Ohio Edison, we bas e formed a joint action team to f urther improve storm restoration activities.
6 - -
7 . _. . . _ _ . _ _ _ _ _ _ _ _ . _ _ _ _ _ _ _ _ _
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What i,s New L gower?
- %g New Power is energy, strength and desire.
W New Power is movement, transformation and change.
l New Power is an enhanced commitment to customer service.
iW~ It is success.
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, }. New Power is Centerior Energy Corporation.
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%Q3 Our Company is embracing the changes in our industry, fw NY l perfonning the hard tasks necessary to prepare usfor this new j
'N reality. We are gnnving n> venues through marketing initiatives ,
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- and a price increase. We are securing our largest customers through long-tenn agreements that give us revenue stability.
WC "n' cutting operating costs throughfiscal discipline and
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'P : employment reductions.
&% We are rethinking and impnwing the ways we operate our
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QA manage the supply of goods and services intentally. \}'e an-using our core skills and assets to develop new opportunities QpyDTW
%q'%d in telecommunications. We air establishingfertile working
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We are preparingfor thefinure.
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J In the fourth quarter of 1996, we Achienng perational launched a major reengineering initia-work management effort. This initiatise ,,c,ffene, j, , g,y tise to improse our customer sersice. is continuing as part of the transition to component of the The program aims to sase the Company ,. n" Distnbuten Group's up to $20 million a year w hile greatly enhancing our ability to meet and Our new INi:ORM computer system 8'#9'C D"8'""88 ##8" exceed customers' expectations. We allows our customer sersice phone base targeted several specific areas for representatises to respond faster and improvement, such as streamlining the more effectisely to customer orders and . customer billing and payment process, requests for information. Instead of hat-expediting the new-service installation ing to acerss seseral different computer process and redesigning our entire field screens during a typical customer call, 8 _ . . - _ _
1 .i } customer service representatives now Retention and growth and almost 7.(XX) new and retained jobs ! can process many customer calls with of our core business far northern Ohio. We helped convince just one screen. Our storm restoration We are seeking to grow our core Delafoil/Phillips to build a 250.(KX). i 1 efforts improved during 1996, as did business through economic deselop- square-foot plant to poduce television ! the level of satisfaction our customers ment, winning customers from components near Toledo. In September, l '. have with our service. We have competitors, aggressive sales and we saw the benefit of an earlier effort } established a goal for 1997 of raising marketing and a proactive contracting when Birmingham Steel's American
- j. customer satisfaction ratings by 35 strategy aimed at our largest customers. Steel & Wire division unveiled its new percent over 1996 levels. Customer l Economic derclopment. We continue $109 million precision rod and bar mill satisfaction is absolutely essential as l to view economic deselopment as an expansi n in the Cleveland suburb of i we attempt to retain and expand our important means of achieving sustained Cuyahoga lleights. At the opening cere-
{ customer base in an increasingly revenue growth. In 1996, we gained mony, Ohio Governor George Voinovich competitive environment. commitments on 47 economic develop- publicly complimented Centerior for its i ! Operational excellence
'nent prmects, representmg almost $11 vital role in economie development.
i g E,xcellent operations means working million in new and retained annual base Competition. The Distribution Group safely to keep the lights on. The rate revenues. These projects represent is facing competitive challenges from Distribution Group intends to be $407 million in new capital investment a number of municipal systems - and among the industry's leaders in service reliability, while maintaining a safe work emironment for our employees. In 1996, (y*'4 we greatly expanded our commitment { to trimming trees, which should reduce
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> 1 ,- , .,'3 t g=,,1 installing a system to remotely control g
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! some of our larger distribution power pF
'g,F lines, allowing us to bring them back j on line without having to send out a h ";.
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i l Our storm restoration efforts improved during 1996. despite a h ' ~ s. %h'^, .,,A
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- t' We also won a contract to serse to our largest industrial customers by U renewing and extending contracts. Prior .
- Mj$1 [h[Q M. I h{*j;.]Y)'. .', J/ 1 J 'J 20 Cuyahoga County gmernment buildings in the city - 10 of w hich to these renewals. 69 percent of our W1 - were CPP customers. industrial base rate revenues under con- .
Nd
'% tract was scheduled for renewal before f: MN Sales and marActu.tg. During 1996.
. R,- 2 %c our sales and marketing ef. forts closed 1999. Through our contract renewal
, /4.- c actisity, now only 19 percent of those
,%, sales w hich w.ll i proside approximately .
4 - Y contracted revenues is up f.or renewal s 7 $15 m.lh.on i annually m. base rate
" before 1999 and 54 percent is secured e -
' g - revenues.These sales derive from a dj,ti.-#3 (
under longer-term contracts. variety of. . . . .imtiatives, such as Night wa(N'*.. . i
!y ' Vision (outdoor lightingn Recipe for .
t , . yt fly delivering better service, ach.ieving k- < t Success (food servicen process heating; i p- operational excellence and retaining i
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% v: sales of garage and other supplemental and growing our core busin. ss. our
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electne heaters; sales of carbon monox-
- , e: "-$ c Distnbution Group .is playing a ide detectors; a renewed focus on
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significant ro:e in our strategy to
* . - marketing electric heating appl,ances i become more competitive, we're more than holding our own. Our and technologies in new home construc-tion; and sales of electric desices and sales and marketing efforts proved successful in the retention of approsi. technology to individual, commercial and industrial customers, mately 525 million in base rate resenues threatened by competition from Contracts. In 1996. we continued to alle.uate energy sources and pursue a proactive contract strategy municipal espansion. aimed at retaining and expanding sales The Cleseland Public Power (CPP) expansion program is falling far short of its goals for switching customers Revenue retention and expansion:
Major contract expirations advanced to beyond 2004 from Cleveland Electric. We have been successful in winning ses eral new large Status in /995 Status in 1996 customers including a new federal { 30 3.,g- { 30 office building in dow ntow n Cleseland 2 j 23 h j,, ( and the new Regional Transit Authority ER } 20 de- 1 II 4 20 # h-
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w ater-front rail line in Clevelaad. 23 0 d 22 s in g 3 , 15 p q A J m Q- a g .i5 y, 1- 2 n ep 10 - 10 li u y 7 }- O M
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3 K.,r)] M L1 1 di d k q p i d) o E 2) o !! L$ 1996 1997 1998 1999 2000 '01.'04 '05 Post '05 1996 1997 1998 1999 Post 1999 Sbar of Etpiration )'c ar of Erpiration 10
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-7 7: j, > - The Generation Group continued to
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(;j p;?I k/j.f' ' p [ G j/j [ ] d[ [h I' pursue strategies to safely improve plant performance while reducing f t' ' t , .3 G " ?.y ( p; s f Ie -:22 operating costs. } .t i ;. K f e1
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Since 1994, our cost to produce a i? [ , r, . ,
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a j kilowatt-hour of electricity has fallen [; } b,i nearly 14 percent, to 2.23 cents in 1996. i k;
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Qs Meanw hile, production remained essen-I c ,
i 4' - ' tially unchanged from 1995 - at approx-h imately 32 million megawatt-hours of electricity - even though planned refuel-g / ,
. . - ing outages were performed at all three
(- c og nuclear units in 1996. ! i' l [ . i Nuclear
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4 1 Our nuclear generating units had g u .- an excellent ycar, in terms of safety,
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regulation and performance. The Davis-l Besse Nuclear Power Station continued ' d - I '
.[
to achieve the high marks that have h I 4 d ai made it a "world-class' nuclear per- ,
.., .i , m . . ' .m former, producing more than 6.4 Proper maintenance is important in million megawatt-hours in 1996, the i improving plant performance. most ever for the plant in a refueling outage year, its scheduled refueling shutdown in the second quarter came l after 509 days of continuous operation, the longest run in the plant's history.
The refueling period lasted 55 days, which was the second shortest in the plant's history. Excluding the refueling period Davis-Besse had an availability rate of 96 percent (85 percent including the refueling shutdown). j The Perry Nuclear Power Plant, mean-l w hile, continued its focus on improving ( 1 i 1 11
operational and regulatory performance. Availability rate The plant and employees performed Perry pnxtuced nearly 7.5 million 300 extremely well in the experiment, megawatt-hours of electricity, the most demonstrating that the use of Western ever by the plant in a refueling outage ao __ _._ __. coal may proside future power market-year. Its first-quarter scheduled refueling ing opportunities for Lake Shore. outage of 74 days was the shortest in Reducing our costs remains critical plant history. At year-end, Perry had run . if we m. tend to be competitive in a S 204 consecutive days, its third longest , _ _ _ _ , deregulated environment. During the - run ever. Excluding the scheduled year, the Generation Group reduced its refueling shutdown, Perry had an go _ _ _ total expenditures, including escry thing availability rate of 95 percent (79 from operation and maintenance to percent including the refueling pen.od). capital and overhead, by $74 million. In the f.ourth quarter, the Nuclear Fossr Nuclear
- Total The group reduced its work force by Regulatory Comm.ission characteri/cd .%,oo,,,,,,,,,,,
e,oi oo no, op 438 during the year. Perry operations as good overall and continuing to improve. 1997 While the performance of fleaser Valley In 1997 and beyond, the Generation Power Station Unit 2 - of which we Fossil Group will continue to implement its ow n and lease a portion but do not The Generation Group began strategic business plan focusing on: operate-was below expectations, man- implementation of its Fossil Operations
- Maintaining world class performance agement of the plant is taking positive Performance Improvement Program at Davis-flesse, steps to improve operations. The unit (FOPIP) in 1996. Key initiatives includ-
- ntinuing improvement of operations produced 2.13 million megawatt-hours ed the shutdown of the Acme Power and regulatory performance at Perry, of electricity ais Centerior's share and Station and two high-production cost was available 70 percent of the time units at the Ashtabula Plant, and modi- + Continuing implementation of FOPIP.
oserall. Ileaver Valley Unit 2's 1996 fled operations at other units. Unit 9 at . Working closely with our power refueling outage lasted 107 days, our Avon Lake Plant, one of our largest marketing unit to sell more electricity fossil-fired units, had its best year in the wholesale market. ever with a 95 percent availability
+ Continuing creative fuel supply rate and the lowest production costs options. -
in its history. Eastlake Unit 1, a smaller unit, produced at an availability rate of a Supporting and executing options and ; W percent. At the Lake Shore Plant in initiatives to reduce costs. . Cles eland, placed in cold storage in Among its goals for l997 are to reduce 1993, we experimented with low-cost, production costs -- operation and main-Iow-sulfur coal from the western U.S. tenance and fuel - by 11 percent and l t and a plant operation redesign. to lower total costs by 9 percent. The goals are aggressive, but significant l progress is necessary if the Generation l Group is to continue on its path toward enhanced competitiveness. _12_ _ _
y _ c_, s , , ,.,
, , . , .q ,
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A.. receive honors
.]
d
, M r- + w, u ;
+
.a g Davis-Besse was honored as
- t a .
, a, ] " Outstanding Organization of
' s' m... :3 i the Year" by the Pacific institute in s
j Seattle. The Institute, an educational t > - ' corporation that seeks to improve n { [ [ .iE the effectiveness of individuals and } q.- < ' c q organizations, works with more ! l . ry l ? Y than 60 percent of the Fortune 500 ! i
- 1
. }- 'D['
F-
', , , companies and many international e ,
, a organizations.
m d8 Ze -
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N =u
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[ ~ .' -. y Both Perry and Davis-Besse received L f, ":- k g 'l *~ p positive recognition in 1996 from Nucleonics Week, a respected gg g _ . .q r t u
, !, (, ' -
,d independent trade publication.
e . -
. , .,ct 2 s The magazine ranked Davis-Besse
- h.
- e J
l ( F
,a:w . y,' second in the U.S. and sixth in the
, t. - . Mht f- world in efficiency for producing 100
' es ~"
',q, .. - g$f[ .
g .
- g.
- percent of its capacity in 1995. Perry, fty.g j
1
, ,g meanwhile, ranked 10th in the U.S.
j Our nuclear plants performed wellin 1996 and 23rd in the world in production, j generating a gross of 9.6 million 3 megawatt-hours of electricity in 1995. l. While we're pleased with the
~
recognition, we're aware that the most difficult part - maintaining and exceeding that high level of performance we have come to expect - has just begun. e f i 1 ) I 1 . _ . . . .. . 1.!
The Power of uovement - V '*~, L -. r; wpm *" l~T% L\f W~ kb. A fQ;
%pr# y f" PQ,,udS'" The Transmission Group moved e
g$3.% sj ,. . ... n _. s " "" ' h, g w: ts s( aggresmely .m 1996 to take advantage noz, :m 6 V dr
"""agua.- a e g of new opportunities to actively buy 9 QG g[ jib}.
- a. and sell wholesale pow er on the open
~ 65 -- es /s
[ n,%. u % ,p.W*"pwg
,9 '-+
-i .+ market. Under new orders from the y# ' ' h Federal Energy Regulatory Commission k .p m (FERC) utilities must open their gl - ' . ' k
,J. -> y% transmission systems to competitors
"% ,e under the same terms as their own c:r ,g j g ,jV 'I internal transactions. Plus, the utilities QsaS J: d .ti' must establish an Internet-based system I
- js ~a #[<a. ,
to share information about transmission
,,.pyc capacity and pricing with competitors, ,.] .l p er n.3 g;pm ,
9EQ;; in July, we filed an open access tariff y ,l]27 with the FERC so we can fully pursue ff 1 power marketing transactions. We
.m .,
- A 4 j moved quickly to establish a separate, I ,
fully functioning power marketing g- a [. ,i j
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sq m n entity that is already producing results. Wholesale power sales grew 7 percent
.g ,
in 1996.
$g f .
(W#f gi 3 , r ;j t; 7 1er'n ' 4 4 Lt 1 rp L-u f( E t
;j. .
$kEi bi :0%id : ~ ~ On The Transmos,ston Group's more aggressive power marketing program helped Increase wholesale sales 7 percent. .
14 ,_-
The Power of Support e. e7.Q N. m i . 7~4 Swe T .' r e-~e .q n n.py'l k,n.y
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$; f ) l"l<i 1 - w3 W : ,; s c -S Yr o
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- 1. , The Business Services Group worked ff [- (; .
j, [ actively to improve operating efficien- ? [t,Q f [,. 71 m
",m ,'j N. ".ifi
"! p y j; IW , f. ,(,/ .. ( .-.: f.
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cies and reshape public perceptions of i
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the Company. lp '
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, g\-y F py i
i .
. t s
a
,g
.- g .. g in 1996, our supply chain management h,, <p h, d ipi: ,
!.,"ij}]
'.yj m
program to reengineer the way the pf ;jp.. gg ' ij Company buys, delivers and stores # Ud goods and services made great strides (q,,c;<L 3ppl{ , y s=
; :j .I 'QA *
' j
- in inventory management. The effort ij- _y,_
1
% , :* - .s reduced our owned inventory balance Q ..,ap ,
m j ^4 by $66 million, and will provide f ; a ,
$7 million in annual property tax
.gy j: : p b ,a savings in 1997 and beyond. ! ' .
i 7' sh ,) s " i i s The Group also initiated a vibrant, t I '
. .g h9 ]
p
^
a energetic new advertising campaign = 1 ,
$-gT F L{
$ q, .
for the Company, "New Power to You," h;' ' R q i n l that seeks to cement our position as j. - m the electricity supplier of choice in the ' i Toledo and Cleveland markets. The
' :{ d 3
] y an.: . .M 3 i
advertising has been well received {0 ..
- . j k .
1.? '3 . . /", .' . . , by consumers. p~ 2 s.,> ' n 4 8
-s ;g g h ,_
_- w ,d Our supply chain management program reenginected the way the Company buys. dehvers and stores goods and services. saving the Company mahons of dollars in the process. I 16 .. - .-
The Powerof Opportunity
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j j,p , g
.]* wy; w' ,
- jfgllj0)~o-y , a , [a?>%_3 Q (. ,
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g, -- r {. , 1 ! i 1 I i i ' ' 1 g [ I f . 1 1.7 y, v i , ', p
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'h Our Enterprises Group is putting our e- M j
- l. s 3.s g core competencies and assets to work j.
l j in non-traditional areas of business. In 2 1996, the Enterprises Group established ~b \ l an important alliance with telecommuni-
'd j
/!~q E' i cations piant AT&T to build a highly </
sophisticated wireless telecommunica- ; ?! . l y j t. tions network in Northeast Ohio and [p p 4 g hD ] western Pennsylvania. i t r s ' 1 Centerior owns a 25-percent equity f '. : Laea .4~ . :$ P stake in AT&T PCS Clescland. The wireless telecommunicat:ons represonts an partnership has access to a license to to the Cleveland area. The first commer. onormous opportunity for the Company supply personal communications ser- cial offering of the service is expected sices < PCS). PCS is the next wase of in the first half of 1997, and the partner-portable telecommunications, offering ship expects to be profitable by 1998. j soice and data transmission that is more fleyible, feature-filled and economical [ than u!'ular senice. The netwoil will improve our internal communications and serve as a spring-board for Centerior to enter into the l w holesale or retail telecommunications j business. In 1996, the partnership began l crecting telecommunications towers necessary to begin offering its sersices 1 l l I 1 1 1 15
The Power of uanagement
- . ; _q ..,._. 3 . .,._y,..-,
rs : n; a;,wwwwnemenam wm ? .' - ' -
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., The Administration Group guided our price increase request to a successful y, TH I = j l i'i, E h[fff] ![j Fu - " f f/;,i] T y d' g " ^ y completion in 1996, helping form a j 5't g gew j q [ .t,7 i , gyy j u 4 l l
. , , 4 una 3 e
a g strong h.nancial foundation for the {.* m n ; w p3 ,p s 4 a Company. [ } i , ,] h f - [p i - d Through its financial activities, the b '
- ~ ~~"
p E-p 3 p, ,' l my ,um g , m _ y
- v-Group also helped reduce costs. Tax ,g. ay 4i>> " -
3 , .;
,~. +a8 -. p sn .
q reduction ideas saved the Company ' A f / j j c f' ig 9. i$ ..l..';? f ,_..% j fj., s ,
._. t 7 ., ~
y p,~q
$4 million annually starting in 1997. '
sh
- g 9 5 4' s'__EQ 4j h July, we raised $150 million to
'1eg;,$. s/
u
- e.
l. 9A retire debt through the sale of securities f+ g 1F } d ll (L
- M b; U ( .7
.=
II y
, d backed by the monthly electric bills u.
y) /
-q owed to us by our customers. Most of
, /p_ .&4 Q,
~
- a the net proceeds were used to retire CE' se p%.,
- e higher-cost debt. The action, unusual p{}f , ,
7 .l ] for our industry but used regularly in others, should sase us more than $3 s -n Q[ s.
- L.C W~.
.c .
+
*w ,
.a million in annual interest payments. 1 3
.! (: '
s m:2 g Lj mm ; 24 m by A "-,..- e
, ca.u .M The Gioup is actively participating in gigg: -
s - efforts in the state and national capitals . s y 1 S E to reshape the electric utility industry. - in August, the Administration Group w , m e, ., F' 4
/ _' ,,, 1, shared our vision of the future of the '
i 2 >N 4' w,m q electric utility industry in Ohio by l . - -
./ t 9
%omL 7 g r. , . g
, introducing "Energ) Choice" to the k ' wi 4 > O" "
PUCO-sponsored Ohio Roundtable on Competition in the Electric Industry. k 7 *. T2 Lm m . w "Energychoice" advocates that, as part i e 4 . 4 e
}
)9 b . 5 ., ~
[ ;' , " ' .j The Administration Group is playing an ;j 1 active role in reshapong the laws and ./ ' T cn regulations governing our industry w ,. + a.:4 4 17
of the intraluction of retail wheeling. Stranded costs and tax A we need to achieve fair resolutions to reform: A closer look two key issues: stranded investment recovery and tax reform. (See Stranded costs. Currently, investor-owned accompanying story for more details.) electric utilities are assigned designated The Group is committed to providing service areas in Ohio and are required to a fair and equitable opportunity for all provide electric power for customers' current emplopes to grow and contribute to ~. and future energy needs. To meet this the Company's future. It continued the obligation to serve, electric utilities invested implementation of a performance-based management program to facilitate billions of dollars in generation, transmission employee development. and distribution facilities. p = ,% e gem g As the industry is deregulated and multiple t.. + m', cq ,I j T i-fp utility and non-utility power sources are
. e: s U q/g - ). j p g made available, customers could choose 5 $- lk .;, . .bg b different suppliers, leaving behind - or W {c r rj [, *i, .,,
f L 9 t f. gj;' W;;;Q v .M c '* R 7n _ 7 r+ e -e e
.h - ; y ,7 _
a stranding -investments made by share O go .y - . C cM owners in order for the utilities to serve their a i g- . g y 7 = m - -g *.- \V . J y a
. - I* customers' needs. Investor-owned electric jT qg[ Ih / utilities have met their obligation to serve, as J
IO/2 , ) - 7 iL;T required under the regulatory compact. That 4 ' il }
; compact is crumbling now, and retail compe-h {-~' , p . ,_ ,,_
3:
) tition is coming. We accept that. But share pp '
/ '1 :
. .3 >U *
! -:c q owners are entitled to a fair return on the 4 . t- 3 i~ . -
" % ; f '- investments they made under the old rules.
} ,
7 v
'Ie E E -
4[ ,' [ Tax reforin. Investor-owned electric utilities
,'_ /T M -
in Ohio are charged higher tax rates than F.1 ,t , similar companies in surrounding states and t ' municipally-owned electric utilities in the
~ ,
f. 3 .g . state. Taxes take away money from utilities ed,_ , Utshtoes have spent bellions of dollars to provide electric power for customers' current and future needs, investments that could be stranded situation seriousiy impedes the ability of unless the transition to a competitsve industry includes provisions for investor-owned utilities in Ohio to Compete fair and equitable cost recovery in an open market and acts as a drag on economic growth in the State. 18
Management's Financial Analysis renewal before 1999. Following the renewals, the compa-rable percentage is 19% At 3 ear-end 1996, 54% of our Outlook industrial base rate revenues was under long-term Strategic Plan contracts. In early 1994, we created a strategic plan to achieve the Northwest Ohio is recognized as one of the nation's twin goals of strengthening our financial condition and leading areas in job creation and economic growth. New improving our competitive position. To meet these goals, and expanded operations at businesses such as we seek to maximize share owner return, achieve profita. Delafoil/Phillips and Alcoa, as well as the development ble revenue growth, become a leader in customer satisfac- surrounding a new, major North Star BHP Steel facility, tion, build a winning employ ee team and attain are adding to our opportunities for revenue growth. In increasingly competitive supply costs. During 1996, the 1996, we gained commitments on 47 economic develop-third year of the eight-year plan, we made strong gains ment projects. representing almost $1I million in new and toward reaching some plan objectives but need significant retained annual base rate revenues and nearly 7,000 new improvement on others. and retained jobs for Northern Ohio. A major step taken to reach the twin goals was our Under the strategic plan, we are structured in six strategic agreement to merge with Ohio Edison Company (Ohio business groups to better focus on our competitiveness. v Edison) to form a new holding company called During 1996, we reduced employment from about 6,800 FirstEnergy Corp. (FirstEnergy). The proposed merger, to 6,200, below our goal of 6,300. Further reduction in our combined with good operating performance, our success- work force to about 5,800 is planned by year-end 1997. ful price increase and the accelerated paydown of debt, We also plan to reduce expenditures for operation and resulted in a significant stock price gain, tach that the maintenance activities (exclusive of fuel and purchased total return to our common stock share owners during power expenses) and capital projects from $954 million in 1996 was 331 The merger is expected to better position 1996 to approximately $900 million in 1997 by continuing both companies to meet coming competitive challenges. to streamline operations. We will continue to reduce our unit cost of fuel used for generating electricity, while Revenue growth is a key obj.ective of our plan, from safely improving the operating performance of our genera-pncmg actions as well as market expansion. tion facilities. In April 1996, The Public Utilities Commission of Ohio .
# "E # ""
(PUCO) approved in full the $119 million price increases """ "E " * "'
*T" requested by our subsidiaries, The Cleveland Electric me in umng en ng our nanqal and mmpeth pe Illuminating Company (Cleveland Electnc) and The tion. In 1996, we reduced our fixed obligations for debt, Toledo Edison Comp [mv (Toledo Edison) (collectivelv, -
prped nod and generah facW. . ties kases Qadah the Operating Compam.'es). The primary purpose of the ollset by the new accounts receivable securitization) by increases was to provide additional revenues to recover all $227 million. See Notes 1(i) and 2. Interest expense and the costs of prosiding electric service, meluding deferred preferred dividends dropped $26 million. In the last three costs, and provide a fair return to our common stock share -years, fixed obligations were reduced by $523 million owners. The additional revenues also provided cash tc, which is ahead of the schedule in our strategic plan to accelerate the redemption of debt and preferred stock. reduce these obligations by $1.3 billion by 2001. Kilowatt-hour sales to retail customers were virtually in 1996, we reported earnings per common share of 5.82 e
~
unchanged compared to 1995 results, while wholesale emnp red to $1.49 in 1995. The reported decrease masks sales increased by 6.8% from 1995 as a result of the good a 5.05 per share increase in basic earnings from operations availability of our generating units and a more aggressive and a significant improvement in the quality of reported bulk power marketing elTort. Adjusted for weather, how- earnings. The dechne in reported earnings is primarily ever, kilowatt-hour sales to residential and commercial attributable to the delay in implementing our price customers increased by 19 and 1.79, respectivelv, from increase until late April, while we began at the end of 1995. 1995 to charge earnings for operating expenses and amor-tization of deferrals uhich the price increase was designed Another key element of our revenue strategy is to ofter to recover. The price increase contributed approximately long-term contracts to large industrial customers who $47 million after tax, or S.32 per share, more cash to our might otherwise consider changing power suppliers. Dur- carnings in 1996. In addition,1996 results included non-ing 1996, we renewed and extended for as long as ten cash charges against earnings of $22 million after tax, or years contracts with many of our large industrial custom- 5.15 per share, for the disposition of inventory and write-ers, including the six largest. While this strategy has down of inactive production facilities. The full benefit of resulted in lower prices for these customers, in the long our $119 million price increase, substantial reductions in run, it is expected to maximi /c share owner value by operation and maintenance expenses and a continuing retaining our customer base in a changing industry. Prior decline in intere3t charges are expected to result in to these renewals, 69% of our industrial base rate improvement in earnings and cash flow from operations in (nonfuel) revenues under contract was scheduled for 1997. 19
Panding M:rg r with Ohio Edison Centerior Energy prior to the merger and dividend action by FirstEnergy after such time will be determined by their On September 16,1996, we announced the merger with respective Boards of Directors. The merger agreement Ohio Edison in a stock-for-stock transaction. Our share limits the indicated annual dividends prior to the merger owners will receive 0.525 of a share of FirstEnergy com- to 5.80 per share of Centerior Energy common stock and mon stock for each share of Centerior Energy common $1.60 per share of Ohio Edison common stock. See stock owned, w hile Ohio Edison share owners will receive Ca^ ital Resources and Liquidity-Liquidity below. one share of FirstEnergy common stock for each share of Ohio Edison common stock owned. FirstEnergy plans to Various aspects of the merger are subject to the approval account for the merger as a purchase in accordance with of the Federal Energy Regulatory Commission (FERC) generally accepted accounting principles. and other regulatory authorities. Common stock share .- owners of Centerior Energy and Ohio Edison are expected We believe that the merger will create a company that is to vote on approval of the merger agreement on better positioned to compete in the electric utility industry March 27,1997. The merger must be approved by the -
~
than either we or Ohio Edison could on a stand-alone aflirmative votes of the share owners of at least two-thirds basis, enhancing long-term share owner value and provid- of the outstanding shares of Ohio Edison common stock ing customers with reliable service at more stable and and a majority of the outstanding shares of Centerior competitive prices- Energy common stock. The merger is expected to be ef-The combination of Centerior Energy and Ohio Edison is fective in late 1997. a natural alliance of two companies with adjoining service areas who already share many major generating units. FirstEnergy Rate Plan FirstEnergy expects to reduce costs, rnaximize etliciencies On January 30,1997, the PUCO approved a Rate Reduc-e e ue ash flo d a ning db or IT cti competitor in the mereasmgly competitive electne utthty 9 9 "(" ; mation of the merger. The Plan would be null and void if
'" "' D the merger is not consummated. The rate order granting FirstEnergy anticipates the merger will result in net the April 1996 price increase will remain in full force and savings for the combined companies of approximately efTect during the pendency of the merger or if the merger $1 billion over ten years,in addition to the impact of cost is not consummated.
reduction programs underway at both companies. The The Plan calls for a base rate freeze through 2005 (except additional savings, which we believe could not be to comply with any significant changes in environmental, achieved without the merger, will result primarily from the reduction of duplicative functions and positions, joint la ory or tax laws), followed by an immediate
$310 million (which represents a decrease of approxi-dispatch of generating facilities and procurement etlicien-ly 15% from current levels) base rate reduction in cies. We expect reductions m labor costs to comprise ,
2006; interim reductions beginning seven months after slightly over half the estimated savings. In addition, c nsummation of the merger of $3 per month increasing FirstEnergy expects to reduce system-wide debt by at to $5 per month per residential customer by July 1,2001; least $2.5 billion through the year 2000, yielding addi.
$105 m.llion i for economic des.elopment and energy efli-tional long-term savings in the form of lower interest ciency programs; earnings caps for regulatory purposes for "I* "
- the Operating Companies; a commitment by FirstEnergy The Operating Companies' share of the $1 billion of for a reduction, for regulatory accounting purposes, in savings will permit them to reduce prices to their custom- nuclear and regulatory assets by the end of 2005 of at ers as discussed below under FirstEnergy Rate Plan. least $2 billion more than it otherwise would be, through Absent the merger, the Operating Companies plan to revaluing facilities or accelerating depreciation and amor-achieve savings as well, but at a lower level, which is tization; and a freeze in fuel cost factors until Decem- '
expected to allow prices to be frozen at current levels until ber 31, 2005, subject to PUCO review at year-end 2002 at least 2002 despite inflationary pressures. and annual inflation adjustments. The Plan permits the Ohio Edison currently has an indicated annual common
# "E *P"" #8 E#"# "E ""#"
n a ate po e an e e urr n I an indi ed an ua co mns ck di iden of $.80 per share. FirstEnergy expects that its dividend at Total price savings for the Operating Companies' custom-the time of consummation of the merger will be at least ers of ab)ut $391 million are anticipated over the term of equivalent to an indicated annual dividend of $1.50 per the Plan, as summarized below, excluding potential eco-share of Ohio Edison common stock and 5.7875 per share nomic development benefits and assuming that the of Centerior Energy common stock. Dividend action by merger takes place on December 31,1997. i n 1
PI ^""'""' remainder of their business, they would be required to 19w Q"[5 21 write oft their remaining regulatory assets and measure all 1999 other assets for impairment. For a discussion of the 2000 n criteria for complying with SFAS 71, see Note 7(a). i I 43 2Q f9 April 1996 Rate Order 2003 y 59 In its April 1996 order, the PUCO granted price increases totaling $119 million in annualized revenues to the Oper-
.g Q[
- ating Companies. The Operating Companies intend to Under the Plan's earnings cap, the Operating Companies freeze rates at existing levels until at least 2002, although will be permitted to earn up to an 11.5% return on they are not precluded from requesting further price
- common stock equity for regulatory purposes during cal- increases. In the order, the PUCO provided for recovery endar years prior to 2000,12% during calendar years 2000 of all regulatory assets in the approved rates, and the and 2001, and 12.59% during calendar years 2001 through Operating Companies continue to comply with the provi-sions of SFAS 71.
2005. The regulatory return on equity is generally expected to be lower than the return on equity calculated in connection with its order, the PUCO recommended for financial reporting purposes due to the calculation that the Operating Companies write down certain assets methodology defined by the Plan and, as discussed in the for regulatory purposes by an aggregate of $1.25 billion next paragraph, anticipated ditTerences in accounting for through 2001. If the merger is consummated, we believe the Plan for financial reporting versus regulatory purposes. acceleration of $2 billion of costs under the Plan would if for any calendar year the regulatory return on equity fully satisfy this recommendation. We agree with the
~
exceeds the specified level, the excess will be credited t concept of accelerating the recognition of costs and the customers, first through a reduction in Percentage of recovery of assets as such concept is consistent with our income Payment Plan (PIPP) arrearages and then as a strategic objective to become more competitive. However, credit to base rates. PIPP is a deferred payment program
, we believe that such acceleration must also be consistent for low-income residential customers w th the reduction of debt and the opportunity for Center-ior Energy common stock share owners to receive a fair The Plan requires, for regulatory purposes, a revaluation of or an accelerated reduction in the Operating Compa. return on their investment. Consideration of whether to implement a plan responsive to the PUCO's recommen-nies' investment in nuclear plant and certain regulatory assets (excluding amounts due from customers for future dation to revalue assets by $1.25 billion is pending the merger with Ohio Edison, federal income taxes) by at least $2 billion by the end of 2005. Only a portion of the $2 billion of accelerated costs Notwithstanding the pending merger with Ohio Edison is expected to be charged against earnings for financial and discussions with regulators concerning the efTect of reporting purposes by 2005. the Plan on our nuclear generating assets, we believe it is reasonable to expect that rates will be set at levels that FirstEnergy believes that the Plan will not provide for the wg recover all current and anticipated costs associated full recovery of costs and a fair return on investment with our nuclear operations, including all associated regu-associated with the Operating Companies' nuclear opera- 1 t ry assets, and such rates can be charged to and tions. Pursuant to the PUCO's order, FirstEnergy is c Hected from customers. If there is a change in our required to submit to the PUCO staff the regulatory evalu tion of the competitive environment, regulatory accounting and cost recovery details for implementing the framew rk or other factors, or if the PUCO sigmficantly Plan. After approval of such details by the PUCO staff, reduces the value of our assets or reduces the approved FirstEnergy expects that the Operating Companies will return on common stock equity of 12.59% and overalt rate discontinue the application of Statement of Financial f retum of 10.06%, or both, for future regulatory pur-Accounting Standards (SFAS) 71 for their nuclear oper- p ses, the Operating Companies may be required to ations if and when consummation of the merger becomes record material charges to earnings.
probable. The remainder of their business is expected to continue to comply with the provisions of SFAS 71. At Merger of the Operating Companies the time the merger is probable, the Operating Compa. In October 1996, the FERC authorized the merger of nies would be required to write off certain of their regula. Toledo Edison into Cleveland Electric. The merger agree-tory assets for financial reporting purposes. The write-oft ment between Centerior Energy and Ohio Edison requires amounts uould be determined at that time. FirstEnergy the approval of Ohio Edison prior to consummation of the estimates the write-otT will be approximately $750 mil. proposed merger of the Operating Companies. Ohio lion. Under the Plan, some or all of this write-otT cannot Edison has not yet made a decision. be applied toward the $2 billion regulatory commitment discussed above. For financial reporting purposes, nuclear Competition } generating units are not expected to be impaired. If events I cause one or both Operating Companies to conclude they Structural changes in the electric utility industry from no longer meet the criteria for applying SFAS 71 for the actions by both federal and state regulatory bodies are continuing to place downward pressure on prices and 21
business. Through aggressive door-to-door campaigns, we increase competition for customers. Our nuclear plant have been successful in limiting the number of conver-licenses have required open-access transmission for our l wholesale customers for 20 years. More recently, the sions of Cleveland Electric customers to Cleveland Public Power (CPP) under its ongoing expansion plan. CPP is Federal Energy Policy Act of 1992 initiated broader access to utility transmission systems and, in 1996, the the largest municipal supplier in our ser ice areas. In 1996, we reached agreements to serve a number of large FERC adopted rules relating to open-access transmission Cleveland commercial customers, including some previ-services. The open-access rules require utilities to deliver ously served by CPP. power from other utilities or generation sources to their wholesale customers at nondiscriminatory prices. In the Toledo Edison service area, all existing customers
- A number of states have enacted transition legislation in the City of Clyde now have the right to choose between the municipa! supplier and Toledo Edison, as a result of a which provides for introduction of competition for retail November 1996 referendum overturning a Clyde ordi-electric business and recovery of stranded investment.
- nance limiting such choice. In Toledo, City Council -
Several groups in Ohio are studying the possible introduc-funded a consultant's study of alternatives to Toledo tion of retail wheeling and stranded investment recovery. Edison service. Municipal expansion activity continues in Retail wheeling occurs when a customer obtains power areas surrounding several towns serviced by municipal from a utility company other than its local utility. The term " stranded investment" generally refers to fixed costs systems in the Toledo Edison service area. We continue to pursue legal remedies to halt illegal municipal expansion approved for recovery under traditional regulatory meth-ods that would become unrecoverabic, or " stranded", as a in both service areas. result of legislative changes which allow for widespread Our merger with Ohio Edison and the benefits of the Plan competition. The PUCO is sponsoring discussions among to ur customers are expected to better position us to deal a group of business, utility and consumer interests to with the structural changes taking place m the mdustry explore ways of promoting competitive options without nd to improve our competitive position with respect to unduly harming the interests of utility company share , municipalization. owners or customers. The PUCO also has introduced two pilot projects, both intended as initial steps to introduce Nuclear Operations competitive elements into the Ohio electric utility We have interests in three nuclear generating units-business. Davis-llesse Nuclear Power Station (Davis-llesse), Perry ' Nuclear Power Plant Unit 1 (Perry Unit 1) and lleaver
/, bill to restructure the electne utih.ty mdustry in Oh.'
has been mtroduced m the Ohio llouse of Representa- Valley Power Station Unit 2 (lleaver Valley Unit 2)- tives. A bipartisan committee from both legislative houses and operate the first two. has been formed to study the issue. We presented our All three units were out of service temporarily for refuel-model for customer choice, called Energy Choice, to the ing during 1996; thus, plant availability factors for Davis-PUCO discussion group in August 1996. Under our llesse, Perry Unit I and licaver Valley Unit 2 were 85%, model, full retail competition should be introduced by 79% and 70% respectively, for 1996. The 1994-1996 2002, but two essential elements, recovery of stranded availability factors for the units were 91% 73% and 85% investment and levelization of tax burdens among energy for Davis-llesse, Perry Unit I and llcaver Valley Unit 2, suppliers, must be resolved in the interim to assure share respectively. The comparable industry averages for a owners' recovery of and a fair return on their investments. three-year period (as of August 31,1996) are 82% for Although competitive pressures are increasing, the trad.,-i pressurized water reactors such as Davis-Ilesse and llea-tional regulatory framework remains in place and is ver Vallev Unit 2 and 78% for boiling water reactors such expected to continue for the foreseeable future. We can- a Perry Unit 1. Davis-llesse established a plant record not pred,ct i when and to what extent retail wheeling or with its 509-day continuous run at or near full capacity
~
other forms of competition will be allowed. We believe before shutting down for its scheduled refueling outage in that pure competition (unrestricted retail wheeling for all April 1996. customer classifications) is at least several years away and - A significant part of our strategic plan involves ongoing that any transition to pure competition will be in phases. elTorts to increase the availability and lower the cost of The FERC and the PUCO have acknowledged the need production of our nuclear units. In 1996, we continued our to provide at least partial recovery of stranded investment progress toward increasing long-term unit availability as greater competition is permitted and, therefore, we while continuing to lower production costs. The goal of believe that there will be a mechanism developed for the our nuclear improvement program is to replicate Davis-recovery of at least some stranded investment. Ilowever, liesse's operational excellence and cost reduction gains at due to the uncertainty involved, there is a risk in connec-tion with the introduction of retail whccling that some of Perry Unit 1. while improving performance ratings. our assets may not be fully recovered. Our nuclear units may be . impacted by activities or events beyond our control. Operating nuclear units have exper-Competition from municipal electric suppliers for retail I business in both Operating Companies' service areas is ienced unplanned outages or extensions of scheduled l outages because of equipment problems or new regulatory producing both favorable and unfavorable results in our 22
i requ'rements. A major accident at a nuclear facility anywhere in the world could cause the Nuclear Regula-ing facilities to meet demand for electric senice and to tory Commission to limit or prohibit the operation or comply with gosernment regulations. Our cash construc-licensing of any domestic nuclear unit. If one of our tion expenditures totaled $205 million in 1994, $201 mil-nuclear units is taken out of senice for an extended period lion in 1995 and $151 million in 1996. Our debt and for any reason, including an accident at such unit preferred or any stock maturities and sinking fund requirements other nuclear facility, we cannot predict whether regula- totaled $119 million in 1994, $374 million in 1995 and tory authorities would impose unfavorable rate treatment. $235 million in 1996. In addition, we optionally redeemed Such treatment could include taking our affected unit out $525 million of securities in the 1994-1996 period, includ-of rate base, thereby not permitting us to recover our ing $237 million of tax-exempt issues refunded in 1995. investment in and earn a return on it, or disallowing in July 1996, Centerior Funding Corporation (Centerior certain construction or maintenance costs. An Funding), extendeda wholly owned subsidiary of Cleveland Elec-outage coupled with unfavcaable rate treatment could have a materiat adverse elTect on our financial condition, tric, issued $150 million in AAA-rated accounts receiva-cash flows and results of operations. Premature plantble-backed investor certificates due in 2001 with an closings could also base a material adverse etTect on our interest rate of 7.2%. Net proceeds from the accounts financial condition, cash flows and results of operations receivable securitization were used to redeem higher-cost securities ar because the estimated cost to decommission a plant a for general corporate purposes. exceeds the current funding m the decommissionmg trust. As a result of these activities, the embcdded cost of the Hazardous Waste Disposal Sites Operating Companies' debt at the end of 1996 declined to The Operating Companies have been named as "poten. tially responsible parties" (PRPs) for three sites listed on We renewed a $125 million revolving credit facility in the Superfund National Priorities List (Superfund List) May 1996 for a one-year term. In 1996, portions of our and are aware of their potential involvement in the nuclear fuel lease financing vehicles matured: 584 million cleanup of several other sites. Allegations that the Oper. ofintermediate-term notes in September and a $150 mil-lio '- ating Companies disposed of hazardous waste at these
- of credit supporting short-term borrowing in sites. and the amount involved, are often unsubstantiated Octoner. These facilities were replaced by $100 million of and subject to dispute. Federallaw provides that all PRPsintermediate-term notes and a $100 million two-year for a particular site be held liable on a joint and severalletter of credit. The net reduction in the facility site basis. If the Operating Companies were held liable for results from lower nuclear fuel financing requirements.
100% of the cleanup costs of all the sites referred t above, the cost could be as high as $415 million. Ilow- 1997 and Beyond Cash Requirements ever, we believe that the actual cleanup costs will be substantially lower than $415 million, that the Operating Our anticipated 1997 cash requirements for construction Companies' share of any cleanup costs will be substan-tially less than 100% and that most of the other PRPs for are $110 wilion for Cleveland Electric and $61 million areToledo Edison. Debt and preferred stock maturities linancially able to contribute their share. The Operating and sinking fund requirements are $145 million for Cleve-Companies have accrued a liability totaling $10 million at December 31,1996 based on estimates of the costs of land Electric and $51 million for Toledo Edison. Of thes amounts. $70 million for Cleveland Electric and $10 mil-cleanup and their proportionate responsibility for such lion for Toledo Edison are tax-exempt issues secured by costs. We believe that the ultimate outcome offirst these mortgage bonds and subject to optional tender by the matters will not have a material adverse clTect on our on November 1,1997, which we expect to replace owners financial condition, cash flows or resuhs of operations. with similar issues at substantially lower interest rates. We expect to meet remaining requirements with internal A new Statement of Position issued by the Accounting cash generation and cash reserves. We also expect to be Standards Executive Committee of the American a t Insti-tute of Certified Public Accountants, Inc. efTective Janu- m 1997 optionally redeem more debt and preferred stock than we did in 1996. ary 1,1997 provides guidance on the recognition and disclosure of environmental remediation liabilities.We Adop- expect to meet all of our 1998-2001 cash require-tion of the statement in 1997 is not expected to have aments with internal cash generation. Estimated cash material results adverse of operations. effect on our financial condition or requirements for our construction program during this period total $496 million for Cleveland Electric and
$213 million for Toledo Edison. Debt and preferred stock Capital Resources and Liquidity maturities and sinking fund requirements total $445 mil-1994-1996 Cash Requirements lion and s207 million for Cleveland Electric and Toledo EQn, respectively, for the same period. If economical, We need cash for normal corporate operations (including additional securities may be redeemed with funding the payment of dividends), retirement of maturing securi- expected to be provided through internal cash generation.
ties, and an ongoing program of constructing and improv- External funding may be required to support investments in nonregulated business opportunities. mum B
The Operating Companies can make cash available to Consummation of the merger with Ohio Edison is fund Centerior Energy's common stock dividends by expected to reduce the Operating Companies' cash con- paying dividends on their respective common stock, which struction requirements and improve their ability to is held solely by Centerior Energy. Federal law prohibits redeem fixed obligations. the Operating Companies from paying dividends out of capital accounts. Each Operating Company has since Liquidity 1993 declared and paid preferred stock dividends, and Cleveland Electric has also declared and paid common Net cash flow from operating activities in 1996 was stock dividends, out of appropriated current net income significantly increased from 1995 by implementation of , included in retained earnings. At the times of such decla-
- the price increases efTective in April 1996. Most of the net rations and payments, each Operating Company had a proceeds from our accounts receivable securitiration of deficit in its retained earnings. At December 31, 1996,
$143 million were used to redeem other higher-cost '
securities, producing net savings in our overall cost of Cleveland Electric and Toledo Edison had $130 million and $223 million, respectively, of appropriated retained borrowing. In 1996, we reduced our fixed obligations for earnings for the payment of dividends. Toledo Edison also debt, preferred stock and generation facilities leases (par-has a provision in its mortgage applicable to approni-tially offset by the new accounts receivable securitization) matelv $94 million of outstanding first mortgage bonds by $227 million. At year-end 1996, we had $138 million in ' cash and temporary cash investments, down from $179 ($31 million of which mature in August 1997) that million at year-end 1995. requires common stock dividends to be paid out of its total balance of retained earnings, which had been a Additional first mortgage bonds may be issued by the deficit from 1993 through November 1996. Operating Companies under their respective mortgages on the basis of property additions, cash or refundable first As part of a routine audit, the FERC is considering a statement w hich it requested and received from Cleveland mortgage bonds. If the applicable interest coverage test is met, each Operating Company may issue first mortgage Electric supporting the payment of dividends out of bonds on the basis of property additions and, under appropriated current net income included in retained certain circumstances, refundable bonds. At Decem- carnings while total retained earnings were a deficit. A ber 31,1996, Cleveland Electric and Toledo Edison would similar request has been made of Toledo Edison. At have been permitted to issue approximately $666 million December 31, 1996, Cleveland Electric's retained earn-and $148 million of additional first mortgage bonds, ings delicit was $276 million and Toledo Edison's total retained earnings were $5 million. The final disposition of respectively. FirstEnergy has not decided whether t . apply purchase accounting to the Operating Compames if this issue is a factor expected to be considered by the merger with Ohio Edison is completed.1f such , FirstEnergy in deciding whether to apply purchase accounting is applied to the Operating Compames, their accounting to the Operating Companies, one effect of hrst mortgage bond capacities would be adversely which would be to reset deficit retained earnings to zero. If the merger is not consummated or if FirstEnergy atTeeted. determines not to apply purchase accounting to the Oper-Cleveland Electric is able to issue preferred and prefer- ating Companies, the Operating Companies intend to ence stock and Toledo Edison is able to issue preference continue to support their position and pursue all available stock. Centerior Energy may raise funds through the sale alternatives to allow them to continue the declaration and of common stock under various employee and share payment of dividends. owner plans. The Operating Companies have $273 million in financing Results of Operations vehicles to support their nuclear fuelleases, $83 million of which mature in 1997 Lcplacement financing for the 1996 vs.1995
- maturing issues may not be needed in 1997. We plan to Factors contributing to the 1.5% increase in 1996 operat-renew the $125 million revolving credit facility which ing revenues are as follows:
matures in May 1997. Millions . of I>ona increase iDecreme) in oneratine Resenuca Current credit ratings for the Operating Companies are as 5 62 liase Rates po) IO!IO* M K 11 Sales Vulume and Ma f"iN in rs krets Sersice. Ing Wholesale Resenues il (N) I uct Cost Recovery Re6cnues ' Ha2 Mncellaneous Resenues 11rst mortgage bonds BH Total Q Ht Ha3 Subordinate debt for Clesetand 11cetrie __ H+ HI The increase in 1996 base rates revenues resulted prima-Subordinate debt for loledo 1:dwn B b2 rily from the April 1996 rate order issued by the PUCO j Preferred ud for the Operating Companies as discussed under Outlook- i Following the FirstEnergy merger announcement, both April 1996 Rate Order and in Note 7(b). Renegotiated rating agencies placed the Operating Companies'securi- contracts for ecrtain large industrial customers resulted in ties on credit watch with positive implications. 24
a decrease in base revenues which partially offset the Interest charges and preferred dividend requirements a row, of the general price increase. For the fourth year in elTect industrial kilowatt-hour sales increased. The decreased in 1996 because of the redemption of securities increase in 1996 was 0.9%, as increased sales to petroleum and refundings at favorable terms in 1996 and 1995. refineries, large chemical industry customers and the broad-based, smaller industrial customer group were1995 par-vs.1994 tially offset by fewer sales to large automotive manufac-turing and steel industry customers. Commercial Factors contributing to the 3.9% increase in 1995 operat-kilowatt-hour sales increased only 0.1% and residential ing revenues are as follows: kilowatt-hour sales decreased 1.7% primarily because of Minions
!nerease mecrease) in oneratine Revenues the cooler summer weather in 1996. On a weather- or Donars normalized basis, residential and commercial sales Kwii sales volume and Mix _
ut ' wholesale Revenues increased 1% and 1.7%, respectively. Other sales l'uci Cost Recovery Revenues 13 increased 3.8% as a 6.8% increase in wholesale sales was
**""d""'"'"""
9 partially offset by a 5.2% decrease in sales to public 9 authorities. Good availability of our generating units and a D more aggressive bulk power marketing efTort helped Industrial kilowatt-hour sales increased 0.8% in 1995, but increase wholesale sales. Lower 1996 fuel cost recovery sales grew 2.2% excluding reductions at two low-margin revenues resulted from a decrease in the fuel cost factors steel producers (representing 5% of industrial revenues). for Cleveland Electric. The weig ted average of these fuel Residential and commercial kilowatt-hour sales increas cost factors decreased 3% for Cleveland Electric3.5% but and 2.8%, respectively, primarily because of the hot increased 1% for Toledo Edison. summer weather, although there was about 1% nonweather-related growth in commercial kilov'att-hour For 1996, operating revenues were 32% residential,30% commercial,30% industrial and 8% other, and kilowatt- sales. Other sales increased 26% because of a 43% increase in whclesale sales due principally to the hot hour sales were 23% residential, 25% commercial, 40% summer and good availability of our generating units. industrial and 12% other. The average prices per kilowatt- Weather accounted for approximately $38 million of the hour for residential, commercial and industrial customers$61 million increase in 1995 base rate revenues, liigher were 11.38,9.94 and 6.33 cents, respectively. 1995 fuel cost recovery revenues resulted from an increase Operating expenses increased 5.8% m. . 1996. The cessation in the fuel cost factors for Cleveland Electric. The weighted average of these fuel cost factors increased 7% of the Rate Stabilization Program deferrals and the com-for Cleveland Electric but decreased 6% for Toledo mencement of their amortization in December 1995Edison' resulted in the decrease in deferred operating expenses. See Note 7(d). Depreciation and amortization expenses For 1995, operating revenues were 32% residential,30% increased primarily because of a $12 million net increase commercial, 3' % industrial and 7% other, and kilowatt-in depreciation related to changes in depreciation rates, hour assales wew 23% residential, 25% commercial, 40% discussed in Note 1(d), and the cessation of the ac cler- industrial and 12% other. The average prices per kilowatt-ated amortization of unrestricted investment taxhour creditsfor residential, commercial and industrial customers under the Rate Stabilization Program, which was were 11.02,9.70 and 6.39 cents, mspectively. The changes reported in 1995 as a $10 million reduction of deprecia- from 1994 were not significant, tion. Other operation and maintenance expenses in 1996 included a $23 million one-time charge for the disposition Operating expenses increased 4.5% in 1995. Fuel and ofinventory as part of a reengineering of the supply chain purchased power expenses increased as higher fuel process. Reengineering the supply chain process increases expense was partially ofTset by lower purchased power the use of technology, consolidates warehousing and uses expense. The higher fuel expense was attributable to just-in-time purchase and delivery. Federal income taxes increased generation and more amortization of previously decreased as a result oflower prelax operating income. deferred fuel costs than the amount amortized in 1994. The higher other operation and maintenance expenses A nonoperating loss resulted in 1996 primarily from resulted primarily from charges for an ongoing inventory Toledo Edison's $11 million write-down of tworeduction inactiveprogram and the recognition of costs associated production facilities, as discussed in Note 14, and merger- with preliminary engineering studies. Federal income related expenses. The deferral of carrying charges related taxes increased as a result of higher pretax operating to the Rate Stabilization Program ended in November income. Taxes, other than federal income taxes, increased 1995. The federal income tax credit for nonoperating primarily due to property tax increases resulting from income increased in 1996 accordingly, plant additions, real estate valuation increases and a nonrecurring tax credit recorded in 1994. 25
l Board is also responsible for making changes in manage-IVlanagement's Statement meni or independent public accountants if needed. of Responsibility fc / The Board has appointed an Audit C,ommittee, comprised Financial Statements entirely of outside directors, which met two times in 1996. The management of Centerior Energy Corporation is The Committee recommends annually to the Bowl the responsible for the consolidated financial statements in ifor firm of independent public accountants to be retar this Annual Report. The statements were prepared in the ensuing year and revicus the audit approach usal by accordance with generally accepted accounting principles. Under these principles, some of the recorded amounts are the accountants and the results of their audits. It also ' oversees the adequacy and effectiveness of our internal estimates which are based on an analysis of the best accounting controls and ensures that our accounting sys-information available. - tem produces financial statements which fairly present We maintain a system of internal accounting controls ur financial position. designed to assure that the financial records are substan-tially complete and accurate. The controls also are
- designed to help protect the assets and their related records. We structure our control procedures such that their costs do not exceed their benefits. Terrence G. Linnert Senior Vice President, Our internal audit program monitors the internal account.
Chief Financial Officer ing controls. This program gives us the opportunity to and General Cutursel asaess the adequacy and efl'ectiveness of existing controls and to identify and institute changes where needed. In ~ xididon, an audit of our financial statements is conducted [- by Arthur Andersen LLP, independent public account-ants, whose report appects below. E. Lyle Pepin Controller and Our Board of Directors is responsible for determining Chief Accouni/ng Officer whether management and the independent public accountants are carrying out their responsibilities. The or material misstatement. An audit includes examining, Report of Independent on a test basis, evidence supporting the amounts and Public Accountants disclosures in the financial statements. An audit also meludes assessing the accounting principles used and To the Share Owners and Board of Directors of significant estimates made by management, as well as Centerior Energy Corporation: evaluatmg the overall financial statement presentation. We believe that our audits provide a reasonable basis for We have audited the accompanying consolidated balance our opinion. sheet and consolidated statement of capitalization of Centerior Energy Corporation (an Ohio corporation) and in our opinion, the financial statements referred to above subsidiaries as of December 31,1996 and 1995. and the present fairly, in all material respects, the financial posi-
- related consolidated statements of income, retained earn- tion of Centerior Energy Corporation and subsidiaries as of December 31,1996 and 1995, and the results of their ings and cash flows for each of the three years in the period ended December 31.1996. These fii.mcial state- operations and their cash flows for each of the three years ments are the responsibility of the Companfs manage- in the period ended December 31,1996, in conformity ment. Our responsibility is to express an opinion on these with generally accepted accounting principles.
financial statements based on our audits. r/ 2 We conducted our audits in accordance with generally accepted auditing standards. Those standards require that Cleveland, Ohio we plan and perform the audit to obtain reasonable February 14,1997 assurance about whether the financial statements are free 26
Income Statem6nt cenwrior Enera corporation and Subsidiaries For the_ygars ended December 31 m 1996 1995 1994 tmillions of dollars, except per share amounts) Operating Resenues
$2.553 $2 516 $2,42 i Operatin, Expenses Fuel and purchased powet 465 465 442 .~ Other operation and maintenance 635 617 595 Generation facilities rental expense, net 159 160 160 Total operation and maintenance 1,259 1,242 1,197 . Depreciation and amortization 304 281 278 Taxes, other than federal income taxes 320 322 309 Amortiration of deferred operating expenses, net 43 Federal income taxes (53) (55) 111 135 114 2.037 1.927 1.843 Operating Income 516 589 578 Nonoperating income (Loss)
Allowance for equity funds used during construction 3 3 5 Other income and deductions, net (17) 6 8 Deferred carrying charges - 43 40 Federal income taxes-credit (expense) 9 (5) (6) (5) 47 47 income liefore Interest Charges and Preferred Diiidends _ _ 511 636 625 Interest Charges and Preferred Diiidends Debt interest 337 358 361 Allowance for borrowed funds used during construction Preferred dividend requirements of subsidiaries (3) (3) (6) 56 61 66 390 416 421 Net income
$ I21 $ 220 $ 204 Ascrage Number of Common Shares Outstanding (millions) 1480 148 0 147.8 Earnings Per Common Share
$ .R2 S 1 49 $ 1.3x Diiidends Declared Per Common Share S 80 $ .80 $ .R0 Retained Earnings For the years ended December 31.
1996 _l391 1994 (millions of dellars) Retained Earnings (Deficit) at Heginning of Year
$DJf>) $1433) $(523)
Additions Net income 121 220 204 Deductions Common stock dividends fi18) (l18) (l18) Other, including preferred stock redemption expenses of subsidiaries Net increase ___11) - (i) 2 102 85 Retained Earnings (Deficit) at End of Year
$(314) Sl136) $(438)
The accompanying notes are an integralpart of these statements. 27
Balance Sheet December 31. 1996 1995 (millions of dollars) ASSETS l'roperty, I'lant and Equipment
$ 9,867 $ 9,768 Utility plant in senice Less: accumulated depreciation and amortization 3.272 3.036 6.595 6,732 .*
Construction work in progress 79 101 6.674 6,833 Nuclear fuel, net of amortization 189 200 89 102 Other property, less accumulated depreciation _ (s9_52 7.135 Current Assets Cash and temporary cash investments 138 179 Amounts due from customers and others, net 201 223 12 100 Unbilled revenues Materials and supplies, at average cost 85 151 Owned Under consignment 34 - Taxes applicable to succeeding years 250 255 24 18 Other 744 926 Regulatory and Other Assets 2,278 2,375 Regulatory assets Nuclear plant decommissioning trusts 140 114 investment in partnership 23 - 73 93 Other 2.514 2.582 Total Assets s f o.2 t o $ 10.643 The accompanying notes are an integral part of this statement. 0 2#
Centerior Energy co,Poration and subsidia,je, _ December 31. CAPITALIZATION AND LIABILITIES 1996 g Capitalization (millions of dollars} Common stock equity. Preferred stock
*. $ 1.987 5 1,984 With mandatory redemption provisions -
Without mandatory redemption provisions __ _ 189 220 Long-term debt _ _ 448 451 _144_4 . 3 734 Current IJabilities _h0ld . 6,389 current portion oflong-term debt and preferred stock _ Current portion of nuclear fuellease obligations- __ 196 235 Accounts payable _ _ 88 95 Accrued taxes _ l38 153 Accrued interest _ 389 374 Other __ _ 75 83 86 87 972 1027 Deferred Credits and Other Liabilities Unamortized investment tax credits _ Accumulated deferred federalincome taxes 252 263 Unamortized gain from Bruce Mansfield Plant sale _ 1,877 1,875 Accumulated deferred rents for Bruce Nuclear fuel lease obligations _ a eyMansfield Unit 2_ Plant 475_ and Beaver 138 499 V ll 145 Retirement benefits _ 123 Other 137 184 179 121 129 Total Capitalization and Liabilities _ _112D _1222 S10210 $10 641 29
~
l cc,,1criar c,,cruc ariwrari.n, a,a s+uiarin Cash Flows For the years ended December 31. 1995 1994 1996 (millions of dollars)
$J20 $ 204 Cash 1710ws from Operating Actisities (1) $__L21 Net Ineome _ 281 278 Adjustments to Reconcile Net Income to Cash from Operating Activities: _
304 42 72 95 .* Depreciation and amortization _ 31 , (3) (7) Deferred federal income taxes 17 6 (17) l Unbilled revenues _ (40) . (43) Deferred fuel _ 79 125 98 Deferred carrying charges (55) 43 (53) Leased nuclear fuel amortization (3) (3) (5) Amortization of deferred operating expenses, net _ 10 Allowance for equity funds used during construction _ _ (10) (12) 143 Changes in amounts due from customers and others, net _ 17 Net proceeds from accounts receivable securitization 32 (15) 9 (44) Changes in materials and supplies - 6 (10) Changes in accounts payable _ _ 9 14 Changes in working capital affecting operations . _ (18) 617 391 365 Other noncash items _ 569 738 611 Total Adjustments __ _ Net Cash from Operating Activities _
- 542 77 Cash Flows from Financing Actisities (2) -
- 12 First mortgage bond issues (214)
(363) (683) Common stock issues (90) (102) (l10) Maturities, redemptions and sinking funds __ _ (l18) (118) (118) Nuclear fuel lease obligations _._ _L]. ) (17) __. (!) Common stock dividends paid _ Premiums, discounts and expenses . _ (572) (378) _ (354) Net Cash from Financing Activities __ (151) (201) (205) Cash Flows from imesting Actiiities (2) _ (6) (3) (3) Cash applied to construction _ Interest capitalized as allowance (22) for (24) borrowed (26) funds used d Contributions to nuclear plant decommissioning trusts _ (23) Investment in partnership _ (8) (12) _Lil) (207) _L24()) (254) Other cash applied Net Cash from investing Activities _ (41) (7) (39) Net Change in Cash and Temporary Cash Imestments _ 179 186 225 Cash and Temporary Cash lmestments at Heginning of Year 5 179 5 186 5_ 14 Cash and Temporary Cash Imestments at End of Year _ S 306 S 3N) _ S .US - S R9 $ 6 (1) Interest paid (net of amounts capitali:cd) 5 46 Federalincome taxes paid Balance Sheet resulting from the nuncash h (2) Increases in Nuclear Fuel and Nuclear Fuel Lease obligations i The accompanying notes are an integral part of this statement. 3() -
Statement of Capitalization Centerior Enerm Corporation andSubsidiaries December 31. 1996 1995 CO31 MON STOCK EQUITY: (millions of dollars) j Common 5, hares, without par value (stated value of $357 million for 1995 and I994- ot Retained earnings (dcheit) .
$2,321 $2,320 Total Common Stock Equity (334)
- s. (336)
_ l.9x7 1984
- Current 1996 Shares Call Price PREFERRED STOCK: _Outstandinc
- _Per Share _
Cle$ eland Electric Without par value, 4.000,000 preferred shares authorized Subject to mandatory redemption:
$ 7.35 Series C -
120,000 88.00 Series E - $ 101.00 12 12,000 13 9.125 Series N 1.011.48 12 150,000 15 91.50 Series Q -- 100.00 15 53,572 1,000.00 30 88.00 Series R 54 50,000 64 90.00 Series S . - 50 74,000 - 50 73 73 Less: Current maturities 216 245 30 30 Not subject to mandatory redemption: Ik6 _ljj
$ 7.40 Series A 7.56 Series D 500.000 101.00 450,000 50 50 Adjustable Series L 102.26 474,000 45 45 42.40 Series T- 100.00 46 200,000 -
49 97 97 Toledo Edison 238 241
$100 par value, 3,000,000 preferred shares authorized;
$25 par value, 12,000,000 preferred shares authorized Subject to mandatory redemption:
$100 par $9.375 -
50,200 100.99 5 7
- 1. css: Current maturities 5 7
__.2 2 Not subject to mandatory redemption: 3 5
$100 par $4.25 4.56 _ 160,000 104.625 16 4.25 50,000 16 101.00 5 8.32 100,000 5 102.00 10 7.76 - 100,000 10 102.46 10 7.80 150,000 10 102.437 15 10.00 150,000 15 101.65 15 25 par 2.21 190.000 101.00 19 15 2.365- 1,000,000 19 25.25 25 1,400,000 25 Series A Adjustable . 27.75 35 1,200,000 35
- Series B Adjustable 25.00 30 1,200,000 30 25.00 __30 ,10 Centerior Energ3 Without par value, _ 110 210
) 5.000,000 preferred shares authorized, none outstanding-Total Preferred Stock, with Mandatory Redemption Provisions -- Total Preferred Stock, without Mandatory Redemption Provisions 189 220 444 45) The accompanying notes are an integralpart of this statement. 3_1
Statement of Capitalization (conunu.ol December 31, December 31. December 31, 1996 1995 1996 1995 1996 1995 (millions of dollars) (millions of dollars) (millions of dollars) 1.ONG-TERM DEllT: Toledo Edison Cleseland Electric l'irst mortgage bonds: 6.125% duc 1997 $ 31 $ 31 7.625% duc 2002 $ 195 $ 245 85 100 100 100 7.250% due 1999 7.375% due 2003 26 26 / 300 300 7.500% due 2002 - 9.500% due 2005 36 36 75 75 8.000% duc 2003 8.750% duc 2005 - 145 145
- 50 7.875% du: 2004 10.880% due 2006 50 50 .
l 9.250% due 2009 125 125 l 8.375% duc 2011 75 75 8.375% due 2012 300 300 9.375% due 2017 100 100 10.000% duc 2020_ 150 150 1,793 1,908 9.000% due 2023 323 338 1.470 1.570 Tux-exempt issues secured by first mortgage bonds: 1 1 64 64 10.00(YL due 1998 7.000'7e due 2006-09_ 31 31 6 6 3.700% due 2011" 67 6.000% duc 2011** 67 2 2 8.000% due 2019 - 6.000% due 2011" 45 45 48 48 7.625% due 2020 6.200% due 2013 54 54 79 79 7.750% duc 2020 8.00(YE due 2013 31 31 40 40 7.400% due 2022__ 3.500% due 2015" 10 10 l I 9.875% duc 2022"* _ 37 6.000% due 2017" 7.550% due 2023_ 37 73 73 20 3.500% due 2018** 20 41 41 6.875% due 2023 6.000% due 2020" 50 50 9 9 8.000% duc 2023 6.000% due 2020" 70 70 9.750% due 20""* 30 30 6.850% due 2t'23_ 73 73 8.000% due 2023 54 54 7.625% duc 2025 45 45 7.750% due 2025_ 44 44 1,025 1,025 7.700% due 2025 346 346 679 679 Medium term notes secured by first mortgage bonds: - 10
'O 9.050% due 1996_
8.700% duc 1996 - 3
- 32 9.000% due 1996 9.100% due 1996 26 26
- 13 9.300% due 1998 9.110% due 1995 7 7
- 13 8.000% due 1998 9.000% duc 1996 5 5 12 7.940% due 1998 9.140% duc 1996_
4 4
- 10 8.470% due 1999 9.050% due 1996 15 15
- 40 7.720% duc 1999 *
- 8.950% due 1996 7.500% duc 2000 43 43 14 9.450% due 1997 7.380% due 2000 14 5 5 17 9.000% due 1998 7.460% due 2000 17 10 10 21 8.870% due 1998 9.500% due 2001 21 2 2 8 8.260% due 1998 8 25 25 8.500% due 2001 7 ,
H.330% due 1998 8.620% due 2002 7 8.170% due 1998_ 11 II 5 5 8 8 8.650% duc 2002 8.150% due 1998_ 17 17 5 5 8.180% duc 2002__ 8.160% duc 1998 37 37 52 52 7.820% due 2003
- 9.250% due 1999 15 15 25 25 7.850% due 2003 9.300% due 1999 -
5 5 3 3 7.760% due 2003 7.670% due 1999 3 3 12 12 7.910% due 2003 7.250% duc 1999__ 7.780% due 2003 1 1 25 25 15 7.850% due 1999_ 10.000% due 2021 15 17 17 7.770% due 1999 15 15 10 10 9.220% due 2021 8.290% due 1999 15 15 9.200% due 2001 10 20 7.420% due 2001 5 5 9.050% due 2001 4 1 R
Statement of Capitalization (coniino.o) December 31. December 31. December 31, 1996 1995 1996 1995 1996 1995 (millions of dollars) (millions of dollars) (millions of dollars) 1.ONG-TERM DEBT: (Contin 6ed) Cleteland Electric Toledo Edison Medium-term notes secured by first mortgage bonds: (Continued) 8.680% due 2001 15 15 8.540% due 2001 3 3
-~ 8.560% due 2001 4 4 8.550% due 2001 5 5 7.850% duc 2002 5 5 8.130% due 2002 28 28 7.750% due 2003 15 15 9.520% due 2021 8 8
_ _ 166 516 237 250 603 766 Tax-exempt notes: 6.500% due 1996 - 3 5.750% duc 2003 4 4 5.500% due 1997 10.000% due 2010 l I 6.700% due 2006 20 21 5.700% due 2008 7 8 6.700% due 2011 6 6 5.875% due 2012 14 14 47 52 5 5 52 57 Bank loans secured by subordinate mortgage: 7.500% due 1996 - 2 9.050% due 1996 - 25 7.500% due 1996 - 2 2 - 27 - 29 Notes secured by subordinate mortgage: 10.060% duc 1996 - 14 8.750% due 1997 8 Ii 8 25 8 25 Debentures: 8.700% due 2002 135 135 135 135 Unamortized premium (discount), net: (6) (6) (2) (2) (8) (8) 2.556 2,813 1.052 1,124 3.608 3,937 Less: Current maturities 115 147 49 56 164 203 Total Long-Tenn Debt _. $? 441 $2666 $ 1001 $106R 3.444 3.734 TOTAL. CAPITA 13ZATION $6 068 $6.3 R9
- Denotes debt ofless than $1 million.
" Denotes variable rate issue with December 31.1996 interess rate shown.
*" Subject to optional tender by the owners on November I.1997.
l. 33
Notes to the Financial Statements (b) nevenues (1) Summary of Significant Accounting Cust mers are billed on a monthly cycle basis for their Policles energy consumption based on rate schedules or contracts authorized by the PUCO or on ordinances of individual 4 (a) General municipalities. An accrual is made at the end of each month to record the estimated amount of unbilled reve-Centerior Energy is a holding company with two electric nues for kilowatt-hours sold in the current month but not utility subsidiaries, Cleveland Electric and Toledo Edison, billed by the end of that month. ~, with service areas in Northern Ohio. The consolidated h,nancial statements also m. elude the accounts of Center-
. A fuel factor is added to the base rates for electric service. . . . This factor is designed to recover from customers the tor E.nergy s wholly owned subsidiary, Centenor S.ervice -
costs of fuel and most purchased power, it is reviewed and Company (Service Company), and its three other wholly
. . adjusted semiannually in a PUCO proceeding. See Man-owned subsidianes, which m. the aggregate are not mate-agement's Financial Analysis - Outlook-FirstEnergy j nal. The S.ervice Company provides management, fmar.-
. Rate Plan.
cial, adm.mis . trative, engineering, legal and other serv;ces at cost to Centerior Energy, the Operating Companies (c) Fuel Expense and the other subsidiaries. The Operating Companies operate as separate companies, each serving the custom- The cost of fossil fuel is charged to fuel expense based on ers in its service area. The preferred stock, first mortgage inventory usage. The cost of nuclear fuel, including an bonds and other debt obligations of the Operating Com- interest component, is charged to fuel expense based on panies are outstanding securities of the issuing utility. All the rate of consumption. Estimated future nuclear fuel significant intercompany items have been climinated in disposal costs are being recovered through base rates. consolidation. The Operating Companies defer the ditrerences between actual fuel costs and estimated fuel costs currently being Centerior Energy and the Operating Companies follow recovered from customers through the fuel factor. This the Uniform System of Accounts prescribed by the matches fuel expenses with fuel-related revenues. FERC and adopted by the PUCO. Rate-regulated utili-Ownas of nuclear generating plants are assessed by the ties are subject to SFAS 71 which governs accounting for the efTcets of certain types of rate regulation. Pursuant to na g mnment h h at d decontaminadon and ecmm n ng n ar e c ent facMes opa-SFAS 71, certain incurred costs are deferred for recovery ated by the United States Department of Energy. The m future rates. See Note 7(a). The Sem.ce Company - follows the Uniform System of Accounts for Mutual assessments are based upon the amount of enrichment services used in prior years and cannot be imposed for Service Companies prescribed by the Securities and m re than 15 > cars (to 2007). The Operating Companies Exchange Commission (SEC) under the Public Utility ' lloiding Company Act of 1935. have accrued the liability for their share of the total assessments. These costs have been recorded as a regula-The preparation of financial statements in confonnity tory asset since the PUCO is allowing the Operating with generally accepted accounting principles requires Companies to recover the assessments through their fuel management to make estimates and assumptions that cost factors. See Note 7(a). affect the reported amounts of assets, liabilities, revenues (d) Depreciation and Decommissioning and expenses, and the disclosure of contingent assets and J liabilities. The estimates are based on an analysis of the The cost of property, plant and equipment is depreciated best information available. Actual results could ditTer over their estimated useful lives on a straight-line basis. from those estimates. In its April 1996 rate order, the PUCO approved changes in depreciation rates for the Operating Companies. An The Operating Companies are members of the Central increase in the depreciation rate for nuclear property from Area Power Coordination Group (CAPCO). Other 2.5% for both Operating Companies to 2.88% for Cleve-members are Duquesne Light Company, Ohio Edison and land Electric and 2.95% for Toledo Edison increased its wholly owned subsidiary, Pennsylvania Power Com- annual depreciation expense approximately $2l million pany. The members have constructed and operate genera. for Centerior Energy. A reduction in the composite depre-tion and transmission facilities for their joint use. ciation rate for nonnuclear property from 3.34% to 3.23% 1/
for Cleveland Electric and from 3.36% to 3.13% for includes $155 million of decommissioning costs previ-Toledo Edison decreased annual depreciation expense by ously expensed and the earnings on the external trust approximately $5 million for Centerior Energy. The funding. This amount exceeds the Balance Sheet amount changes in depreciation rates were effective in April 1996 of the external Nuclear Plant Decommissioning Trusts and resulted in a $12 million net increase in 1996 depreci- because the reserve began prior to the external trust ation expense. funding. The trust earnings are recorded as an increase to the trust assets and the related component of the decom-The Operating Companies accrue the estimated costs of missioning reserve (included in Accumulated Deprecia-decommissioning their three nuclear generating units.
' tion and Amortization).
The accruals are required to be funded in an external
~
trust. The PUCO requires that the expense and payments The staff of the SEC has questioned certain of the current to the external trusts be determined on a levelized basis accounting practices of the electric utility industry, by dividing the unrecovered decommissioning costs in including those of the Operating Companies, regarding current dollars by the remaining years in the licensing the recognition, measurement and classification of period of each unit. This methodology requires that the decommissioning costs for nuclear generating stations in nel carnings on the trusts be reinvested therein with the the financial statements. In response to these questions, intent of having net earnings oliset inflation. The PUCO the Financial Accounting Standards Board (FASB) is requires that the estimated costs of decommissioning and reviewing the accounting for removal costs, including the funding level be reviewed at least every five years. decommissioning. If current accounting practices are changed, the annual provision for decommissioning could in April 1996, pursuant to the PUCO rate order, the increase; the estimated cost for decommissioning could be Operating Companies decreased their annual decommis_ rec rded as a liability rather than as accumulated depreci-sioning expense accruals to $22 million from the $24 mil-ati n; and trust fund income from the external decommis-
' ion lesel in 1995. The accruals are reflected in current si ning trusts could be reported as investment income rates. The accruals are based on adjustments to updated, rather than as a reduction to decommissioning expense.
site-specific studies for each of the units completed in The FASB issued an exposure draft on the subject on 1993 and 1994. These estimates reflect the DECON February 7,1996 and continues to review the subject. method of decommissioning (prompt decontamination), and the locations and cost characteristics specific to the (e) Property, Plant and Equipment units, and include costs associated with decontamination Property, plant and equipment are stated at original cost and dismantlement for each of the units. The estimate for less amounts disallowed by the PUCO. Construction costs Davis-Besse also includes the cost of site restoration. The include related payroll taxes, retirement benefits, fringe adjustments to the updated studies which reduced the benefits, management and general overheads and allow-annual accruals beginning in April 1996 were attributable ance for funds used during construction ( AFUDC). to changed assumptions on radioactive waste burial cost AFUDC represents the estimated composite debt and estimates and the exclusion of site restoration costs for equity cost of funds used to finance construction. This Perry Unit I and Beaver Valley Unit 2. After the decom-n neash allowance is credited to income. The AFUDC missioning of these units in the future, the two plant sites r tes averaged 10.2% in 1996, i1.5% in 1995 and 9.8% in may be usable for new pouer production facilities or other 1994-industrial purposes. Maintenance and repairs for plant and equipment are The revised estimates for the units in current dollars and
- in dollars at the time of license expiration, assuming a 4%
charged to expense as incurred. The cost of replacing annual inflation rate, are as follows: plant and equipment is charged to the utility plant i thense accounts. The cost of pmperty retired plus removal costs, Generatine ttnit Ya Anmunt n$ ult after deducting any salvage value, is charged to the
< millions er accumulated provision for depreciation.
dollars) Dasis-Hewe 2017 $.142 $ k?7 791 (f) Deferred Gain and Loss from Sales of Utility Perry Unit i 2n26 217 Heaver Valley ll nit 2 2027 _9] 369 Plant Total SW
$? m7 The sale and leaseback transactions discussed in Note 2 The classification, Accumulated Depreciation and Amor- resulted in a net gain for the sale of the Bruce Mansfield tiration, in the Balance Sheet at December 31, 1996 Generating Plant (Mansfield Plant) and a net loss for the 35
sale of 13eaver Valley Unit 2. The net gain and net loss ment for financial reporting purposes. Costs associated I were deferred and are being amortized over the terms of with the sale totaling $5 million in 1996 are included in the leases. See Note 7(a). These amortizations and the Other Income and Deductions, Net in the income State- ' lease expense amounts are reported in the income State-ment. These costs are expected to be $11 million annually ment as Generation Facilities Rental Expense, Net. over the remaining period. (g) Interest Charges (j) Materials and Supplies Debt interest reported in the income Statement does not in December 1996, the Operating Companies sold sub-include interest on obligations for nuclear fuel under stantially all of their materials and supplies and fossil fuel # construction. That interest is capitalized. See Note 6. inventories for certain generating units and other storage - locations to an independent entity at book value. The Losses and gains realized upon the reacquisition or buyer now provides all of these inventories under a con-redemption of long-term debt are deferred, consistent signment arrangement. In accordance with SFAS 49 with the regulatory rate treatment. See Note 7(a). Such losses and gains are either amortized over the remainder accounting for product fmancing arrangements, the inven-of the original life of the debt issue retired or amortized tories continue to be reported as assets in the Balance Sheet even though the buyer owns the inventories since over the life of the new debt issue when the proceeds of a new issue are used for the debt redemption. The amorti- the Operating Companies have guaranteed to be buyers of g zations are included in debt interest expense. (k) AT&T Telecommunications Partnerst.ip (h) Federal income Taxes in April 1996, a wholly owned subsidiary of Centerior We use the liability method of accounting for income Energy and an AT&T Wireless Senices (Wireless) sub-taxes in accordance with SFAS 109. See Note 8. This sidiary entered into a 25%/75% partnership called AT&T method requires that deferred taxes be recorded for all PCS Cleveland, LLC. The partnership will operate a temporary ditTerences between the book and tax bases of personal communications senices network which will assets and liabilities. The majority of these temporary provide wireless communications senices to Northeast ditTerences are attributable to property-related basis dif-Ohio and Western Pennsylvania pursuant to licenses ferences. Included in these basis ditTerences is the equity owned by Wireless. The total investment of the Centerior component of AFUDC, which will increase future tax Energy subsidiary in the partnership at December 31, expense when it is recovered through rates. Since this 1996 is $23 million. component is not recognized for tax purposes, we must record a liability for our tax obligation. The PUCO (2) Utility Plant Sale and Leaseback permits recovery of such taxes from customers when they become payable. Therefore, the net amount due from Transactions customers through rates has been recorded as a regulatory The Operating Companies are co-lessees of 18.26% (150 asset and will be recovered over the lives of the related nug watts) of Beaver Valley Unit 2 and 6.5% (51 mega-assets. See Note 7(a). watts),45.9% (358 megawatts) and 44.38% (355 mega-watts) of Units I, 2 and 3 of the Mansfield Plant, Investment tax credits are deferred and amortized over respectively. These leases extend through 2017 and are the lives of the applicable property as a reduction of the result of sale and leaseback transactions completed in depreciation expense. j9g7, (i) Accounts Receivable Securitization Under these leases, the Operating Companies are respon-In May 1996, the Operating Companies began to sell on a sible for paying all taxes, insurance premiums, operation and maintenance expenses, and all other similar costs for daily basis substantially all of their retail customer their interests in the units sold and leased back. They may accounts receivable and unbilled revenue receivables t Centerior Funding pursuant to a five-year asset-backed incur additional costs in connection with capital improve-secuntization agreement. ments to the units. The Operating Companies have options to buy the interests back at certain times at a in July 1996, Centerior Funding completed a public sale premium and at the end of the leases for the fair market 1 of $150 million of receivables-backed investor certificates value at that time or to renew the leases. The leases in a transaction that qualifies for sale accounting treat- include conditions for mandatory termination (and possi-M l
. Property, ble repurchase of the leasehold interests) upon certain Plant and events of default. Ownership Equipment Megawaus (Exclusive or Accumulated
. Generatine Unit N Share) Nuclear Fuel) Depreciation Future minimum lease payments under the operatmg (millions or dollars) leases at December 31,1996 are summarized as follows: seneca rumped storage 351 (80 00% ) 5 65 5 24 Year Amount Eastlake Unit 5 411 (68.80) 161 -
(millions of Perry Unit i 609 (51.02) 2.822 636 dollars) Beaver Valley Unit 2 and 1997 $ 165 Common Facilities 1998 165 (Note 2) 214 (26.12) 1.488 377 g 1999 178 Total $4 m $1 n17 2000 187 2001 186 Depreciation for Eastlake Unit 5 has been accumulated with all other nonnuclear depreciable property rather than t i Future Minimum t. ease Payments $ by specific units of depreciable property. Rental expense is accrued on a straight-line basis over the terms of the leases. The amount recorded in 1996,1995 (4) Construcilon and Contingencies and 1994 as annual rental expense for the Mansfield Plant (a) Construction Program leases was $115 million. The amounts recorded in 1996, The estimated cost of our construction program for the 1995 and 1994 as annual rental expense for the Beaver 1997-2001 period is $905 million, including AFUDC of Valley Unit 2 lease were $63 million, $63 million and
$25 million and excluding nuclear fuel.
$64 million, respectively. See Note 1 (f). Amounts charged to expense m excess of the lease payments are The Clean Air Act Amendments of 1990 (Clean Air Act) require, among other things, significant reductions in classified as Accumulated Deferred Rents in the Balance Sheet. th emissbn d suKur Me and umgen oxMes by fossil-fueled generating units. Our strategy provides for Toledo Edison is selling 150 megawatts of its Beaver compliance primarily through greater use of low-sulfur Valley Unit 2 leased capacity entitlement to Cleveland coal at some of our units and the use of emission Electric. We anticipate that this sale will continue allowances. Total capital expenditures from 1994 through indefinitely.
1996 in connection with Clean Air Act compliance amounted to $36 million. The plan will require additional (3) Property Owned with Other Utilities capital expenditures over the 1997-2006 period of approx-and investors imately $42 million for nitrogen oxide control equipment The Operating Companies own, as tenants in common and other plant process modifications. In cddition, higher with other utilities and those investors who are owner- fuel and other operation and maintenance expenses will participants in various sale and leaseback transactions be incurred. Recently proposed particulate and ozone (Lessors), certain generating units as listed below. Each ambient standards have the potential to increase future owner owns an undivided share in the entire unit. Each compliance costs. owner has the right to a percentage of the generating l capability of each unit equal to its ownership share. Each (b) Hazardous Waste Disposal Sites utility owner is obligated to pay for only its respective The Operating Companies are aware of their potential share of the construction costs and operating expenses. involvement in the cleanup of three sites listed on the Each Lessor has leased its capacity rights to a util4y Superfund List and several other sites. The Operating which is obligated to pay for such L.essor's share of the Companies have accrued a liability totaling $10 million at I a 1 construction costs and operating expenses. The Operating December 31, 1996 based on estimates of the costs of I Companies' share of the operating expenses of these cleanup and their proportionate responsibility for such generating units is included in the income Statement. costs. We believe that the ultimate outcome of these The Balance Sheet classification of Property, Plant and matters will not have a material adverse efTect on our Equipment at December 31,1996 includes the following financial condition, cash flows or results of operations. See facilities owned by the Operating Companies as tenants in Management's Financial Analysis - Outlook-flazardous common with other utilities and Lessors: Waste Disposal Sites. l 1 37 E_
(5) Nuclear Operaflons and 104 weeks. The amount and duration of extra expense Contingencies could substantially exceed the insurance coverage. (a) Operating Nuclear Units (6) Nuclear Fuel Our three nuclear units may be impacted by activities or Nuclear fuel is financed for the Operating Companies events beycnd our control. An extended outage of one of through leases with a special-purpose corporation. The our nuclear units for any reason, coupled with any unfa- total amount of financing currently available under these vorable rate treatment, could have a material adverse lease arrangements is $273 million ($173 million from etTeet on our financial condition, cash flows and results of intermediate-term notes and $100 million from bank ? operations. See the discussion of these and other risks in credit arrangements). The intermediate-term notes - Management's Financial Analysis - Outlook-Nuclear mature in the 1997 through 2000 period. The bank credit , Operations. arrangements terminate in October 1998. The special-purpose corporation may not need alternate financing in (b) Nuclear Insurance 1997 to replace $83 million of maturing intermediate-
. . term notes. At December 31, 1996, $216 million of The Pn.ce-Anderson Act limits the public liabih.ty of the
~
nuclear fuel was financed. The Operating Companies owners of a nuclear power plant to the amount provided severally lease their respective portions of the nuclear fuel by private insurance and an m. dustry assessment plan. In
. .. and are obligated to pay for the fuel as it is consumed in a the event of a nuclear m.eident at aay umt in the Um.ted reactor. The lease rates are based on various intermedi-States resultmg m losses m. excess of the level of private ate-term note rates, bank rates and commercial paper insurance (currently $200 million), our maximum poten-rates' tial assessment under that plan would be $155 million per incident. The assessment is limited to $20 million per year The amounts financed include nuclear fuel in the Davis-for each nuclear incident. These assessment limits assume Besse, Perry Unit I and Beaver Valley Unit 2 reactors the other CAPCO companies contribute their proportion- with remaining lease payments of $92 million, $77 million ate share of any assessment for the generating units that and $32 million, respectively, at December 31,1996. The they have an ownership or leasehold interest in. nuclear fuel amounts financed and capitalized also included interest charges incurred by the lessors amount-The utility owners and lessees of Davis-Besse, Perry and ing to $4 million in 1996, $5 million in 1995 and $11 mil-Beaver Valley also have insurance coverage for damage t lion in 1094. The estimated future lease amortization property at these sites (including leased fuel and cleanup pay ments based on projected consumption are $88 million costs). Coverage amounted to $1.3 billion for Davis-Besse n 1997, $69 million in 1998, $67 million in 1999 and and $2.75 billion for each of the Perry and Beaver Valley
$62 million in both .T 0 and 2001.
sites as of January 1,1997. Damage to property could exceed the insurance coverage by a substantial amount. If (7) Regulatory Matters it does. our share of such excess amount could have a (a) Regulatory Accounting Requirements and material adverse efTect on our financial condition, cash Regulatory Assets flows and results of operations. In addition, we can be The Operating Companies are subject to the provisions of assessed a maximum of $22 million under these poh.cies . during a pok.ey vear if the reserves available to the insurer SFAS 71 and have complied with its provisions. SFAS 71 provides, among other things, for t' deferral of certain are inadequate to pay claims arising out of an accident at any nuclear facility covered by the insurer, incurred c sts that are probable of future recovery in , rates. We monitor changes in market and regulatory We also have extra expense insurance coverage. It conditions and consider the clTects of such changes in includes the incremental cost of any replacement power assessing the continuing applicability of SFAS 71. Crite-purchased (over the costs which would have been ria that could give rise to discontinuation of the applica-incurred had the units been operating) and other inciden- tion of SFAS 71 include: (1) increasing competition tal expenses after the occurrence of certain types of which significantly restricts the Operating Companies' accidents at our nuclear tmits. The amounts of the cover- ability to charge prices which allow them to recover age are 100% of the estimated extra expense per week operating costs, earn a fair return on invested capital nnd during the 52-week period starting 21 weeks after an recover the amortization of regulatory assets and (2) a accident and 80% of such estimate per week for the next significant change in the manner in w hich rates are set by 38 l l
the PUCO from cost-based regulation to some other form revaluation of assets. The PUCO invited the Operating of regulation. Regulatory assets represent probable future Companies to file a proposal to efTectuate the PUCO's revenues to the Operating Companies associated with rec mmendation and expressed a willingness to consider certain incurred costs, which they will recover from cus- alternatives to its recommendation. The PUCO stated in its order that failure by the Operating Companies to tomers through the rate-makmg process. follow the recommendation could result in a PUCO-EITective January 1,1996, the Operating Companies ordered write-down of assets for regulatory purposes. The adopted SFAS 121 which imposes stricter criteria ior PUCO approved a return on common stock equity of carrying regulatory assets than SFAS 71 by requirint that 12.59% and an overall rate of return of 10.06% for both , such assets be probable of recovery at each balance sbt Operating Companies. However, the PUCO also indi-date. The criteria under SFAS 121 for plant assets require cated the authorized return could be lowered by the such assets to be written down if the book value exceeds PUCO if the Operating Companies do not implement the the projected net future undiscounted cash flows. recommendation. In August 1996, various intervenors Regulatory ' assets in the Halance Sheet are as follows: appealed the PUCO rate order to the Ohio Supreme necember 31. Court. The Operating Companies did not appeal the order i v* 1993 to the Ohio Supreme Court. In connection with the f PUCO order discussed in Management's Financial tmgns Amounts due from customers for future federal Analysis - Outlook-FirstEnergy Rate Plan, certain par-income iases. net 51.025 s t.m7 ties agreed to request a stay of their appeals until comple-Unamortized loss from Beaser Valles Unit 2 sale 92 96 Unamortized loss on reacquired debt k2 89 tion of the pending merger with Ohio Edison. Pre-phase-in deferrals' $35 $$3 Rate Stabilization Program deferrals 4x0 500 Other 64 'O (c) Assessment Totai <? ?7x <?l75 The Operating Companies agree with the concept of
- Represent dererrais of operating expenses and carrying charges for accelerating the recognition of costs and recovery of assets Perry Unit I and Heaver Valley Unit 2 in 1987 and 1958 which are as such concept is consistent with the strategic objective being amortized over the lives of the related property.
M di However, the Operating As of December 31, 1996, customer rates provide for Companies believe that such acceleration must also be recovery of all the above regulatory assets. The remaining consistent with the reduction of debt and the opportunity recovery periods for about $1.9 billion of the regulatory for Centerior Energy common stock share owners to assets approximate 30 years. The remaining recovery receive a fair return on their investment. Consideration of periods for the rest of the regulatory assets generally range whether to implement a plan responsive to the PUCO's from about two to 20 years. Regulatory liabilities in the recommendation to revalue assets by $1.25 billion is Balance Sheet at December 31,1996 and 1995 totaled pending the merger with Ohio Edison.
$37 million and $21 million, respectively.
The Operating Companies have evaluated their markets, (b) Rate Order regulatory conditions and abilities to bill and collect the approved prices, and conclude that they continue to On April 11,1996, the PUCO issued an order for the comply with the provisions of SFAS 71 and their regula-Operating Companies granting price increases aggregat-tory assets remain probable of recovery. If there is a ing $119 million in annuali/ed revenues ($84 million for change in the Operating Companies' evaluation of the Cleveland Electric and $35 million for Toledo Fdison). competitive environment, regulatory framework or other The PUCO rate order provided for recovery of all costs t factors, or if the PUCO significantly reduces the value of provide regulated services, including amortization of regu-the Operating Companies' assets or reduces the approved latory assets, in the approved prices. The new prices were return on common stock equity of 12.59% and overall rate implemented in late April 1996. The average price of return of 10.06%, or both, for future regulatory pur-increase for Cleveland Electric and Toledo Edison cus-poses, the Operating Companies may be required to tomers was 4.9% and 4.7% respectively, with the actual record material charges to earnings. In particular, if we percentage increase depending upon the customer class determine that the Operating Companies no longer meet The Operating Companies intend to freeze prices through the criteria for SFAS 71, we would be required to record a at least 2002, although they are not precluded from before-tax charge to write oft the regulatory assets shown requesting further price increases. above. In the more likely event that only a portion of The PUCO also recommended that the Operating Com- operations (such as nuclear operations) no longer meets panies reduce the value of their assets for regulatory the criteria of SFAS 71, a write-off would be limited to purposes by an aggregate $1.25 billion through 2001. This regulatory assets that are not reflected in our cost-based represents an incremental reduction beyond the normal prices established for the remaining regulated operations. level in nuclear plant and regulatory assets. Imrlementa- In addition, we would be required to evaluate whether the tion of the price increases was not contingent upon a changes in the competitive and regulatory environment 39
which led to discontinuing the application of SFAS 71 t some or all of our operations would also result in a write-
%Ilion%r doli LWk Income Before l~cderal income Tax $?N $4?! $wn down of property, plant and equipment pursuant to 3,37 7,, ,, ,,u,k ,,c,,, ,, 3,a t,,o,y g,,, 3 93 3,47 SFAS I21. , ,c ,,,,, ( g,,,,,,, ) ;, 7,,
See M anagement's Financial Analysis - Outlook-FirstEnergy Rate Plan for a discussion of a regulatory I g ; ,1;, p, j [g 3 Other items - _D _2 plan for the Operating Companies and its efTect on their Total Federal Income Tax Expense lio?, 3 g compliance with SFAS 71. For tax reporting purposes, the Perry Nuclear Power g (d) Rate Stabilization Program Plant Unit 2 (Perry Unit 2) abandonment was recognized ~ The Rate Stabilization Program that the PUCO approved
" " '**""* m 11 n I ss with a in October 1992 allowed the Operating Companies to
' "**E "E """ ." ""$' " " * * " " ' "
- defer and subsequently amortize and recover certain costs tax HaMtp qcause of the alternative minimum tax
( AMT), $65 milhon of the $114 milhon was reahzed m not being recovered in rates at that time. Recovery of both . . 1994. The remaining $49 million will not be realized until the costs no longer bem.g deferred and the amortization of the 1992-1995 deferrals began in late April 1996 with the " "D a repaynwnt appm mately
$29 million of prevmusly allowed investment tax credits implementation of the price increases granted by the w'as ree gnized in 1994.
PUCO as discussed above. The cost deferrals recorded in 1995 and 1994 pursuant to the Rate Stabilization Pro-gram were $115 million and $112 million, respectively. Under SFAS 109, temporary ditTerences and carryfor-The amortization of the deferrals began in Decen$- wards resulted in deferred tax assets of $582 million and deferred tax liabilities of $2.459 billion at December 31, ber 1995. The total amortization was $20 million and
$2 million in 1996 and 1995, respectively. 1996 and deferred tax assets of $604 milhon and deferred tax liabilities of $2.479 billion at December 31, 1995.
The regulatory accounting measures under the Rate Sta. These are summarized as follows: bilization Program also provided for the accelerated December 31. amortization of certain benefits during the 1992-1995 ],,;,,f,"f period. The total annual amount of such accelerated dollars) benefits was $46 million in both 1995 and 1994. Property, plant and equipment 52.094 52.095 Deferred carrying charges and operating expenses __ 218 224 (8) FederalIncome Tax Net operating loss carr> forwards (44) (113) 1mestment tax credits (139) (145) The components of federal income tax expense recorded sale and leaseback transactions (121) (127) in the Income Statement were as follows: Other (131) (59) 19 % 1995 1994 Net deferred tax liability (1 K77 $1 RM (milhons of dollars) Operating Expenses: current s 79 s 88 s 70 For tax purposes, net operating loss (NOL) carry forwards Deferred 32 47 44 of approximately $125 million are available to reduce E ""8 "' - Nono rati g in o e future taxable income and will expire in 2009. The 35% current <19) (20) (45) tax effect of the NOLs is $44 million. Additionally, AMT Deferred _Lo _2 _J.l credits of $275 million that may be carried forward Total Expense (Credit) to Nonorerating Income _L9 ; J J indefinitely are available to reduce future tax. Total federal Income Tax Expense tIo! $ t .to $i?n (9) Retirement Benefits The deferred federal income tax expense results from the - temporary ditTerences that arise from the difTerent years (a) Retirement income Plan when certain expenses are recognized for tax purpm es opposed to financial reporting purposes. Such temporary We sponsor a noncontributing pension plan which covers ditTerences relate principally to depreciation and deferred all employee groups. The amount of retirement benefits operating expenses and carrying charges. generally depends upon the length of service. Under certain circumstances, benefits can begin as early as age Federal income tax, computed by multiplying the income 55. Our funding policy is to comply with the Employee before taxes and preferred dividend requirements of sub- Retirement income Security Act of 1974 guidelines. sidiaries by the 35% statutory rate. is reconciled to the amount of federal income tax recorded on the books as Pension costs (credits) for 1994 through 1996 were com-follow s: prised of the following components: ,fu
Hion dull The accumulated postretirement benefit obligation and Sersice cost for benefits carned during the accrued postretirement benefit cost are as follows: period $ 13 $ 10 $ 13 December 31. Interest cost on pro)ccted benefit obhgat on _ 28 26 26 i 9w, 1993 Actu .I return on plan assets (50) (53) (2) (millions of Net amortitation and deferral 2 9 _W) dollW Net costs (credits) y) y) 1l Accumulated postretirement benefit obligation attributable to: The following table presents a reconciliation of the funded Retired participants $(i77) $(2003 status of the plan. I~ully eligible active plan participants (4; (3) December 31. Other active plan participants (31) _128)
, 1996 1995 Accumulated postretirement benefit obligation (212) (231)
* (millions of Unrecognized net gain from variance between
, dollars) assumptions and experience (44) (21)
Actuarial present salue of benefit obligations: Unamortized transition obligation 120 128 Vested benefits $326 $304 Accrued postretirement benefit cost included in Nonvested benchts _1fz _._] 41% Retirement Benefits in the Balance Sheet ~~""'")~$(I?4) Accumulated beneht obhgation 342 306 I:treet or future compensation levels 53 54 A September 30 measurement date was used for 1996 and Total projected benetit obligation 395 360 Plan assets at fair market value 1995 reporting. At December 31,1996 and 1995, the _M.J. _3.94 funded status 26 34 settlement rate and the long-term rate of annual compen-Unrecognized net gain from variance between sation increase assumptions were the same as those dis-assumptions and esperience (56) (68) Unrecognized prior service cost 14 15 cussed for pension reporting in Note 9(a). At Transition asset at January 1,1987 being amorti/cd December 31,1996, the assumed annual health care cost
""{.,f,[l,]d pension liability included in trend rates (applicable to gross eligible charges) were Retirement Benefits in the Balance Sheet _, M) g) 7.5% for medical and 7% for dental in 1997. Both rates reduce gradually to a fixed rate of 4.75% by 2003. Ele-A September 30 measurement date was used for 1996 and ments of the obligation alrected by contribution caps are 1995 reporting. At Decemba 31,1996, the settlement significantly less sensitive to the health care cost trend (discount) rate and ivyMrm rate of return on plan rate than other elements. If the assumed health care cost assets assumptions wed 7.75% ,ind 11%, respectively. The trend rates were increased by one percentage point in long-term rate of annuil compei sation increase assump-each future year, the accumulated postretirement benefit tion was 3.5% for 199^ and 4% thereafter. At Decem-obligation as of December 31, 1996 would increase by her 31,1995, the setti . ment rate and long-term rate of
$6 million and the aggregate of the service and interest return on plan ., sets assumptions wert. 8% and 11%,
cost components of the annual postretirement benefit cost respectively. The long-term rate of annual compensation would increase by $0.5 million. increase assumption was 3.5% for 1996 anc 1997 and 4% thereafter. (10) Guarantees Plan assets consist primarily of invest.nents in common The Operating Companies have guaranteed certain loan stock, bonds, guaranteed investment contracts, cash and lease obligations of a coal supplier under a long-term equivalent securities and real estate. coal supply contract. At December 31,1996, the principal m unt of the loan and lease obligations guaranteed by (b) Other Postretirement Benefits the Operating Companies under the contract was We sponsor a postretirement benefit plan which provides $30 million. all employee groups certain health care, death and other
~
postretircment benetits other than pensions. The plan is The prices under the contract which includes certain contributory, with retirce contributions adjusted annually. minimum payments are sullicient to satisfy the loan and l case obhgations and mine closing costs over the life of E J The plan is not funded. Under SFAS 106, the accounting standard for postretirement benefits other than pensions, the contract. If the contract is terminated early for any the expected costs of such benefits are accrued during the reason, the Operating Compames would attempt to emplo3ces' years of sersice. reduce the termination charges and would ask the PUCO to allow recovery of such charges from customers through The components of the total postretirement benefit costs the fuel factor of the respective Operating Company. for 1994 through 1996 were as follows: See Management's Financial Analysis - Outlook-O E E FirstEner8y Rate Plan. (nullions of dollars) Service cost for beneths carned during the period $2 $2 $2 Interest cost on accumulated postretirement benctit obhgation 18 18 18 Amortization of transition obhgation at January 1,1993 of $167 million over 20 years 7 7 8 Amortization of gain _-- _f.1) _-- Total costs 5?7 $?6 5?x
.Il
(11) Capitalization shares at an exercise price of $14.58. In 1994, options were issued for 264,900 shares at an exercise price of (a) Capital Stock Transactions and Common $13.20 but options for 9,500 and 6,800 shares were Shares Reserved for issuance surrendered in 1995 and 1996, respectively. The options Shares sold, retired and purchased for treasury during the expire 10 years from the date of the grant and vest over three years ended December 31, 1996 are listed m the four years. The number of shares available for issuance following table. under the Compensation Plan each year is determined by t93 g i994 formula, generally 0.5% of outstanding shares. Shares of (thousands of shares) common stock required for the Compensation Plan may centerior Energy common siock: be either issued as new shares, issued from treasury stock Di dend i ein stment and stock . Employee savings Pian - - 259 MM& Mdwi% hhhb under the Compensation Plan. No compensation cost has Employee Purchase Plan - - 46 been recognized for the options issued. Computing com- , Trea$u hj" s _ ; } pensation cost for the options consistent with SFAS 123 Net Increase (Decrease) n) n) m would not have materially alTected net income in 1996 e sferred stock of subsidiaries subject to '" * "E PCI "" " W I" Mandatory Redemption: both years would not have changed. Cleveland Electric Retirements 5 7.35 Series C (10) (10) (10) Upon consummation of the pending merger of Centerior () Id sM Energy and Ohio Edison, outstanding options will become 9.12$ Series N (150) (1t1) (189) exercisable for shares of FirstEnergy common stock with 91.50 series Q (ii) (11) - the prices and number of shares adjusted to reflect the (U - Tot n INurements exchange ratio. Limitations on restricted common stock sloo par 59.375 (17) (17) (17) awarded under the Compensation Plan will lapse auto-25 par 2.81 - (400) (800) Preferred Stock of Sub>idiaries Not matically upon consummation of the merger. Subject to Mandatory Redemption: cleveland Liectric Retirements (b) Equity Distribution Restrictions Adjustable Series L LM) _- - Net (Decrease) fily @ M M9) The Operating Companies can make cash available to Shares of common stock required for our stock plans in fund Centerior Energy's common stock dividends by 1996 were acquired in the open market. paying dividends on their respective common stock, which is held solely by Centerior Energy. Federal law prohibits in addition to suen stock plan-related purchases, the the Operating Companies from paying dividends out of Iloard of Directors has authorized the purchase in the capital accounts. Each Operating Company has since open market of up to 10% of our common stock shares 1993 declared and paid preferred stock dividends, and outstanding until June 30,1997. No such purchases have Cleveland Electric has also declared and paid common been made. stock dividends, out of appropriated current net income The number of common stock shares reserved for issu- included in retained earnings. At the times of such decla-ance under the Employee Savings Plan and the Employee ~ rations and payments, each Operating Company had a Purchase Plan was 1,702,475 and 423,797, respectively, at deficit m its retamed earnings. At December 31,1996 December 31,1996. a ectne and Wo mon W M ndon and $223 million, respectively, of appropriated retained in June 1996, tl.c floard of Directors adopted a share earnings for the payment of dividends. Toledo Edison also owner rights plan under which Centerior Energy common has a provision in its mortgage applicable to approxi-stock share owners of record on July 8,1996 were granted mately $94 million of outstanding first mortgage bonds
- a right to purchase one five-hundredth of a share of ($31 million of which mature in August 1997) that Centerior Energy preferred stock for each share of com- requires common stock dividends to be paid out of its mon stock owned on that date. The floard of Directors total balance of retained earnings, which had been a --
will decide if the rights will be exercisable in the event of deficit from 1993 through November 1996. At Decem-an unsolicited takeover attempt that the floard deter- ber 31,1996, Toledo Edison's total retained earnings were mines not to be in the best interest of Centerior Energy or $5 million. See Management's Financial Analysis-its share owners. Capital Resources and Liquidity-Liquidity. Under an Equity Compensation Plan (Compensation Plan) adopted in 1994, options to purchase shares of (c) Preferred and Preference Stock common stock and awards of restricted common stock were granted to management employees. In 1996, options Amounts to be paid for preferred stock which must be were issued for 619,800 shares at an exercise price of redeemed during the next five years are $32 million in
$11.00 but options for 4,000 shares were subsequently 1997,$16 million in 1998,$35 million in 1999, $33 mil-surrendered. In 1995, options were issued for 285,000 lion in 2000 and $80 million in 2001.
42
To Share Owners who hold Centerior Energy stock certificates or participate in . , Complete this card if you hold Centerior stock certificates or participate in our Dividend Reinvestment Plan: - - Centerior's Dividend Reinvestment Plan and wish to discontinue duplicate mailings coming to this address. If you receive duplicate copies of Company , . mailings in your household and have no need for the extra copies, you will help us Name (Please Pnnt) economize by completing and returning the card on the upper right. street Your instructions will eliminate all duplicate mailings except dividend checks, proxy city state zip code cards and tax information. Eliminate Continue Mailings to Mailings to Your help is appreciated. Account (s) No. Account No. (Account number appears on your dmdend check stub or DRP statement of account) If you have questions, please call Share Owner Services at 800-433-7794 or at 447-2400 in the Cleveland area. signatum of sham owneds) Do not return this card if you receive only one copy of each mailing in your household. To Share Owners who own Centerior Complete this card if you own Centerior stock through a broker and wish to be on Energy stock through a broker: our mailing list to receive Quarterly Reports to Share Owners, as released. If your stock is held by your broker and you want to receive our Quarterly Reports to Share Owners, as released, complete and Name (Please Pnnt) return the card on the lower right. If you are already on our mailing list, you do -~ street not need to complete and return the card to - continue receiving Quarterly Reports. City state Zip Code if you have questions, please call Share , Owner Services at 800-433-7794 or at 447-2400 in the Cleveland area. signature of share owner (s) You do not need to complete and return this card if you, as a beneficial share owner, are already on our mailing list for Quarterly Reports. Do not return this card if you hold Centerior stock certificates or participate in our Dividend Reinvestment Plan since you already receive Quarterly Reports with your dividend checks or DRP statements of account.
NO POSTAGE NECESSARY f IF MAILED . IN THE UNITED STATES , _ BUSINESS REPLY MAIL FIRST4 LASS MAIL PERMIT NO. 3356 CLEVELAND OH POSTAGEWILL BE PAID BY ADDRESSEE - SHARE OWNER SERVICES CENTERIOR ENERGY CORPORATION """"""' PO BOX 94661 CLEVELAND OH 44101-9886 1.1.l.l..l...llll......lli.l..l .l.l..l..II..l.l..I NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES BUSINESS REPLY Mall - FIRST-CLASS MAIL PERMIT NO.3356 CLEVELAND OH POSTAGE WILL BE PAID BY ADDRESSEE mummmummmmmuumme SHARE OWNER SERVICES - CENTERIOR ENERGY CORPORATION PO BOX 94661 CLEVELAND OH 44101-9886 1.1.l l..l...llll......lli,l..l..l.l..l..ll..l.l..I
The annual mandatory redemption provisions are as June 1999. The letters of credit are in an aggregate follows: amount of approximately $225 million and are secured by Sha es To Pie first mortgage bonds of Cleveland Electric and Toledo Redeemed in Share Edison in the proportion of 40% and 60%, respectively. At Cleveland Electric Preferred' December 31, 1996, Toledo Edison had outstanding 5 7.35 Series C 10.0lx) 1984 5 100 . 8xxx) Series t 3Jxx) 1981 IJKx) $8 milh.on of notes secured by subordinated mortgage 9125 Series N 150.0tx) 1993 100 collateral. 91.50 Series Q 10,714 1995 LOOO O':s c UN ?9$ YY'O (12) Short Terrn Borrowing Arrangements
) Toledo Edisan Prererred: Centerior Energy has a $125 million revolving credit 5100 par 59.375 16,650 1985 100 facility through May 1997. Centerior Energy and the
- All outstanding shares to be redeemed on December 1,2001.
Senice Company may borrow under the facility, with all in 1995, Cleveland Electric purchased 1,000 shares of borrowings jointly and severally guaranteed by the Oper-Serial Preferred Stock, $90.00 Series S, which reduces ating Companies. Centerior Energy plans to transfer any the 2002 redemption requirement shown in the above of its borrowed funds to the Operating Companies. The table. credit agreement is secured with first mortgage bonds of Cleveland Electric and Toledo Edison in the proportion of The annualized preferred dividend requirement for the 40% and 60%, respectively. The credit agreement also Operatmg Companies at December 31, 1996 was proyides the participating banks with a subordinate mort-
$55 milhon.
gage security interest on the Operating Companies' The preferred dividend rates on Cleveland Electric's properties. The banks' fee is 0.625% per annum payable Series L and Toledo Edison's Series A and B fluctuate quarterly in addition to interest on any borrowings. There based on prevailing interest rates and market conditions. were no borrowings under the facility at December 31, The dividend rates for these issues averaged 7%, 7.11% 1996. Also, the Operating Companies may borrow from and 7.75%, respectively, in 1996. each other on a short-term basis. Preference stock authorized for the Operating Compa-nies are 3,000.000 shares w. it hout par value for Cleveland (13) FinancialInstruments Electric and 5,000,000 shares with a $25 par value for The estimated fair values at December 31,1996 and 1995 Toledo Edison. No preference shares are currently out. of financial instruments that do not approximate their standing for either company. carrying amounts in the Balance Sheet are as follows: December 31' With respect to dividend and liquidation rights, each 1996 i995 Operating Company's preferred stock is prior to its prefer- currpng F air carrying I air ence stock and common stock, and each Operating Com- ^**"[,i}ij, ofdo$laN) pany s preference stock is prior to its common stock. Capitalization and Liabilities: Preferred Stock, with Mandatory (d) Long-Term Debt and Other Borrowing Redempuun Provisions $ 221 $ 225 $ 252 $ 239 p g Long-Term Debt 3.616 3.716 3.945 3.961 Noncash investments in the Nuclear Plant Decommis-Long-term debt which matures or is subj.ect to put
. . sioning Trusts are summarized m. the follow.mg table.
options during the next five years is as follows: $164 mil-December 31. lion in 1997,$107 million in 1998,$251 4 , in 1999, s s
$36 million in 2000 and $92 million in 2w. (millions or dollars)
The mortgages of the Operating Companies constitute Tgc totse peurIti
" sI direct first liens on substantially all property owned and l'ederal cosernment s 24 547 franchises held by them. Excluded from the liens, among $tY"cr ""' 8 .'
other things, are cash, securities, accounts receivable, 32 72 h" fuel, supplies and, in the case of Toledo Edison, automo-tive equipment. [ Q r Certain credit agreements of the Operating Companies ["cjhi" 9n y ,, $g $ contain covenants relating to fixed charge coverage ratios Due in sis to 10 years 7 24 and limitations on secured financing other than through D"" "Ite' ' ) '"" " 25 first mortgage bonds or certain other transactions. The ""' C C Operating Companies were in compliance with all such The fair value of these trusts is estimated based on the covenants as of December 31,1996. The Operating Com- quoted market prices for the investment securities and panies have letters of credit in connection with the sale approximates the carrying value. The fair value of the and leaseback of Beaver Valley Unit 2 that expire in Operating Companies' preferred stock, with mandatory 13
redemption provisions, and long term debt is estimated (75) Panding Merger of Centerior Energy based on the quoted market prices for the respective or and Ohio Edison similar issues or on the basis of the discounted value of i future cash flows. The discounted value used current On September 13, 1996, Centerior Energy and Ohio dividend or interest rates (or other appropriate rates) for Edison entered into an agreement and plan of merger to similar issues and loans with the same remaining form a new holding company, FirstEnergy. Following the maturities. merger, FirstEnergy will directly hold all of the issued and The estimated fair values of all other financial instru- utstanding common stock of the Operating Companies ments approximate their carrying amounts in the Balance and all of the issued and outstanding Ohio Edison com-Sheet at December 31,1996 and 1995 because of their m n stock. As a result of the merger, the common stock 4 short-term nature. share owners of Centerior Energy and Ohio Edison will , own all of the issued and outstanding shares of First-(74) Quarterly Results of Operations Energy common stock. Centerior Energy share owners - (Unaudited) will receive 0.525 of a share of FirstEnergy common stock The following is a tabulation of the unaudited quarterly f r each share of Centerior Energy common stock owned. results of operations for the two years ended Ohio Edison share owners will receive one share of December 31,1996. FirstEnergy common stock for each share of Ohio Edison Ouarters Ended common stock owned. FirstEnergy plans to account for March 31 n 0 Dec. 31. the merger as a purchase in accordance with generally except per share amounts) accepted accounting principles. 1996 Operating Revenues $605 $609 $727 $612 In addition to the approvals by the share owners of Operating income $109 $117 Si72 $lix Net income $ 7 $ 19 $ 73 $ 22 Centerior Energy and Ohio Edison common stock, vari-Average Common Shares ous aspects of the merger are subj.ect to the approval of ( milhons ) 148.0 148.0 148.0 148.0 Earn ngs Per commo" the FERC and other regulatory authorities. A rate reduc-y 3, 3 33 3 3 tion and economic development plan for the Operating Dnidends Paid Per Companies has been approved by the PUCO. From the Common Share $ .20 5 .20 $ .20 $ .20 date of consummation of the merger through 2006, the perating Revenues $588 $607 $740 $581 n pmWs b W duchs, hn fuel coM Mms, Operating Income $130 $137 $205 $118 cconomic development incentive prices, an energ)- Net income $ 38 5 44 5109 $ 29 Average Common Shares etliciency program, an earnings cap and an accelerated (millions) 148.0 148.0 148.0 148 0 reduction m nuclear and regulatory assets for regulatory Earnings Per common purposes. The plan uill require the Operating Companies Di idends Paid Per m c n reg am anets at h h & Common Share 5 .20 $ .20 5.20 1.20 merger becomes probable, which is expected to be after Earnings for the quarter ended March 31,1996 were btaining the aforementioned approvals of the merger. decreased by $7 million, or 5.05 per share, as a result of The write-off amount to be charged against earnings, Toledo Edison's $11 million write-down of the net book estimated by FirstEnergy to be approximately $750 mil-value of two inactive production facilities. The write-down li n, will be detemined based upon the plan's regulatory resulted from a decision that the facilities are no longer accounting and cost recovery details to be submitted by expected to provide revenues. FirstEnergy to the PUCO stalT for approval. Earnings for the quarter ended September 30,1996 were If the merger is not consummated, the plan would be null decreased by $15 million, or $.10 ger share, as a result of and void. See Management's Financial Analysis - Out-a $23 million charge for the disposition of materials and look-Pending Merger with Ohio Edison and -FirstEnergy L supplies inventory. The sale and disposal of inventory was 4 Rate Plan for a discussion of the proposed merger and the part of the reengineering of the supply chain process. plan. - l 44
t Executives of Centerior Energy Corporation Chairman, President and Chief Executive Officer Robert 1. Farhng (60) Executive Vice President Afurray R. Edelman (57) Senior Vice President Fred J. limge, Jr (47) Senior Vice President Gary R. Leidich (46) Senior Vice President, Chief Financial Officer and General Counsel Terrence G. Linnert (50) Controller E. Lyle Pepin (55) Treasurer David Af. Blank (48) Secretary Janis T Percio (44) Executives of Centerior Service Company Chairman, President and Chief Executive Officer (and Chairman & CEO of Cleveland Electric and Toledo Edison) Robert J. Farling (60) Executive Vice President: President - Transmission, Sersices and Business Enterprises Groups (and Vice Chairman of Toledo Edison and President of Cleveland Electric) Afurray R. Edelman (57) Senior Vice President: President - Distribution Group (and President of Toledo Edison) Fred J. Lange, Jr. (47) Senior Vice President: President - Power Generation Group Gary R. Leidich (46) Senior Vice President - Corporate Administration Group, Chief Financial Officer and General Counsel Terrence G. Linnert (50) Senior Vice President - Nuclear John P Stet:(51) Vice President - Business Services Jacquita K. Hau3erman (54) Vice President - Distribution Services David L Afonscau (56) Vice President - Nuclear-Perry Lew W Afyers (47) Vice President - Engineering & Planning Stanley E S:wed (44) Vice President - Sales & Marketing Al R. Tempic (51) Vice President - Nuclear-Davis-Besse John K.%od (45) Controller E. Lyle Pepin (55) Treasurer David AI. BlanA (48) Secretary Janis 1: Percio (44) Nwnber in parentheses indicates age. I 45
Financial and Statistical Review Operating Reienues (millions of dollars) Total Total Total Steam Operating Year Residential Commercial Indusinal Ot her Retail M helcule I lectric lleatmg R even nem 1996 $808 765 777 133 2 483 70 2 553 -
$2 $53 1995 797 747 777 136 2 457 59 2 516 --
2 516 1994 758 722 758 137 2 375 46 2 421 -- 2 421 1993 768 716 754 143 2 381 93 2 474 -- 2 474 1992 732 706 766 143 2 347 91 2 438 - 2 438 1986 599 517 676 80 1872 19 1 891 13 l 904 Operating Expenses (millions of dollars) Other Generation Amortization of I uel & Operation I acilitics Depreciation Taxes. Dcierred Icderal Total Purchned & Rental & Other Than Operatmg income Operating Year Power Mamienance l'ipenw. Net Amortoation iIT l spenws. Net Tasca t xpenses 1996 $465 635 159 304 320 43 Ill $2 037 1995 465 617 160 281 322 (53) 135 I 927 1994 442 595 160 278 309 (55) 114 1 843 1993 474 924(a) 159 258 312 23(b) 1I 2 161 1992 473 623 161 256 318 (52) 122 1 901 1986 530 551 - 141 195 - 138 1 555 income (l.oss) (millions of dollars) I cdcrat income Other Deferred income ( Loss) Income & Currymg Taxes- Herore Operatmg AI UDC- Deductmns. Charges. Credit interest Debt Vent income t qu:tv Net Net i1:xpenw) CharFes Interest 1996 $516 3 (17) - 9 511 337 1995 589 3 6 43 (5) 636 358 1994 578 5 8 40 (6) 625 361 1993 313 5 (589)(c) (649)(b) 398 (522) 359 1992 537 2 9 100 (7) 641 365 1986 349 308 (8) - 116 765 406 Income (Loss) (millions of dollars) Common Stock (dollars per share & %) Return on Preferred & Ascrage Average Preference Net Shares Common A l'U DC- St ock Income Outstandmg Earnmys Stak Dividends ihmk i car De bi Dividends it oso (millmnd (lad I quits Declared s alue 1996 $ (3) 56 $ 121 148.0 $ .82 6.1% $ .80 $13.42 1995 (3) 61 220 148.0 1.49 11.4 .80 13.40 1994 (6) 66 204 147.8 1.38 l 1.1 .80 12.71 , 1993 (5) 67 (943) 144.9 (6.51 ) (40.3) 1.60 12.14 , 1992 (1) 65 212 141.7 1.50 7.4 1.60 20.22 1986 (118) 85 392 128.9 3.04 13.7 2.49 22.13 (a) Imludes early retirement program etpenses and other charges of $272 million (b) insluJes urite-off of phase-in deferrals of $877 million, consisting of $172 million of Jeferred operating etpenses and $705 million of dektred carrs ing t harges. I 46
Centerior Energy Corporation and Subsidiaries Electric Sales (millions of KWil) Electric Customers Residential Usage (thousands at year end) Average Average Average Pnce Revenue Year Residential Industrial K% il Per Per Per Commercial Industnal % holesale Oiher Total Residential Commercial & Other Total Customer K'Kil Customer 1996 _ 7 103 7 698 12 278 2 804 1 011 30 894 925 98 11 1 034 7 685 11.38C $874.53
}995 _ 7 227 7 694 12 168 2 626 1 050 30 765 930 99 11 1 040 7 791 11.02 858.66 $1994_ 6 980 7 481 12 069 1 842 1 074 29 446 925 98 11 1 034 7 556 10.86 820.89 1993 _ 6 974 7 306 l1687 3 027 1 022 30 016 924 97 12 1033 7 546 11.01 830.99 o/992 _ 6 666 7 086 11 551 2 814 1 011 29 128 925 97 13 1 035 7 227 10.98 793.68 1936 _ 6 527 6 239 Ii 409 359 909 25 443 899 88 12 999 7 108 9.18 654.99 I.oad (MW & %) Energy (millions of KWii) l'uel Net Seawnal Peak Capacity Load C,ompany Generated Llhciency-Year Purchastd Fuel Cost MU Per Capahihty load M aryin I aictor l os.sil td; N uclear Tot al Power Total Per KWil K% ll 1996 5 873 5 679 3.37c 61.2% 19 584 12 404 31 988 817 32 805 1.32c 10 336 1995 5 924 5 779 2A 60.0 17 260 14 936 32 196 338 32 534 1.38 10 447 1994 6 226 5 291 15.0 63.9 18 000 1I 824 29 824 922 30 746 1.35 10 454 1993 6 226 5 397 13.3 61.6 21 105 10 435 31 540 273 31 813 1.39 10 276 1992 6 463 5 091 21.2 63.4 17 371 13 814 31 185 (122) 31 063 1.45 10 395 1986 5 535 5 021 9.3 63.0 22 613 22 637 24 4 669 27 306 1.79 10 292 Imestment (millions of dollars)
Construcimn Work in Total Utihn Accumulated Progren Nuclear Property. Plant in ikpreciation & Utihty Net & Perry fuel and Plant and Plant Year Semcc Amorttration Plant Tota'. ifmt 2 Other I aumment Addiuons Aucts 1996 $9 867 3 272 6 595 79 278 $6 952 $ 160 $10 210 1995 9 768 3 036 6 732 101 302 7 135 210 10 643 1994 9 770 2 906 6 864 129 343 7 336 197 10 691 1993 9 571 2 677 6 894 181 385 7 460 218 10 710 1991 9 449 2 488 6 961 781 424 8 166 200 12 071 1986 4 640 1 368 3 272 5 144 653 9 069 1134 9 918 Capitalization (millions of dollars & %) Preferred & Preference Preferred Stock. without Stock. with Mandatory Mandatory Redemptien Year Common Stock f.uuits Redemption Provruons Proviuons 1 one. Term Debt Total 1996 $1987 33% 189 3% 448 7% 3 444 57% $6 068 1 5 1 984 3l 220 3 451 7 3 734 59 6 389 1994 I882 30 253 4 451 7 3 697 59 1993 6 283 1 785 27 313 5 451 7 4 019 1992 61 6 568 2 889 39 364 5 354 5 3 694 51 7 301 ' 1936 2 991 39 488 7 404 5 3 793 49 7 676 (c} Includes nrite-otJof Perry Unit : of MU million. (d) Reduced by net energy used by the Seneca Pumped Storage Plant for pumping l 47 i l
Board of Directors Richardit Anderson (67) Chainnan and Chief Executive Officer of The Anderwns Inc., a grain, farm supply and retading firm.1986 Albert C. Hersticker (62) Chairman and Chief Executive Officer of Ferro Corporation, a producer of specialty chemical materials for manufactured products.1990 Thomas A. Commes (54) t President and Chief Operating Officer of The Sherwii-Williams Company, a manufacturer of paints and painting supplies.1987 3
\\illiam E Conway (66) ,
President of William E Conway & Associates. Inc., a management consulting firm. Retired Executive Vice President-Nuclear of Ari/ona Public Service Company, an electric utili y.1994
\\'ayne R. Embry (59)
President and Chief Operating Officer of the ('leveland Cavaliers, a professional basketball team. Chairman of hl.A.L. Co., a fabricator of hardnoard, fiberglass and carpeting materials for the automotive industry.1991 Robert J. Farling (60I Chairman, President and Chief Executive Officer of the Company and Centerior Service Company.1988 Richard A. h! iller f 70) Retired Chairman and Chief Executise Officer of the Company and Centerior Service Company.1986 Frank E. Alosier t66) Retired Vice Chainnan of the Advisory Board of BP America Inc., a producer and refiner of petroleum products.1986 Sister Alary Afarthe Reinhard, SND (67) Director of Development for the Sisters of Notre Dame of Cleveland. Ohio.1986 Robert C. Sarage (59) President and Chief Executise Officer of Savage & Associates, Inc., an insurance, financial phinning and estate planning firm.1990
\\1lliam J.1111/iams (68)
Retired Chainnan of fluntington National Bank.1986 Robert 31. Ginn Chairman Emeritus John it \\illiamson Chairman Es.t. # f Number in pantheses indicates age. Date indicatesfirst year in u hich elected to Board. Committees of the Board h Emironmental Capital and Community Etecutive Human Audit Expenditures Responsibility and Nominating Finance Resources Nuclear T. A. Commes, A.C. Bersticker, Sr. ht.ht. Reinhard, R.J. Farling. R. A. h1 iller, E E. hiosier, W.E Conw ay, Chainnan Chairman Chainnan Chairman Chairman Chairman Chairman R.P. Anderson W E Conway W R. Embry A.C. Bersticker T. A. Commes W.E Conway R.P. Anderson W.R. Embry R.J. Farling R. A. h1 iller T. A. Commes R.J. Farling W.R. Embry A.C. Bersticker y Sr. 51 h1. Reinhard R.A. h1 iller E E. hiosier R. A. h1 iller E E. hlosier R.C. Sasage Sr. hl.ht. Reinhard W.J. Williams EE. hiosier R.C. Savage WJ. Williams R.C. Savage W.J. Williams W.J. Williams 48 s
Share Owner information Executive Offices investor Relations Common Stock Centerior Energy Corporation Inquiries from security analysts and institu- Listed on the New York, Chicago and 6200 Oak Tree Boulevard tional investors should be directed to Pacific Stock Exchanges. Options are traded Independence, Oil Ronald E. Seeholzer, Manager-Investor on The Pacific Stock Exchange. New York
; Telephone:(216)447-3100 Relations, at the Company's mail address Stock Exchange symbol-CX. Newspaper s FAX: (216) 447-3240 or by telephone at (216) 447 3339 abbreviation - CentEn or CentrEngy. $ Mall Address Dividend Fleinvestment and Stock Annual Meeting Centerior Energy Corporation Purchase Plan and Individual The 1997 annual meeting of the share I P.O. Ilos 94661 Retirement Account (CX+1RA) owners of the Company will be held on Cleveland, Oil 44101-4661 The Company has a Dividend Reinvestment May 8,1997. Owners of common stock as and Stock Purchase Plan which provides of March 12,1997, the record date for the General information about the Company share owners of record and customers of meeting, will be eligible to vote on matters is available on the Internet at Ceveland Electric and Toledo Edison a brought up for share owners' consideration.
http://www.centerior.com convenient means of purchasing shares of Transfer Agent Company common stock by investing all Environmental Report or a part of their quarterly dividends as well The Company will furmsh to share owners, L,enterior Energy Corporation . as m king cash investments. In addition, without charge, a copy of a report on its Share Owner Services P.O. Box 94661 individuals may establish an individual emiranmental performance. Requests i Cleveland, Oli 44101-4661 retirement account (IRA) which innsts in should be directed to Share Owner Senices. Company common stock through the Plan. i Stock transfers may be presented at Information relating to the Plan and the Form 10 K I liariis Trust Company of New York CX=lRA may be obtained from Share The Company will furnish to share owners, 77 Water Street,5th Fh>or without charge, a copy ofits most recent l New York, NY 10005 Owner Services. annual report to the Securities and CX+1RA Custodian Exchange Commission. Requests should Registrar All communications about an existing be directed to Share Owner Services. KeyBank National Association CX=lRA should be directed to the Corporate Trust Disision Custodian at the address or telephone Audio Cassettes P.O. Box 6477 numbers listed below: Share ow ners w ith impaired vision may Cleseland, Oil 44101 . . obtain audio cassettes of the Company's Key Bank Nau.onal Association Quarterly Reports and Annual Report. Independent Public Accountants Custodian, CX=lRA, P.O. Ilox 6477 To obtain a cassette, simply write or call Cleveland, Oli 44101 Arthur Andersen LLP Share Ow ner Services. There is no charge Suite 1800 In Cleveland area: 813-5745 for this service. 200 Public Square Outside Cleveland area: (800) 542-7792 Cleveland Oil 44114 Share Owner Services We haye made forward-looking statements in this Annual Report to Share Owners with respect to the financial condition. results of operations, strategic plan and business of Centerior Energy, and FirstEnergy g Communications regarding stock transfer following the consummation of the merger with Ohio Elison, u hich invohe certain risks and uncertainties. requirements, lost certificates, dividends and Forward-looking statements are statements about future performance or resuhs,includmg any statements
. = - changes of address should be directed to u4ng & wmnehm,"exput,"anheipatAr sinular words F r an of those statements, we claim the protection of the safe harbor for forward 4ooking statements contained in the Nvate Securities Litigation Sharc Owner Senices. To reach Share Reform Act of 1995. Fatlors that may cause actual results to differ materially from those contemplated by Owner Services by phone, call: such forward-hmking statements include, among others, the following possibilities: (1) expected cost sasings from the merger are not fully realized. (2) regional competitise pressure in the elettric utility In Cleveland area: 447-2400 industry increases sigmlicantly; (3) the etTects of unanticipated esents on the Operating Companies' expectations regarding cost recoscry over the regulatory plan period or on the carrying value of regulatory Outside Cleveland area: (800) 433-7794 assets and on the Operating Companies' ability to continue to comply with the provisions of SFAS 71 (as defined herein) cause an impairment of property, plant and equipment or variances from the amounts Please have your account number ready dnclosed; (4) costs or difficuhies related to the integration of the businesses of Ohio Edison and Centerior are greater than expected; (5) state and federal regulatory initiatises are impleraented that further increase w hen calling.
competition, threaten cost ano msestm.nt recosery or impact rate structures or dividends; and (6) national and regional economic conditions are less favorable than expected. 19
Centerior Energy Corporation ,yLg g,,g P.O. Box 94661 U.S. M) STAGE Cleveland.OH 44101-4661 PAID CLEVELAND,01110 PERMIT NO. 409 j f s d e w _ _ _ _ _ _ _ _ _ _ _ . _ - - _ _ _ _ _ _ _ - _
UNITED STATES SECURITIES AND EXCilANGE COMMISSION WASillNGTON, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF TIIE SECURITIES EXCIIANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31,1996 OR ~ O TRANSITION REPORT PURS71 ANT TO SECTION 13 OR 15(d) OF TIIE SECURITIES EXCIIANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission Registrant; State of Incorporation; File Number I.R.S. F.mplo>er Address; and Telephone Number Identsfication No. 1-9130 CENTERIOR ENERGY CORPORATION 34-1479083 (An Ohio Corporation) 6200 Oak Tree Boulevard Independence, Ohio 44131 Telephone (216) 447-3100 1-2323 Tile CLEVELAND ELECTRIC ILLUMINATING COMPANY 34-0150020 (An Ohio Corporation) c/o Centerior Energy Corporation 6200 Oak Tree Boulevard Independence, Ohio 44131 Telephone (216) 622-9800 1-3583 THE TOLEDO EDISON COMPANY 34-4375005 ( An Ohio Corporation) 300 Madison Avenue Toledo, Ohio 43652 Telephone (419) 249-5000 Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes E. No D. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part til of this Form 10-K or any amendment to this Form 10-K. 8 The aggregate market value of Centerior Energy Corporation Common Stock, without par value, held by non-affiliates was
$ 1,535,769,003 on February 28,1997 based on the closing sale piice of $10.375 as quoted for that date on a composite transactions basis in The WallStreet Journal and on the 148,025,928 shares of Cornmon Stock outstanding on that date.
Centerior Energy Corporation is the sole holder of the 79,590,689 shares and 39,133,887 shares of the outstanding common stock of The Cleveland Electric illuminating Company and The Toledo Edison Company, respectively.
Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Peoistrant Title of Each Class on Which Reaistered 1 Centerior Energy Common Stock, Corporation without par value New York Stock Exchange Chicago Stock Excnange Pacific Stock Exchange The Cleveland Electric Cumulative Serial Dreferred Illuminating company Stock, without par values , 57.40 Series A New York Stock Exchange l 57.56 Series B New York Stock Exchange Adjustable Rate, Series L New York Stock Exchange Depositary Shares: 1993 Series A, each share representing 1/20 of a share of Serial Preferred Stock, S42.40 Series T (without par value) New York Stock Exchange First Nortgage Bonds: 8-3/4% Series due 2005 New York Stock Exchange 9-1/4% Series due 2009 New York Stock Exchange 8-3/8% Series due 2011 New York Stock Exchange 8-3/8% Series due 2012 New York Stock Exchange j The Toledo Edison Cumulative Preferred Stock, Company par value $100 per share: 4-1/4% Series American Stock Exchange 8.32% Series American Stock Exchange l 7.76% Series American Stock Exchange ! 10% Series American Stock Exchange l Cumulative Preferred Stock, par value 525 per share: 8.84% Series New York Stock Exchange 52.365 Series New York Stock Exchange i Adjustable Rate, Series A New York Stock Exchange J Adjustable Rate, Series B New York Stock Exchange First Mortgage Bonds: 7-1/2% Series due 2002 New York Stock Exchange 8% Series due 2003 New York Stock Exchange I
i Sacurition registered pursuant to Section 22(g) of the Act: ' Recistrant Title of Each Class I centerior. Energy None , Corporation The Cleveland Electric None Illuminating Company ! The Toledo Edison Cumulative Preferred Stock, l Company- par value $100 per shares ; 4.56% Series and 4.25% Series DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K'- ; Into Which Document Descriotion Is Incorporated Portions of Proxy Statement of Centerior Energy Corporation, dated April 3, 1997 Part III i l I l I I 1
TABLE OF CONTENTS Page Eumber Glossary of Terms iv PART I Item 1. Dusiness . . . . . . . . . . . . . . . . . . . . . . . 1 The Centerior System . . . . . . . . . . . . . . . . . . . . . . 1 Pending Herger with Ohio Edison . . . . . . . . . . . . . . . . 2 Merger of the Operating Companies . . . . . . . . . . . . . . . 2 CAPCO Group . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Construction and Financing Programs . . . . . . . . . . . . . . 4 Construction Program . . . . . . . . . . . . . . . . . . . . . 4 Financing Program . . . . . . . . . . . . . . . . . . . . . . 6 General Regulation . . . . . . . . . . . . . . . . . . . . . . . 6 Holding Company Regulation . . . . . . . . . . . . . . . . . . 6 State Utility Commissions . . . . . . . . . . . . . . . . . . 7 Ohio Power Siting Board . . . . . . . . . . . . . . . . . . . 8 Federal Energy Regulatory Commission . . . . . . . . . . . . . 8 Nuclear Regulatory Commission . . . . . . . . . . . . . . . . 8 Other Regulation . . . . . . . . . . . . . . . . . . . . . . . 8 Environmental Regulation . . . . . . . . . . . . . . . . . . . . 9 General . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Air Quality Control . . . . . . . . . . . . . . . . . . . . . 9 Water Quality Control . . . . . . . . . . . . . . . . . . . . 10 Waste Disposal . . . . . . . . . . . . . . . . . . . . . . . . 11 Electric Rates . . . . . . . . . . . . . . . . . . . . . . . . . 11 General . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1996 Rate Order . . . . . . . . . . . . . . . . . . . . . . . 11 Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Sales of Electricity . . . . . . . . . . . . . . . . . . . . . 12 Operating Statistics . . . . . . . . . . . . . . . . . . . . . 12 Nuclear Units . . . . . . . . . . . . . . . . . . . . . . . . 13 Competitive Conditions . . . . . . . . . . . . . . . . . . . . 14 General . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Cleveland Electric . . . . . . . . . . . . . . . . . . . . . 15 l Toledo Edison . . . . . . . . . . . . . . . . . . . . . . 16
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I , i Page l Uumber i Fuel Supply . . . . . . . . . . . . . . . . . . . . . . . . . 18 J Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ^ Nuclear . . . . . . . . . . . . . . . . . . . . . . . . . . 19 011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ? Executive Officers of the Registrants and the Service Company a i . 21 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 28 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 The Centerior System . . . . . . . . . . . . . . . . . . . . . 28 l Cleveland Electric . . . . . . . . . . . . . . . . . . . . . . 28 4 Toledo Edison . . . . . . . . . . . . . . . . . . . . . . . . 29 Title to Property . . . . . . . . . . . . . . . . . . . . . . . 30 i 1 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 32 Item 4. Submission of Matters to a Vote of Security-Holders . . . 32 i PART II Item 5. Market for Registrants' Common Equity and Related ; Stockholder Matters . . . . . . . . . . . . . . . . . . . 33 l< 1 Market Information . . . . . . . . . . . . . . . . . . . . . . 33 1 Share owners . . . . . . . . . . . . . . . . . . . . . . . . . 33 { Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . 33 l i Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . 33 Centerior Energy . . . . . . . . . . . . . . . . . . . . . . . . 33 Cleveland Electric . . . . . . . . . . . . . . . . . . . . . . . 34 Toledo Edison . . . . . . . . . . . . . . . . . . . . . . . . . 34 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 34 l i Centerior Energy . . . . . . . . . . . . . . . . . . . . . . . . 34 , Cleveland Electric . . . . . . . . . . . . . . . . . . . . . . . 34 ! Toledo Edison . . . . . . . . . . . . . . . . . . . . . . . . . 34 l i i 4 Page l Number l i , Item 8. Financial Statements and Supplementary Data . . . . . . . 34 l Centerior Energy . . . . . . . . . . . . . . . . . . . . . . . . 34 Cleveland Electric . . . . . . . . . . . . . . . . . . . . . . . 34 Toledo Edison . . . . . . . . . . . . . . . . . . . . . . . . . 34 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . 34 l PART III l i l Item 10. Directors and Executive Officers of the Registrants . . 35 i Centerior Energy . . . . . . . . . . . . . . . . . . . . . . . . 35 Cleveland Electric . . . . . . . . . . . . . . . . . . . . . . . 35 Toledo Edison . . . . . . . . . . . . . . . . . . . . . . . . . 35 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . 36 Item 12. Security ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . 36 centerior Energy . . . . . . . . . . . . . . . . . . . . . . . . 36 Cleveland Electric . . . . . . . . . . . . . . . . . . . . . . . 36 Toledo Edison . . . . . . . . . . . . . . . . . . . . . . . . . 37 i i Item 13. Certain Relationships and Related Transactions . . . . . 37 ' PART IV Item 14. Exhibits, Financial Statement Schedules and Reporte ! on Form 8-K , . . . . . . . . . . . . . . . . . . . . . 38 I Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Index to Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; and Financial Statements . . . . . . . . . . . . . . . . . . . . . F-1 Index to Schedules . . . . . . . . . . . . . . . . . . . . . . . . . 5-1 The Cleveland Electric Illuminating Company and Subsidiaries and The Toledo Edison Company Combined Pro Forma Condensed Financial d Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . P-1 Exhibit Index . . . . . .i. . . . . . . . . . . . . . . . . . . . . E-1 i
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i i l This combined Form 10-K ic separately filed by Centorier Energy Corporation, j The Cleveland Electric Illuminating Company and The Toledo Edicen Company.
- nformation contained herein relating to any individual regirtrant ic filed by
! such regictrant on its own behalf. tio registrant makes any representation ao to information relating to any other registrant, except that information relating to either or both of the Operating Companico is also attributed to ! Centerior Energy. ' Centerior Energy, Cleveland Electric and Toledo Edison have made forward- , looking statements in thio Form 10-K with respect to the financial condition, l resulto of operations, strategic plan and buoineos of Centerior Energy, j Cleveland Electric and Toledo Edison, and FirstEnergy following the ' l consummation of the merger with Ohio Edioon, which involve certain rioks and uncertainties. Forward-looking statemente are statemente about future performance or resulto, including any statemento using the words "believe", j
" expect", " anticipate" or similar wordo. For all of those statemento, Centerior Energy, Cleveland Electric, Toledo Edison and FirstEnergy claim the protection of the safe harbor for forward-looking statements contained in the :
Private Securities Litigation Reform Act of 1995. Factors that may cause actual reoults to differ materially from those contemplated by such forward-i looking statemente include, among others, the following possibilities: (1) expected cost savings from the merger of Ohio Edison and Centerior Energy are not fully realized; (2) regional competitive precoure in the electric utility industry increases significantly; (3) the effects of unanticipated events on j the Operating Companies' expectations regarding cost recovery or on the carrying value of regulatory assets and on the Operating Companies' ability to continue to comply with the provisions of Statement of Financial Accounting l Standards 71 cause an impairment of property, plant and equipment or variances l from the amounts disclosed; (4) costs or difficulties related to the integration of the businesses of Ohio Edison and Centerior. Energy are greater than expected; (5) state and federal regulatory initiatives are implemented j ' that further increase competition, threaten cost and investment recovery or impact rate structures or dividends; and (6) national and regional economic } conditions are less favorabic than expected. 1 i l GLOSSARY OF TERMS The following terms and abbreviations used in the text of this Report are defined as indicated: Term Definition AFUDC Allowance for Fundo Used During Construction. ! AMP-Ohio American Municipal power-Ohio, Inc., an Ohio I not-for-profit corporaticn, the members of which are certain Ohio municipal electric systems. Beaver Valley Unit 2 Unit 2 of the Beaver Valley Power Station, in which the Operating Companies have ownership and leasehold interests. CAPCO Group Central Area Power Coordination Group. 3 1 l Centerior Energy or Centerior Centerior Energy Corporation. 4
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Term Definition Centerior System Centerior Energy, the operating Companies and the Service Company. Chase Brass Chase Brass & Copper Co., Inc. Clean Air Act Federal Clean Air Act of 1970 as amended. Clean Air Act Amendments November 1990 Amendments to the Clean Air Act. Clean Water Act Federal Water Pollution Control Act as amended. Cleveland Electric The Cleveland Electric Illuminating Company, an electric utility subsidiary of Centerior Energy and a member of the CAPCO Group. Consol Consolidation Coal Company. CPP Cleveland Public Power, a municipal electric system operated by the City of Cleveland. Davis-Besse Davis-Besse Nuclear Power Station, which is wholly owned by the Operating Companies and operated by Toledo Edison. Detroit Edison Detroit Edison Company, an electric utility. DOE United States Department of Energy. Duquesne Duquesne Light Company, an electric utility subsidiary of DQE, Inc. and a member of the CAPCO Group. ECAR East Central Area Reliability Coordination Group. Federal Power Act Federal Power Act, as amended, codified in Chapter 12 of Title 16 of the United States Code. FERC Federal Energy Regulatory Commission. FirstEnergy FirstEnergy Corp., a new electric utility holding company formed as a result of Centerior's agreement to merge with Ohio Edison. Holding Company Act Public Utility Holding Company Act of 1935.
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l l Iggg Definiti2D' ' ; Mansfield Plant Bruce Mansfield Generating Plant, a coal-fired power plant, in which the Operating Companies have leasehold interests as joint and several lessees. Note or Notes Note or Notes to the 1996 Financial Statements of Centerior Energy, Cleveland Electric and Toledo Edison contained under Item 8 of this Report. (Note or Notes, where used, refers to all three companies unless otherwise specified). NPDES National Pollutant Discharge Elimination System. NRC United States Nuclear Regulatory Commission. Ohio Edison Ohio Edison Company, an electric utility and a member of the CAPCO croup. Ohio EPA Ohio Environmental Protection Agency. Ohio Power Ohio Power Company, an electric utility sub-sidiary of American Electric Power Company, Inc. Ohio Valley The Ohio Valley Coal Company, the successor corporation to The Nacco Mining Company and a subsidiary of Ohio Valley Resources, Inc. Operating Companies Cleveland Electric and Toledo Edison. (individually, Operating Company) OPSB Ohio Power Siting Board. PaPUC Pennsylvania Public Utility Commission. Penelec Pennsylvania Electric Company, an electric utility subsidiary of General Public Utilities Corporation. Pennsylvania Power Pennsylvania Power Company, an electric utility subsidiary of Ohio Edison and a member of the CAPCO Group. I Perry' Unit 1 Unit 1 of the Perry Nuclear Power Plant, j which the Operating Companies have ownership interests in and is operated by Cleveland Electric. PUCO The Public Utilities Commission of Ohio. Quarto Quarto Mining Company, a subsidiary of Consol.
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Term Definition
.SALP Systematic Assessment of Licensee Performance - the NRC's performance evaluation of a nuclear unit.
SEC United States Securities and Exchange Commission. Seneca Plant Seneca Power Plant, a pumped-storage, hydro-electric generating station jointly owned by cleveland Electric and Penelec. Service Company Centerior Service Company, a service sub-sidiary of Centerior Energy. Superfund Comprehensive Environmental Response, com-pensation and Liability Act of 1980 and the Superfund Amendments and Reauthorization Act of 1986. Toledo Edison The Toledo Edison Company, an electric utility subsidiary of Centerior Energy and a 1 member of the CAPCO Group. USEC United States Enrichment Corporation, formerly a part of the DOE. U.S. EPA United Staten Environmental Protection Agency. i
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4 1 i PART I k ) Item 2. Businenn } THE CENTERIOR SYSTEM Centerior Energy is a public utility holding company and the parent company of six wholly owned nubsidiaries, including the Operating Companies and the Service Company, Centerior was incorporated under the laws of the state of l Ohio in 1985 for the purpose of enabling Cleveland Electric and Toledo Edison i to affiliate by becoming wholly owned subsidiaries of Centerior. The I affiliation of the Operating Companies became effective in April 1986. Nearly all of the consolidated operating revenues of the Centerior System are derived ] from the sale of electric energy by cloveland Electric and Toledo Edison. , The Operating Companies' combined service areas encompass approximately 4,200 square miles in northeastern and northwestern Ohio with an estimated popula-
- tion of about 2,610,000. At December 31, 1996, the Centerior System j (including the Operating Companies, the Service Company and the other wholly j owned subsidiaries of Centerior Energy) had 6,204 employees. Centerior Energy has no employees.
l. l Cleveland Electric, which was incorporated under the laws of the State of Ohio > j in 1892, is a public utility engaged in the generation, purchase, transmis-sion, distribution and sale of electric energy in an area of approximately 1,700 square miles in northeastern Ohio, including the City of Cleveland. Cleveland Electric also provides electric energy at wholesale to other elec-tric utility companies and to two municipal electric systems (directly and through AMP-Ohio) in its service area. Cleveland Electric serves approxi-mately 741,000 customers and derives approximately 77% of its total electric retail revenue from customers outside the City of Cleveland. Principal industries served by Cleveland Electric include those producing steel and other primary metals; automotive and other transportation equipment; chemicals; electrical and nonelectrical machinery; fabricated metal products; and rubber and plastic products. Nearly all of Cleveland Electric's operatine revenues are derived from the sale of electric energy. At December 31, 1996, Cleveland Electric had 3,282 employees of which about 54% were represented by one union having a collective bargaining agreement with Cleveland Electric. Toledo Edison, which was incorporated under the laws of the State of Ohio in 1901, is a public utility engaged in the generation, purchase, transmission, distribution and sale of electric energy in an area of approximately 2,500 square miles in northwectern Ohio, including the City of Toledo. Toledo Edicon also provides electric energy at wholesale to other electric utility companies and to 13 municipally owned distribution systems (through AMP-Ohio) and one rural electric cooperative distribution system in its service area. Toledo Edison serves approximately 293,000 customers and derives approximately 56% of its total electric retail revenue from customers outside the City of Toledo. Principal industries served by Toledo Edison include metal casting, forming and fabricating; petroleum refining; automotive equipment and assembly; food processing; and glass. Nearly all of Toledo Edison's operating revenues are derived from the sale of electric energy. At December 31, 1996, Toledo Edison had 1,643 employees of which about 601 were rep' resented by three unions having collective bargaining agreements with Toledo Edison. 4 The service Company, which was incorporated in 1986 under the laws of the State of Ohio, is also a wholly owned subsidiary of Centerior Energy. It pro-vides management, financial, administrative, engineering, legal, governmental and public relations and other services to Centerior Energy and the Operating Companies. At December 31, 1996, the Service Company had 1,267 employees. Centerior's other three wholly owned subsidiaries are Centerior Properties j Company, Centerior Enterprises Company and Market Responsive Energy, Inc. (Fertile-Earth, Inc., a wholly owned subsidiary of Centerior Enterprises company, had 12 employees at December 31, 1996.) These three subsidiaries, individually or in the aggregate, do not have a material impact on the consolidated financial statements of Centerior. i PENDING KERGER WITH OHIO EDISON on September 16, 1996, Centerior Energy and Ohio Edison jointly annoJnced an agreement between them whereby Centerior would merge with Ohio Edison in a stock-for-stock transaction to form FirstEnergy. Upon consummation of the merger, Centerior Energy common stock share owners will receive 0.525 share of FirstEnergy common stock for each share of Centerior common stock owned, and Ohio Edison chare owners will receive one share of FirstEnergy common stock l for each share of Ohio Edison common stock owned. Following the merger, FirstEnergy will directly hold all of the issued and outstanding common stock of Ohio Edison, Cleveland Electric, Toledo Edison, the Service Company and the three other wholly owned subsidiaries of Centerior. FirstEnergy plans to account for the merger as a purchase in accordance with generally accepted accounting principles. On January 30, 1997, the PUCO approved a rate reduction and economic development plan for the operating Companies to be effective upon the consummation of the merger through 2006. The plan provides for rate reductions, frozen fuel cost factors, economic development incentive prices, an energy-efficiency program, an earnings cap and an accelerated reduction in nuclear and regulatory assets for regulatory purposes. On March 27, 1997, Centerior Energy and Ohio Edison common stock share owners approved the merger. The PaPUC had given its approval of the merger on February 18, 1997. Various aspects of the merger remain subject to approval by the FERC, the NRC and the SEC. The merger is expected to be consummated in late 1997. Reference is made to Centerior Energy's, Cleveland Electric's and Toledo Edison's Management's Financial Analysis contained under Item 7 of this Report (specifically, " Strategic Plan", "Pending Herger with Ohio Edison" and "FirstEnergy Rate Plan" under "Hanagement's Financial Analysis -- Outlook") and Note 15 for more information concerning the pending merger with Ohio Edison and the rate reduction and economic development plan. HERGER OF THE OPERATING COMPANIES In March 1994., Centerior Energy announced a plan to merge Toledo Edison into Cleveland Electric. The merger received the approvals of the PaPUC, the PUCO and the FERC in July 1994, December 1994 and October 1996, respectively. In June 1995, the preferred stock share owners of Cleveland Electric and Toledo _ _.__ ._- _ - ...m __._.m_ m._ m - _ .___.- - _ _ . . - _ _ _ _ . _ - . . . _ _ _ .m 1 Edison approved actions necessary for +he Operating Companies to merge. NRC )
- . approval is also necessary. However, the n.crger agreement between Centerior
! Energy and Ohio Edison (see "Pending Merger with Ohio Edison", above) requires the approval of Ohio Edison prior to the consummation of the proposed merger i of the Operating Companies. Ohio Edison has not yet made a decision on this matter. .In the meantime, at the request of the NRC pending Ohio Edison's decision whether to complete the merger of the Operating Companies, the Operating Companies have withdrawn their request for authorization to transfer certain NRC licenses to the merged entity, j See Note 16 to the Operating companies' Financial Statements for further discussion of this matter and "3. Combined Pro Forma Condensed Financial I Statements (Unaudited)" contained under Item 14 of this Report for selected historical and combined pro forma financial information of Cleveland Electric l I and Toledo Edison. r CAPCO GROUP t Cleveland Electric and Toledo Edison are members of the CAPCO Group, which was l
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created in 1967 with Duquesne, Ohio Edison and Pennsylvania Power. The CAPCO Group affords greater reliability and lower cost of providing electric service , through coordinated generating unit operations and maintenance and generating j reserve back-up among the five companies. In addition, the CAPCO Group has con.pleted programs to construct larger, more ef ficient ' electric generating unfr a and to strengthen interconnections within the Group. ) i i
'n April 24, 1996, the FERC issued Order 888 which generally requires i nondiscriminatory transmission access and pricing by public utilities. Order 688 also requires that." loose pools", defined as any multi-lateral arrangements which contain, discounted or special transmission arrangements, !
must'~ file. joint, pool-wide transmission tariffs by December 31, 1996, removing ' eny pr'eferential transmission access and pricing provisions from the loose pool arrangements. On December 30, 1996, Cleveland Electric and Toledo Edison ! responded'to the FERC by letter asserting that the'CAPCO Group is not a power pool because it does not jointly dispatch any generation, address' day-to-day - transmission reliability concerns or have authority to control, transfer or take emergency switching actions to maintain the bul~k power grid of its member companies. , The CAPCO Group companies have placed in service nine major generating units, of which the Operating Companies have ownership or leasehold interests in , seven (three nuclear and four coal-fired). Each CAPCO Group company owns, as a tenant-in-common, or leases a portion of certain of these generating units. l Each company has the right to the net capability and associated energy of its . I respective ownership and leasehold portions of the units and is, severally and not jointly, obligated for the capital, and operating costs equivalent to its i respective ownership and leasehold portions of the units and the required i fuel, except that the obligations of Pennsylvania Power are the joint and several obligations of that company and Ohio Edison and the leasehold ' obligations of Cleveland Electric and Toledo Edison are joint and several. (See " Operations--Fuel Supply".) For all plants but one, the company in whose service area a generating unit is located is responsible for the operation of
'that unit for all the owners,'except for the procurement of nuclear fuel for a nuclear generating unit. The Mansfield Plant, which is located in Duquesne's l
service area, is operated by Pennsylvania Power. Each company owns the i and
- necessary interconnecting transmission f acilities within its service area; !
the other CAPCO Group companies contribute toward fixed charges and operating costs of those transmission facilities. l I
)
1
)
In October 1995, Cleveland Electric filed a Demand for Arbitration seeking unpaid operating costo of Eastlake Unit b which had been invoiced to Duquesne in respect of Duquesne's partial ownership interect in that Unit. In that arbitration proceeding, Duquesne countered with allegations that certain management practices of Cleveland Electric in the operation of Unit 5 have been detrimental to Duqucone. Among the remedico sought by Duquesne is the partition of the property held ao tenanto in common. Also in October 1995, ; i Cleveland Electric filed a complaint for injunctive and declaratory relief I against Duquesne in Lake County (Ohio) Common Pleas Court peeking a court order prohibiting Duquesne from taking action to partition or sell its ownership interest in Eastlake Unit 5. Cleveland Electric later amended its complaint to restate Jto arbitration claims. The Lake County action was removed to the United States District Court for the Northern District of Ohio, Eastern Division. Duqu ee nc subsequently filed counterclaims in the federal court action restating all claims made in the arbitration proceeding. The arbitration has been dismissed and the federal action stayed pending settlement discussions betwoon the parties. All of the CAPCO Group companies are members of ECAR, which 10 comprised of 29 major electric power suppliero and 24 associate members located in nine east-central states, serving 36,000,000 people. ECAR's purpose 10 to improve reliability of bulk power supply through coordination of planning and , operation of member companies' generation and transminolon facilities. 6 CONSTRUCTION AND FINANCING PROGRAMS Construction Procram The Centerior System carries on a continuous program of constructing trano-mission, distribution facilities to meet and general facilities and modifying existing generating anticipated demand for electric service and to comply with governmental regulations. Centerior Energy's 1996 long-term (20-year) forecast, ao filed with the PUCO (see " General Regulation--State Utility Commissiono"), projecto long-term annual growth rates in peak demand and kilowatt-hour sales of 0.7% and 1.0%, respectively, after demand-side management considerations. The Centerior System's integrated resource plan for the 1990s (which is included in the long-term forecast) con %ines peak clipping demand-side management programs with maximum utilization of existing generating capacity to postpone the need for new generating units until the next decade. Lake Shore Unit 18, a 245,000-kilowatt unit which was placed on cold 2000. standby status in October 1993, is ocheduled to resume active status in According to the current long-term integrated recource plan, the Centerior System does not plan to put into rervice any new generating capacity until 2008. The following tables show, categorized by major componento, the construction expenditures by Cleveland Electric and Toledo Edison and, by aggregating them, for the Centerior System during 1994, 1995 and 1996 and the estimated cost of their construction programs for 1997 through 2001, in each case including AFUDC and excluding nuclear fuel (however, consummation of the pending merger with Ohio Ecison is expected to reduce the Operating Companies' cash construction expenditures from those reported in the tables): 1
. ~. .- .. .- - - . - . - . - . . - . . _.. - ..... . . _ ~ - . . . . . . . , _ . - .
Actual Estimated IEES 12.21 1.215. 112.1 1.2EE 112.2 299.E 2.2.21 Cleveland Electric (Millions of Dollars) Transmission, Distribution e and General Facilities S 53 5 68 S 79 $ 76 S 81 S 94 S 96 S105 Renovation and Hodification of Generating Units Nuclear 18 12 17 18 15 17 11 9 Nonnuclear 61 63 19 18 12 18 16 17 Clean Air Act Amendments compliance _.2 4 _.12, f4) _1 10 8 3 0 Total SM $155 Sj,J,j, SM SQ $137 SM S131 Actual Estimated 1.2.24 12.21 1.21k 1211 122E 1.222 2.29E 2. eel Toledo Edison (Millions of Dollars) Transmission, Distribution and General Facilities S 18 5 37 5 32 5 38 5 44 S 34 5 36 S 25 Renovation and Modification of Generating Units Nuclear 10 6 12 14 12 14 10 6 Nonnuclear 12 9 5 9 7 8 4 4 Clean Air Act Amendments Compliance ,_ 1 3 0 1 6 6 _,,,,,2, O Total SS Sg 54_9, Sg Sg Sg Sg S 35 t Actual Estimated 1994 9 199,5_ 1915 J.291 121g 1921 2000 2_0Q1 Q (Millions of Dollars) Centerior System Transmission, Distribution and General Facilities S 71 $105 S111 S114 $125 S128 S132 $130 Renovation and Hodification of Generating Units ! Nuclear 28 18 29 32 27 31 21 15 Nonnuclear 73 72 24 27 19 .'6 20 21 Clean Air Act Amendments compliance ,_2 5 15 (4) 2 16 13 5 0 Total $),,4,], Sp_1,0, Sj,6,0, 5 SJ,],5, $187 $199 SJ,],g Sj,6,6,
. _. m _ _ . _ _ __ - _ - - _ - . _ _ . . _ _ _ . - . _ . _ . - _ _ . _ _ _ . . . _ .
l 1 1 I 4 , Each company in the CAPCO Croup is responsible for financing the portion of i the capital costs of nuclear fuwl equivalent to its ownership and leased l j interest in the unit in which the fuel will be utilized. See " Operations-- l l 4 Fuel Supply--Nuclear" for information regarding nuclear fuel supplies and Note l 6 regarding leasing arrangements to finance nuclear fuel capital costs. 3 Nuclear fuel capital costs incurred by Cleveland Electric, Toledo Edison and , the Centerior System during 1994, 1995 and 1996 and their estimated nuclear
- fuel capital costs for 1997 through 2001 are as follows: i
~ Actual Estimated 1994 1995 1996 1222 1228 1999 2000 2001 l 1 (Millions of Dollars) i Cleveland Electric Toledo Edison S 26 5 19 5 37 $ 25 S 34 S 40 S 34 S 40 i l
$ 21 S 12 S 32 S 22 S 30 $ 30 S 29 $ 32 i
Centerior System 5 47 $ 31 S 69 S 47 5 64 S 70 $ 63 $ 72 , j Financina Procram j j Reference is made to Centerior Energy's, Cleveland Electric's and Toledo Edison's Management's Financial Analysis contained under Item 7 of this Report and to Notes 11 and 12 for discussions of the Centerior System's financing i activity in 1996; debt and preferred stock redemption requirements during the 1997-2001 period; expected external financing needs during such period; re- , strictions on the issuance of additional debt securities and preferred stock; 4 short-term and long-term financing capability; and credit ratings for the operating Companies. In 1997, Cleveland Electric and Toledo Edison plan to refund approximately ' !. S133,100,000 and $10,100,000, respectively, of tax-exempt v. cot secured by l ! their respective first mortgage bonds to take advantage of improved borrowing l i costs. In addition, to take advantage of a favorable interest rate climate, , preliminary consideration is being given to refinancing certain outstanding ! , secured lease obligation bonds. No additional financing is expected to be l necessary to replace S83,000,000 of intermediate-term notes maturing in 1997 j in connection with the Operating Companies' nuclear fuel leases (see Noto 6). 1 j on March 25, 1997, Centerior Energy requested a 364-day extension of its
$125,000,000 revolving credit facility, which is expected to be approved upon i the maturation of the existing facility in May 1997.
i i Following the September 1996 announcement regarding the merger of Centerior j Energy and Ohio Edison (see "Pending Merger with Ohio Edison", above), ) Standard & Poor's Corporation, Hoody'n Investors Service, Inc. and Duff & Phelps Credit Rating Company each placed the operating Companies' securities I on their respective credit watch or review lists with positive / upward
- implications. Fitch Investors Service, Inc. affirm 3d its ratings on the
! Operating Companies' securities following the merger announcement.
i CENERAL REGULATION I i Holdino Company Reculation ' i Centerior Energy is currently, and FirstEnergy is expected to be, exempt from regulation under the Holding Company Act. 4 4 I ]
- -_ . -~ . .-- . -_- - _ . - _ _ - _ _.
t State Utility Comminnionn ! The Operating Companies are subject to the jurisdiction of the PUCO with re-l spect to rates, service, accounting, issuance of securities and other matters. 4 Under Ohio law, municipalities may regulate rates, subject to appeal to the l PUCO if not acceptable to the utility. See " Electric Rates" for a description of certain aspects of Ohio rate-making law. The Operating Companies are also subject to the jurisdiction of the PaPUC in certain respects relating to their ! ownership interests in generating facilities located in Pennsylvania. The PUCO is composed of five commissioners appointed b,y the Governor of Ohio from nominees recommended by a Public Utility Commission Nominating Council. Nominees must have at least three years' experience in one of several disci-I plines. Not more than three commissioners may belong to the same political ; party. - 4 Under Ohio law, a public utility must file annually with the PUCO a long-term j forecast of customer loads, facilities needed to serve those loads and
~proopective sites for those facilities. This forecast must include the j following:
(1) Demand Forecast--the utility's 20-year forecast of sales and peak demand, before and after the effects of demand-side management programs. J (2) Integrated Resource Plan (required biennially)--the utility's projected mix of resource options to meet the projected demand. (3) Short-Term Implementation Plan and Status Report (required biennially)-- the utility's discussion of how it plans to implement its integrated resource plan over the next four years. Estimates of annual expenditures and security issuances associated with the integrated resource plan over the four-year period must also be provided. I The PUCO must hold a public hearing on the long-term forecast at least once every five years to determine the reasonableness of the forecast. The PUCO and the OPSB are required to consider the record of such hearings in proceed-ings for approving facility sites, changing rates, approving security issues , and initiating energy conservation programs. In April 1995, the PUCO approved l Centerior Energy's 1994 long-term forecast. Ohio law also permits electric ! utilities under PUCO jurisdiction to submit environmental compliance plans for ! PUCO review and approval. Ohio law requires that the PUCO make certain i statotory findings prior to approving the environmental compliance plan, which includes that the plan is a reasonable least cost strategy for. compliance with air quality requirements. In July 1995, the PUCO approved Centerior's updated environmental compliance plan which was filed in January 1995. Centerior Energy's 1996 long-term forecast was submitted in May 1996 and is under review by the PUCO. The PUCO has jurisdiction over certain transactions by companies in an elec-tric utility holding company system if it includes at least one Ohio electric utility and is exempt from regulation under Section 3(a)(1) or (2) of the Holding Company Act. Consequently, the Operating Companies must obtain PUCO approval to invest in, lend funds to, guarantee the obligations of or otherwise finance or transfer assets to any nonutility company in the l l
)
Centerior Syctem, unless the tranoaction is in the ordinary course of busineos I operations in which one company acto for or with respect to another company. Also, Centerior must obtain PUCO approval to make any inventment in any nonutility suboidiaries, affiliates or aosociates if such investment would cause all such capital investmento to exceed 15% of Centerior's consolidated capitalization unless such funds were provided by nonutility subsidiaries, affiliates or ascociates. The PUCO has a reserve capacity policy for electric utilities,in Ohio stating that (i) 20% of service area peak load excluding interruptible load is an , appropriate generic benchmark for an electric utility *o reserve margin; (ii) a reserve margin exceeding 201 gives rise to a presumption of excess capacity, but may be appropriate if it confers a pooitive net present benefit to cus- > tomers or is justified by unique system characteristics; and (iii) appropriate remedies for exceso capacity (possibly including disallowance of costo in rateo) will be determined by the PUCO on a case-by-cape basin, In its April 1996 rate order for the Operating Companies (see " Electric Rates - 1996 Rate Order", below), the PUCO found that the Operating Companies had no excess capacity. Ohio Power Sitina Board The OPSB han state-wide jurisdiction, except to the extent pre-empted by federal law, over the location, need for and certain environmental aspects of electric generating units with a capacity of 50,000 kilowatts or more and transmission lines with a rating of at least 125 kV. Federal Enerov Reculatory Commission The Operating Companies are each subject to the jurisdiction of the FERC with
- respect to the transmission and sale of power at wholesale in interstate com-merce, interconnections with other utilities, accounting and certain other matters. Cleveland Electric is also subject to FERC jurisdiction with respect to its ownership and operation of the Seneca Plant.
'{
Nuclear Reaulatory Commission The nuclear generating units in which the Operating Companies have an interest are subject to regulation by the NRC. The NRC's jurisdiction encompasses broad supervisory and regulatory powers over the construction and operation of nuclear reactors, including matters of health and safety, antitrust considera-tions and environmental impacts. Owners of nuclear units are required to purchase the full amount of nuclear liability insurance available. See Note 5(b) for a description of nuclear in-surance coverages. 1 Other Reculation The Operating Companies are subject to regulation by federal, state and local authorities with regard to the location, construction and operation of certain facilities. The Operating Companies are also subject to regulation by local authorities with respect to certain oning and planning matters. 1 i I _ ENVIRONMENTAL REGU14TIfLf! , General The Operating Companico are subject to regulation with respect to air quality, water quality and waste dispocal matters. Federal environmental legislation
- affecting the operations and properties of the Operating Companies includes
; the Clean Air Act, the clean Air Act Amendmento, the clean Water Act, i Superfund, and the Resource Conservation and Recovery Act. The requirements j of these statutes and related state and local lawo are continually changing i due to the promulgation of new or revioed laws and regulations and the results of judicial and administrative proceedings. Compliance with such laws and j
regulations may require the Operating companico to modify, supplement, abandon j or replace facilities and may delay or impedo construction and affect the i operation of facilities, all at cooto which could be substantial. The Operating companien expect that the impact of such costs would eventually be I reflected in their respective rate schedules. Cleveland Electric and Toledo Edison plan to spend, during the period 1997-2001, S22,000,000 and
$15,000,000, respectively, for pollution control facilities, including Clean s Air Act Amendmento compliance coots.
The Operating Companies believe that they are currently in compliance in all material reopects with all applicable environmental laws and regulations, or to the extent that one or both of the Operating companies may dispute the applicability or interpretation of a particular environmental law or regula-tion, the affected company has filed an appeal or has applied for permits, revisions to requirements, variances or extensions of deadlines. Concerns have been raised regarding the possible health effects associated with electric and magnetic fields. Although scientific recearch as to such effects has yielded inconclusive results, additional studies are being con-ducted. If electric and magnetic fields are ultimately found to pose a health risk, the Operating Companies may be required to modify transmission and distribution lines or other facilities. Air Ouality Control Under the Clean Air Act, the Ohio EPA has adopted emicolon limitations for particulate matter and sulfur dioxide for each of the Operating Companies' plants. The Clean Air Act provides for civil penalties of up to $25,000 per day for each violation of an omission limitation. The U.S. EPA has approved I the Ohio EPA's emission limitations and the related state implementation plan except for some particulate matter emissions. , l In November 1990, the Clean Air Act Amendments imposed more stringent ! restrictions on nitrogen oxide emissions and culfur dioxide emissions beginning in 1995. See Note 4(a) for a description of the Operating Companies' compliance strategy, which was included in the agreement approved by the PUCO in April 1995 in connection with the Operating Companies' 1994 long-term forecast. The Clean Air Act Amendmente also require studies to be j conducted on the emission of certain potentially hazardous air pollutants l which could lead to additional restrictions. l l In December 1996, the U.S. EPA proposed revised ambient air quality standards for ozone and fine particulates. If these propoced standards are adopted without being changed, large areas of northern Ohio would be designated as _ _ _ . _ . . _ _ _. _ _ _ _ _ _ . _ . ._ - _ _ . _ _ .. _ . _ _ . - _ _ . _ . m.__ __ 1 i being "nonattainment" with respect to these pollutants. This, in turn, could result in additional air pollution control requirements and substantial
- additional expense being imposed upon the Operating Companies' fossil generating facilities by 2005.
, Global warming, or the " greenhouse effect", has been the subject of scientific study and debate within the United States and internationally. One area of I study involves the effect on global warming of the emissions of gases such as
-those resulting from the burning of coal. Based on a 1992 United Nations treaty, the United States has developed a voluntary plan to reduce the ,
emissions of certain gases thought to contribute to global warming to 1990 , levels by the year 2000. The operating companies will work with the DOE and other utilities to develop a plan for limiting such emissions. i Water Ouality Control The clean Water Act requires that power plants obtain permits under the NPDES T program that contain certain effluent limitations (that is, limits on , discharges of pollutants into bodies of water). It also requires the states ! to establish water quality standards which could result in more stringent t effluent limitations. Violatore of effluent limitations and water quality > standards are subject to a civil penalty of up to S25,000 per day for each such viola *. ion. i The Operating Companies have received NPDES permit renewals from the Ohio EPA or have applied for such renewals for all of their power plants. In those situations in which a permit application is pending, the affected plant may , continue to operate under the expired permit while such application is pending. Any violation of an NPDES permit is considered to be a violation of the Clean Water Act subject to the penalty discussed above. The clean Water Act permits thermal effluent limitations to be established for ' a facility which are less stringent than those which otherwise would apply if .
, the owner can demonstrate that such less stringent. limitations are sufficient ,
to assure the protection and propagation of aquatic and other wildlife in the i affected body of water. By 1978, the Operating companies had submitted to the . Ohio EPA such demonstrations for review with respect to their Ashtabula, Avon !
~
Lake, Lake Shore, Eastlake, Acme and Bay Shore plants. The Ohio EPA has taken ' no action on the submittals. ' In 1990, the Ohio EPA issued revised water quality standards applicable to
~
Lake Erie and waters of the State of Ohio. Based upon these revised water l quality standards, the Ohio EPA placed additional effluent limitations in their most recent NPDES permits. The revised standards also may serve as the basis for more stringent effluent limitations in future NPDES permits. Such limitations could result in the installation of additional pollution control equipment 'and increased operating expenses. The operating companies are ; monitoring discharges at their plants to support their position that addi-tional effluent limitations are not justified. In March 1995, the U.S. EPA issued guidelines for water quality standards applicable to all states abutting the Great Lakes, including Ohio. These
, states are required to adopt state water quality standards and procedures con- .t sistent with the guidelines by April 1997. Preliminary reviews indicate that the cost of compliance could be significant based on Ohio's proposed regulations. Ohio is expected to adopt final regulations during 1997.
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1 l 1 Waote Dispocal See " Outlook--Hazardoun Wacto Disposal Sites" in Management's Financial Analysis contained under Item 7 of thio Report and Note 4(b) for a discuosion of the Operating Companies' potential involvement in certain hazardous waote disposal sites, including those subject to Superfund. See " Operations-- Nuclear Units" for a discussion concerning the disposal of nuclear waste. ELECTRIC RATES General Under Ohio law, rate base is the original cost less depreciation of a utility's total plant adjusted for certain items. The law permits the PUCO, in its discretion, to include construction work in progress in rate base under certain conditions. Current Ohio law further provides that requested rates can be collected by a public utility, oubject to refund, if the PUCO does not make a decision within 275 days after the rate requent application in filed. If the PUCO does not make ito final decision within 545 days, revenues collected thereafter are not subj et to refund. A notice of intent to file an application for a rate in-crrase cannot be filed before the issuance of a final order in any prior pend-J , application for a rete increase or until 275 days after the filing of the Jior application, whichever is earlier. The minimum period by which the notice of intent to file must precede the actual filing is 30 days. The tect year for determining rates may not end more than nine months after the date the application for a rate increase is filed. Under Ohio law, electric rates are adjusted every six months to reflect changes in fuel costs. The PUCO reviews such adjustments annually. Any difference between actual fuel costs during a six-month period and the fuel revenues recovered in that period is deferred and is taken into account in setting the fuel recovery factor for a subsequent six-month period. (The rate reduction and economic development plan approved by the PUCO on January 30, ; 1997 for the Operating Companies includes a freeze in fuel cost factors by the Operating Companies effective upon the consummation of Centerior's merger with Ohio Edison. See Management's Financial Analysis contained under Item 7 of this Report and Note 15.) Also, under Ohio law, municipalities may regulate rates charged by a utility, subject to appeal to the PUCO if not acceptable to the utility. If municipally fixed rates are accepted by the utility, such rateo are binding on both parties for the specified term and cannot be changed by the PUCO. 1996 Rate Order i l On April 11, 1996, the PUCO approved in full the requests of Cleveland i Electric and Toledo Edison for price increases aggregating 5119,000,000 annually. Cleveland Electric's price increase of 584,000,000 in annual revenues reflected an average increase of 4.9% for Cleveland Electric's customero. Toledo Edison's price increase of $35,000,000 reflected an average increase of 4.7% for Toledo Edison's customers. The new pricos were implemented in late April 1996. 3 P l 1 1 1
)
l The primary purpose of the price increacen was to provide additional revenuen , l to recover all the costs of providing electric nervice, including deferred sts, and provide a fair return to Centerior Energy common stock share owners. The additional revenues also provided cash to accelerate the ' redemption of debt and preferred stock. For a discussion and analysis of the Operating Companies' 1996 rate order, see "Hanagement's Financial Analysis -- Outlook -- April 1996 Rate Order" under Item ? of this Report and Note 7(b). OPERATIONS Sales of Electricity Kilowatt-hour sales by the Operating Companies follow a seasonal pattern 1 marked by increased customer usage in the summer for air conditioning and in the winter for heating. Historically, Cleveland Electric has experienced its heaviest demand for electric service during the summer months because of a significant air conditioning load on its system and a relatively low amount of electric heating load in the winter. Toledo Edison, although having a , significant electric heating load, has experienced in recent years its l heaviest demand for electric service during the summer months because of heavy air conditioning usage. The Centerior System's largest customer is a steel manufacturer which has two major steel producing facilities served by Cleveland Electric. Sales to these facilities accounted for 2.3s and 3.3% of the 1996 total electric operating revenues of Centerior Energy and Cleveland Electric, respectively. The loss of these facilities would reduce Centerior Energy's and Cleveland Electric's ) annual net income by about $16,000,000 based on 1996 sales levels. l l The largest customer served by Toledo Edison is a major automobile manufac-turer. Sales to this customer accounted for 1.4% and 3.9% of the 1996 total electric operating revenues of Centerior Energy and Toledo Edison, re-spectively. The loss of this customer would reduce Centerior Energy's and Toledo Edison's annual net income by about $11,000,000 based on 1996 sales i levels. Oneratine Statistics For data on operating revenues by service category, electric sales by service category, customers by service category and electric energy generation for j 1986 and 1992 through 1996, see the attached Pages F-29 and F-30 for Centerior ! Energy, F-56 and F-57 for Cleveland Electric and F-84 and F-85 for Toledo I Edison. l l l j l l l Euclear Unitr. The Operating Companies' generating facilities include, among others, three nuclear units owned or leased by the CAPCO Group--Perry Unit 1, Beaver Valley Unit 2 and Davis-Desse. These three units are in commercial operation. Cleveland Electric has responsibility for operating Perry Unit 1, Duquesne has responsibility for operating Beaver Valley Unit 2 and Toledo Edison has re-sponsibility for operating Davis-Besse. Cleveland Electric and Toledo Edison own, respectively, 31.11% and 19.91% of Perry Unit 1, 24.471 and 1.65% of Beaver Valley Unit 2 and 51.38% and 48.62% of Davis-Besse. Cleveland Electric and Toledo Edison also lease, as joint lessees, an additional 18.26% of Beaver Valley Unit 2 as a result of a september 1987 sale and leaseback transaction (see Note 2), i Davis-Besse was placed in commercial operation in 1977, and its operating license expires in 2017. Perry Unit 1 and Beaver Valley Unit 2 were placed in commercial operation in 1987, and their operating licenses expire in 2026 and 2027, respectively. In 1989, the PUCO approved nuclear plant performance standards for the Operating Companies based on rolling three-year industry averages of availability for pressurized water reactors and for boiling water reactors over the 1988-1998 period. Availability in the ratio of the number of hours a unit is available to generate electricity (whether or not the unit is operated) to the number of hours in the period, expressed as a percentage. The three year availability averages of the Operating Companies' nuclear units are compared against the industry averages for the same three-year period with a resultant penalty or banked benefit. If the industry performance standards are not met, a penalty would be incurred which would require the Operating Companies to refund incremental replacement power costs to customers through the semiannual fuel cost rate adjustmenc. However, if the performance of the operating Companies' nuclear units exceeds the industry standards, a banked benefit results which can be used to offset disallowances of incremental replacement power costs should future performance be below industry standards. The relevant industry standards for the 1994-1996 period (as of August 31, j 1996) are 81.5% for pressurized water reactors such as Davis-Desse and Beaver i Valley Unit 2 and 78.2% for boiling water reactors such as Perry Unit 1. The 1994-1996 combined availability average for Davis-Besse and Beaver Valley Unit 2 was 87.7% and the availability average for Perry Unit I was 72.21. At December 31, 1996, the total banked benefit for the Operating Companies is estimated to be between $34,000,000 and $37,000,000. All three nuclear units have received generally favorable evaluations from the NRC in their most recent SALP reviews. Each of the functional areas evaluated is rated according to three performance categories, with category 1 indicating performance substantially exceeding regulatory requirements and that reduced NRC attention may be appropriate; category 2 indicating performance above that needed to meet regulatory requirements and that NRC attention may be main-tained at normal levels; and category 3 indicating performance does not significantly exceed that needed to meet minimal regulatory requirements and that NRC attention should be increased above normal levels. l l l The most recent review periods and SALP review scores for Beaver Valley Unit 2, Perry Unit J and Davis-Besse are: Leaver Vallev Unit 2 Perry Unit 1 Davis-Besse ! SALP Review Period 6/4/95-9/28/96 1/8/95-9/14/96 Operations 2 1/22/95-1/18/97 2 2 I Engineering 2 2 1 Maintenance 1 2 1 Plant Support 2 2 1 l In 1980, Congreso passed the Low-Level Radioactive Waste Policy Act which provides that the disposal of low-level radioactive waste is the responsibility of the state where such waste is generated. The Act encourages states to form compacts among themselves to develop regional disposal facilities. Failure by a state or compact to begin implementation of a program could result in access denial to tne two facilities currently accepting low-level radioactive waste. Ohio is part of the Midwest Compact and has responsibility for siting and constructing a disposal facility. In June 1995, the Ohio legislature authorized the siting, construction and operation of a disposal facility. In addition, the South Carolina legislature voted to allow out-of-region generators (such as Centerior's nuclear units) to j resume shipments of low-level radioactive waste to the Barnwell disposal i facility. Nonetheless, the Operating Companies' ability to chip offsite in the future depends on whether the State of Ohio proceeds with the development of a low-level radioactive waste disposal facility. As an interim solution to disposal availability, the Operating Companies have constructed storage facilities to house the waste at each nuclear site. Off-site disposal of spent nuclear fuel is unavailable, but the CAPCO Group companies have contracts with the DOE which provide for the future acceptance of spent fuel for disposal by the federal government. On December 17, 1996, the DOE notified the Operating Companies that it would be unable to begin , acceptance of spent fuel for disposal by January 31, 1998 as mandated by Section 302(a)(5)(B) of the Nuclear Waste Policy Act (NWPA). As a result, the Operating Companies along with 35 other nuclear utilities and 46 state agencies have asked for federal court approval to stop payments into the l ' Nuclear Waste Fund and for an order requiring DOE to take immediate action to comply with NWPA. On-site storage capacity at Davis-Besse, Perry Unit 1 and Beaver Valley Unit 2 should be sufficient through 2017, 2011 and 2013, respectively. See Note 5(a) and " Outlook--Nuclear Operations" in Management's Financial Analysis contained under Item 7 of this Report for a discussion of potential risks facing Centerior and the Operating Companies as owners and lessees of nuclear generating units. l Comnetitive Conditions General. The Operating Companies compete in their respective service areas with suppliers of natural gas to satisfy customers' energy needs with regard
- to heating and appliance usage. The Operating Companies also are engaged in competition to a lesser extent with suppliers of oil and liquefied natural gas for heating purposes and with suppliers of cogeneration equipment. One competitor provides steam for heating purposes and provides chilled water for cooling purposes in certain areas of downtown Cleveland.
The Operating Companies alco compete with municipally owned electric systems within their respective nervice areas. Several communities have evaluated municipalization of electric service and decided to continue cervice from the 4 Operating Companies. Officials in other communities have indicated an interest in evaluating the municipalization issue. The Operating Companien face continuing competition from locations outside their service areas which are promoted by governmental and private agencies in attempts to influence potential and existing commercial and industrial cus-c tomers to locate in their respective areas. i j The Operating Companies also periodically compete with other producers of I clectricity for sales to electric utilities which are in the market for bulk power purchases. The Operating Companies have interconnections with other electric utilities (see " Item 2. Properties--General") and have a transmission system capable of transmitting (" wheeling") power between the Midwest and the
; East.
l In the future, the Operating Companies will encounter an increasingly i competitive environment as a result of the structural changes taking place in i the electric utility industry. For a discusolon of these changes, including open-access transmission, retail wheeling and stranded investment j considerations, see " Outlook--Competition" in Management's Financial Analysis I contained under Item 7 of this Report. 3 Cleveland Electri_c. Located within Cleveland Electric's service area are two ] municipally owned electric systems. Cleveland Electric supplies a small portion of those systems' power needs at wholesale rates. ) I i One of those systems, CPP, is operated by the City of Cleveland in competition 1 with Cleveland Electric. CPP is primarily an electric distribution system which currently supplies electric power in approximately 60% of the City's geographical area and to approximately 33% (about 72,000) of the electric consumers in the City--equal to about 10% of all customers served by Cleveland i Electric. CPP's kilowatt-hour sales and revenues are equal to about 6% of 1 Cleveland Electric's kilowatt-hour sales and revenues. Much of the area , served by CPP overlaps that of Cleveland Electric. For all classes of customers, Cleveland Electric's rates are h.gher than CPP's rates due largely
- to CPP's exemption from taxation, the lower-cost financing available to CPP, j the continued availability to CPP of lower cost power through short-term power purchases and CPP's access to cheaper governmental power.
Cleveland Electric makes power available to CPP on a wholesale basis, subject to FERC regulation. In 1996, Cleveland Electric directly and through AMP-Ohio provided a negligible amount of CPP's energy requirements. CPP's power is
' purchased from other sources and wheeled over Cleveland Electric's i transmission system. In cases currently pending, the FERC has ruled that l
Cleveland Electric is obligated to provide an additional interconnection with
. CPP but has not ruled on the terms and conditions. Cleveland Electric has asked the FERC to reconsider its order to provide CPP with an additional j interconnection. Also, the FERC has not ruled on Cleveland Electric's request for an increase in rates for power and services provided to CPP. Cleveland Electric believes that it is entitled to a higher level of compensation for
- I the power and the services it provides because the rates currently paid by CPP do not adequately cover the cost of providing such power and services.
i CPP has conctructed new trancmionion and dictribution facilitiec extending into cactern portions of Cleveland and plano to enhance its existing eyotem in western portions of Cleveland. CPP's expansion hho resulted in a reduction in 1 Cleveland Electric'n annual not income by about $7,000,000 in 1994, 58,000,000 l in 1995 and $11,000,000 in 1996. Cleveland Electric estimates that its net ! income will continue to be reduced by an additional S1,000,000-52,000,000 each j year in the 1997-2001 period because of CPP'o expanoion, with the exception of l 1997 when the reduction would be about $7,000,000 including the loss of ; Medical Center Co. as discuooed below. ! Despite CPP's expansion efforto, Cleveland Electric has been successful in retaining most of the large industrial and commercial customers in the expansion areas by providing economic incentives in exchange for sole-supplier contracts. During 1996, Cleveland Electric renewed and extended for as long as ten years contracts with many of its large industrial customers, including the five largest. Prior to these renewals, 61% of Cleveland Electric's industrial base rate (nor. fuel) revenues under contract was scheduled for renewal before 1999. Following the renewalo, only 18% of such revenues under contract 10 ocheduled for renewal by 1999. At year-end 1996, 51% of Cleveland Electric's industrial base rate revenuce was under long-term contracts. Also, in 1996, Cleveland Electric reached agreements to serve a number of large commercial customers in Cleveland, including some previously served by CPP. An increasing number of CPP customero are converting back to Cleveland Electric service. However, competition for auch cuotomers will continue. In March 1995, one of Cleveland Electric's large commercial customers which has provided annu21 net income to Cleveland Electric and Centerior of $6,000,000, Medical Center Co., signed a five-year contract with CPP for electric service provided by another utility beginning in September 1996, when its contract with Cleveland Electric terminated. Cleveland Electric believes that the purchase of power by this customer is a direct purchase from another utility in violation of Ohio's certified territory statute. Being denied a rehearing on this matter by the PUCO, Cleveland Electric filed an appeal with the Ohio Supreme Court. In August 1996, the Court granted Cleveland Electric's request for rehearing and remanded the case back to the PUCO. Cleveland Electric also filed a petition with the FERC on the grounds that such a transaction is a violation of the Federal Power Act. However, in July 1996, the FERC ruled that the transaction does not violate such Act. On September 18, 1996, the FERC granted a rehearing to Cleveland Electric, which has agreed to begin providing the requested transmission service to CPP. Igledo Edison. Located wholly or partly within Toledo Edison's service area are six rural electric cooperatives, five of which are supplied with power, transmitted in some cases over Toledo Edison's facilities, by Buckeye Power, Inc. (an affiliate of a number of Ohio rural electric cooperatives) and the sixth is supplied by Toledo Edison. i Also located within Toledo Edison'a service area are 16 municipally owned i electric distribution systems, three of which are supplied by other electric l systems. Toledo Edison provides a portion of the power purchased by the other ! 13 municipalities at wholesale rates through a contract with AMP-Ohio that expires in 2009. Rates under this agreement are permitted to increase annually to compensate for increased costa of operation. Less than 3% of Toledo Edison's total electric operating revenues in 1996 was derived from sales under the AMP-Ohio contract. ' l I
L i As does Cleveland Electric, Toledo Edison offers long-term contracts te, large 4 industrial customers who might otherwise consider changing power suppliers.
- During 1996, Toledo Edison renewed and extended from seven to ten years contracts with many of its large industrial customers, including the six largest. Prior.to these renewals, 94% of Toledo Edison's industrial base rate 1
- (nonfuel) revenues under contract was scheduled.for renewal before 1999.
- Following the renewals, only 19% of such revenues under contract is scheduled for renewal by 1999. At year-end 1996, 61% of Toledo Edison's industrial base rate revenues was under long-term contracts.
) In October 1989, the City of Toledo established an Electric Franchise Review
- Committee to (i) study Toledo Edison's franchise agreement with the City to determine whether alternate energy sources may be utilized and (ii) investigate the feasibility of establishing a municipal electric system within
- the City of Toledo. In November 1993, the City approved a non-exclusive j franchise with Toledo Edison which runs through the end of 1998. In October j_ 1995, the Toledo City Council responded to a petition drive by appropriating e funds to complete the Electric Franchise Review Committee's study on whether f to create a municipal electric utility in the City of Toledo. The Committee j is also expected to look into the aggregating of load to provide a conduit for l
retail wheeling to customers. A draft of the consultant's report in connection with this study states that, if Centerior Energy and Ohio Edison I merge, a municipal system in Toledo could not compete with Toledo Edison because of the rate reductions contained in the rate reduction and economic . development plan approved by the PUCO on January 30, 1997 (see Management's l Financial Analysis under Item 7 of this Report and Note 15 for information on such plan). The consultant's draft report also states that, if the merger does not occur, a municipal system could be competitive with Toledo Edison in l j one portion of the City. However, errors have been found in the draft report ! which may change the content of the final consultant's report. The final
- report will be considered by the Electric Franchise Review Committee before 1 making its recommendation to City Council later in 1997.
I i In January 1995, the City of Clyde, which operates its own municipal electric 3 system, passed ordinances to force Toledo Edison to remove most of its ! equipment from within the City's borders and to prevent any residential and l commercial customers within the City from obtaining service from Toledo l Edison. The City subsequently asked the PUCO to authorize the removal of Toledo Edison equipment under the Miller Act. The Miller Act is an Ohio f statute which provides that a utility cannot be required to withdraw or abandon its facilities and services in a city without a demonstration that i i such action is in the public interest and without the approval of the PUCo.
- Toledo Edison challenged the City of Clyde's Miller Act proceeding before the
- 1. PUCO and filed an action in the Court of Appeals in Sandusky County, Ohio to j challenge the City's ordinance prohibiting customers from using Toledo Edison j
service. The Court of Appeals denied Toledo Edison's challenge, and Toledo j Edison appealed to the Ohio Supreme Court. In August 1996, the Supreme Court f ruled that Toledo Edison can continue to serve customers who were customers ] j prior to the establishment of the municipal system, but Clyde has the ,
! exclusive right to serve new customers. The PUCO had previously issued a I ruling in April 1996 that Clyde cannot force Toledo Edison to abandon service j within the City of Clyde. The ordinance that prevented Toledo Edison from i serving customers in Clyde was repealed in an initiative ballot issue in i November 1996. Toledo Edison currently serves approximately 345 customers i
i within the City of Clyde. i 17 - i
i
- v 1
t i In October 1995, Chase Brass terminated its service with Toledo Edison and began to receive its electric service from a consortium of four municipal electric systems and AMP-Ohio. Service is being provided over a transmission line owned by AMP-Ohio. Although the Ohio Constitution allows municipal electric systems to sell and deliver limited amounts of power outside their municipal boundaries, Toledo Edison has filed two lawsuits in Williams County (Ohio) Common Pleas Court against the four municipalities and AMP-Ohio contending, in part, that this arrangement violates the legal limits of such sales and that AMP-Ohio's system design for this transaction raises certain safety issues. North Western Electric Cooperative, whose certified territory is crossed by AMP-Ohio's transmission line, has also filed suit to challenge this transaction. The loss of Chase Brass as a customer reduced Centerior Energy's and Toledo Edison's annual net income by about $1,600,000 based on 1994 sales levels. As yet, no ruling has been issued by the Williams County Common Pleas Court. In addition, Chase Brass and other surrounding businesses and residences in Jefferson Township continue to seek incorporation as a municipality to be named the Village of Holiday City. The Williams County Board of Commissioners and the Williams County Court of Con. mon Pleas issued an order permitting the area to be incorporated. Toledo Edison has appealed the Court's order to the Sixth District Court of Appeals, thereby staying the incorporation proceedings. The Court of Appeals ruled against Toledo Edison, finding a lack of standing. However, Toledo Edison has appealed to the Ohio Supreme Court, thereby staying the incorporation proceedings again. If the incorporation is permitted, the municipality would be able to negotiate with other utilities for electric power. The other businesses in the proposed municipality previously terminated their service with Toledo Edison and are receiving electric service from the Village of Montpelier, one of the consortium now supplying chase Brass. Fuel Supply Generation by type of fuel for 1996 was 68% coal-fired and 32% nuclear for Cleveland Electric; 48% coal-fired and 52% nuclear for Toledo Edison; and 61% coal-fired and 39% nuclear for the Centerior System. Coal. In 1996, Cleveland Electric and Toledo Edison burned 5,922,000 tons and 2,061,000 tons of coal, respectively, for electric generation. Each utility normally maintains a reserve supply of coal sufficient for about 20 days of normal operations. On February 1, 1997, this reserve was about 20 days for plants operated by Cleveland Electric, 16 days for the plant operated by Toledo Edison and 35 days for the Mansfield Plant, which is operated by Pennsylvania Power. In 1996, about 45% of Cleveland Electric's coal requirements were purchased under long-term contracts, with the longest remaining term being almost seven years. In most cases, these contracts provide for adjusting the price of the coal on the basis of changes in coal quality and mining costs. The sulfur content of the coal purchased under these contracts ranges from less than 1% to about 4%. Additionally, about 34% of Cleveland Electric's coal requirements were purchased under short-term contracts (nine to twelve-month terms) with price adjustments on the basis of coal quality. The sulfur content of the short-term contracts ranged from 1.5% to 1.9%. The balance of Cleveland Electric's coal was purchased on the spot market with sulfur content ranging from lous than 11 to 4%.
- la -
In 1996, about 54t of Toledo Edison *o coal requirements were purchaced under long-term contracto, with the longent remaining term toing almout four years. In most cases, these contracto provide for adjusting the price of the coal on , the basis of changen in coal quality and mining costs. The sulfur content of 1 the coal purchased under those contracto ranges from less than it to 4%. The balance of Toledo Edison's coal was purchased on the spot market with sulfur ' content from less than 1% to 41. on May 3, 1996, Cleveland Electric and Ohio Valley terminated their existing , coal supply agreement, which was scheduled to continue until September 1997, and entered into a new coal supply agreement scheduled to expire in September . 1997. Under the prior agreement, Cleveland Electric agreed to pay Ohio Valley l certain amounts to cover Ohio Valley's costs, including amounto sufficient to service certain long-term debt and lease obligations incurred by Ohio Valley. Cleveland Electric also agreed to assume certain Ohio Valley costs and expenses, including mine clocing costs, upon termination of that agreement. However, under the new agreement, the terms and conditions were revised whereby Cleveland Electric is only obligated to purchase and pay Ohio Valley for a specified tonnage of coal during the term of the agreement and has no 1 responsibility for Ohio Valley's debt and lease obligations and other ' expensen, including mine closing costs. The CAPCO Group companies, including the Operating Companico, have a long-term , contract with Quarto and Consol for the supply of about 75%-85% of the annual coal needs of the Mansfield Plant. The contract is scheduled to run through at least the end of 1999, and the price of coal is adjustable to reflect changes in labor, materials, transportation and other costs. The CAPCO Group j companies have guaranteed, severally and not jointly, the debt and lease obligations incurred by Quarto to develop, equip and operate two of the mines which supply the Hansfield Plant. At December 31, 1996, the total dollar amount of Quarto's debt and lease obligations guaranteed by Cleveland Electric i was $19,150,000 and by Toledo Edison was $11,182,000. Centerior, Cleveland Electric and Toledo Edison expect that Quarto revenues from sales of coal to the CAPCO Group companies will continue to be sufficient for Quarto to meet , its debt and lease obligations. l The Operating Companies' least cost plan for complying with the Clean Air Act Amendments, which was included in the agreement approved by the PUCO in [ February 1993 in connection with the Operating Companies' 1992 long-term forecast and updated in 1995 proceedings, calls for compliance either through [ the use of low-sulfur coal or the use of high sulfur-coal in combination with emission allowances. l Nuclear. The acquisition and utilization of nuclear fuel involves six dis-tinct steps: (1) supply of uranium oxide raw material, (ii) conversion to uranium hexafluoride, (iii) enrichment, (iv) fabrication into fuel assemblies, (v) util!.zation as fuel in a nuclear reactor and (vi) storing or disposing of spent fuel. The Operating Companies have inventories of raw material sufficient to provide nuclear fuel through 1997 for the operation of their k nuclear generating unito and have contracts for fabrication services for all i of that fuel. The CAPCO Group companies have a contract with the USEC which will supply the needed enrichment services for their nuclear units' fuel supply. However, the amount of enrichment services under the USEC contract j varies by CAPCO Group company, with Cleveland Electric's and Toledo Edison's l i
enrichment cerviceo reduced to 704 in 1997-1999 and reduced to 0% in 2000 and beyond. The additional required enrichment services are available. Substantial additional fuel will have to be obtained in the future over the remaining useful lives of the units. There is a plentiful supply of uranium oxide raw material to meet the induntry's nuclear fuel needs. l 211 The operating Companieo each have adequate supplico of fuel oil for I their oil-fired electric generating units which are used primarily as rererve and peaking capacity. 4 EXECUTIVE OFFICERS OF THE REGISTRANTS AND THE SERVICE COMPANY Set forth below are the names, ages as of March 15, 1997, and business experience during the past five years (effective dates of positions in parentheses) of the executive officers of Centerior Energy, the Service Company, Cleveland Electric and Toledo Edison. Positions currently held are designated with an asterisk (*). BUSINESS EXPERIENCE Name (Age) Centerior Eneroy Service Company Cleveland Electric -Toledo Edison Robert J. Farling
- Chairman of the
- Chairman of the
- Chairman of the
- Chairman of the (60) Board and Chief Board and Chief Board and Chief Board and Chief Executive Officer Executive Executive Officer Executive Officer (March 1992) Officer (March (February 1989 to (October 1988 to
*Presidant 1992) April 1990; July April 1990; July (October 1988)
- President (July 1993) 1993) 1988)
Murray R. Edelman
- Executive Vice
- Executive Vice
- President *Vice Chairman
' President; (57) President (November 1993) (November 1993) (July 1988) President- President (July 1988) [ Transmission, 8 Services and-Business Enterprises Groups (October 1995) Executive Vice President-Operations & Engineering (July 1993) Executive Vice President-Power Generation (April 1990)
i BUSINESS EXPERIENCE Name (Age) Centerior Enerov Service Company Cleveland Electric Toledo Edison Fred J. Lange, Jr.
- Senior Vice
- Senior Vice *Vice President
- President (November (47) President President; (April 1990) 1993)
(July 1993) President- Vice President (April Senior Vice Distribution Group 1990) President-Legal, (October 1995) Human & Corporate Senior Vice Affairs (March President-Fossil & , 1992) Transmission and Vice President- Distribution Legal & Corporate Operations (July 1993) Affairs (April Senior Vice 1990) President-Legal, Human & Corporate Affairs (March 1992)
' Vice President-M Legal & Corporate Affairs (April 1990) t Gary R. Leidich
- Senior Vice
- Senior Vice *Vice President *Vice President (46) President President; (October 1995) (October 1995)
(October 1995) President-Power Vice President & Vice President & Vice President Generation Group Chief Financial Chief Financial (July 1993) (October 1995) Officer (July Officer (July Vice President- 1993) 1995) Finance & Administration (July 1993) Director-Human Resources Dept. (August 1991)
. . _. . _. . _ _ _ _ _ _ m ._. _ . . _ _ . . . _ . . _ . . . _ . _ _ . - __ . _. _._m.- _ _
BUSINESS EXPERIENCE Name (Age) Centerior Enercy l Service Company C1cveland Electric Toledo Edison ' Terrence G. Linnert
- Senior Vice (50)
- Senior Vice *Vice President &
President, Chief President- *Vice President & Financial Officer Corporate Chlef Financial Chief Financial Officer
& General Counsel Administration Officer (October 1995) Group; chief (October 1995) (October 1995)
Vice President Vice President Vice President (July 1993) Financial Officer (July 1993) (July 1993)
& General Counsel (October 1995)
Vice President-Legal & Governmental , Affairs and General Counsel (July 199a) t Vice President-N Legal and General Counsel 1 (March 1992) General Counsel and Director- + Legal Services Dept. (May 1990) Jacquita K. Hausorman (54) *Vice President- *Vice President Business Services (November 1993) (October 1995) Vice President-Vice President- Administration Customer Support (July 1993) (October 1988) Vice President-Customer Service
& Comn. unity Affairs (April 1990)
BUSINESS EXPERIENCE Name (Age) Centerior Eneroy Service Company Cleveland Electric Toledo Edison Jack A. Kline Director-Eastern
- Regional Vice Sales Region President-(53)
(November 1994) Eastern Director-Cleveland (October 1995) Marketing East (October 1993) Director-Cleveland Industrial Market-ing (July 1993) ! General Manager-Cleveland East operations (May 1990) e w David L. Monseau *Vice President-(56) Distribution Serv-1 ices (October 1995) , Vice President-Transmission & Distribution operations (April 1990) Lew W. Myers *Vice President-Nuclear-Perry (September 1996) (47) Houston Light & Power Plant Manager-South Texas Project Unit 1 (June .1993) . Westinghouse Electric Corp. Start-up Mgr.-Savannah , River Project (September 1992) Tennessee Valley Authority Plant Mgr.-Browns Ferry Nuclear Station (January 1990)
BUSINESS EXPERIENCE Name (Age) Centerior Energy Service Company Cleveland Electric Toledo Edison John E. Paganle (50) Director-Human Resources
- Regional Vice President-(July 1993) West (October 1995)
General Manager-Cleveland West Operations (August 1991) John P. Stetz (51)
- Senior Vice President- .
Nuclear (June 1996) Vice President-Nuclear-Davir-Besse (July 1994) t Northeast Utilities: M w Vice President-Connecticut Yankee 1 Nuclear Power Station (October 1993) Station Director-Connecticut Yankee Nuclear Power Station (September 1990) Stanley F. Szwed (44) *Vice President-Engineering S Planning (October 1995) Director-System Planning
& Operations (July 1993)
Director-System Planning (August 1991) r
1 -- - w__..~__..,_.,..,.~ .
. - ~- - _- .-
BUSINESS EXPERIENCE Cleveland Electric Toledo Edison Service Company Name (Age) _enterior C Eneroy
*Vice President- ,
Al R. Temple Sales & Marketing (51) (February 1994) WMX Technologies, Inc.: Alliance Executive (July 1992) Vice President / General Manager, Midwest Region (April 1991) Director-
- Regional Vice David W. Whitehead Governmental President-Central (50) Affairs (October 1995) i (July 1993)
N General Counsel-Cleveland n (September 1990) General Manager-
*Vice President- Davis-Besse (June 1993)
John K. Wood Nuclear-Davis-Besse Manager of Operations-(45) (June 1996) Davis-Besse (November 1990)
- Controller and
- Controller and
- Controller and
- Controller and Assistant E. Lyle Pepin Assistant Assistant Secretary Assistant Secretary (55) Secretary Secretary (November 1994)
(November 1994) (November 1994) Secretary (November 1994) Secretary Secretary Secretary (April 1986) (October 1988) (October 1988) (February 1986)
BUSINESS EXPERIENCE Name (Age) Centerior Enercy Service Comtany Cleveland Electric Toledo Edison David M. Blank
- Treasurer (48)
- Treasurer
- Treasurer (November 1994)
- Treasurer (November 1994) (November 1994)
Director of (November 1994) Strategic Planning (October 1993) Director of Rates & Corporate Planning (May 1990) Janis T. Percio
- Secretary (44)
- Secretary
- Secretary (November 1994)
- Secretary Assistant (November 1994) (November 1994)
' Assistant (November 1994)
Secretary Assistant Assistant N Secretary Secretary a (April 1986) Secretary (April 1986) 1 (October 1982) (April 1986) _ _ _ _ _ _ _ _ _ _ - - - - - ' ' ' ' - ' ' - - ' __ _ _ _ _ _ _ _ __ _______ - _ - - - - - - - - - - - - - - - ~ - ~
All of the executive officers of Centerior Energy, the Service company, Cleveland Electric and Toledo Edison are elected annually for a one-year term l by the Board of Directors of Centerior, the Service company, Cleveland !
-Electric or Toledo Edison, as the case may be. ]
No family relationship exists among any of the executive officers and direc-tors of any of the centerior System companies. Item 2. Properties CENERAL l The Centerior System The wholly owned, jointly owned and leased electric generating facilities of the operating Companies in commercial operation as of February 14, 1997 pro- l vide the Centerior System with a net demonstrated capability of 6,208,000 kilowatts during the winter. These facilities include 18 fossil-fired steam electric generating units (3,562,000 kilowatts) at five generation stations; ; three nuclear generating units (1,856,000 kilowatts); two pumped-storage i hydroelectric generating stations (651,000 kilowatts); seven combustion l turbine generating units (135,000 kilowatts) and one diesel generator (4,000
- kilowatts). In addition, one fossil-fired generating unit (245,000 kilowatts) is currently on cold standby status. Except for the lease of 300,000 i kilowatts of pumped-storage hydroelectric capacity located in Michigan, all !
of the Centerior System's generating facilities are located in Ohio and Pennsylvania. i
-The Centerior System's net 60-minute peak load of its service area for 1996 I
was 5,679,000 kilowatts and occurred on August 7. The net seasonal capability i at the time of the 1996 peak load was 5,873,000 kilowatts. .The Centerior j i System's 1997 native peak load is forecasted to be 5,250,000 kilowatts, after i i demand-side management considerations. The net seasonal capability expected to be available to serve the Centerior System's 1997 peak is 6,138,000 j kilowatts. Over the 1997-1999 period, Centerior Energy forecasts its capacity
! margins at the time of the projected Centerior System peak loads to range from !
13% to 14.5%, excluding the capacity on cold standby. l Each operating Company owns the electric transmission and distribution facili-1 ties located in its respective service area. Cleveland Electric and Toledo Edison are interconnected by 345 kV transmission facilities, some portions of which are owned and used by Ohio Edison. The Operating Companies have a long-term contract with the CAPCO Group companies, including Ohio Edison, relating i to the use of these facilities. These interconnection facilities provide for the interchange of power between the two Operating Companies. The Centerior 'Il '. System is interconnected with Ohio Edison, Ohio Power, Penelec and Detroit f Edison. 1 j Cleveland Electric The wholly owned, jointly owned and leased electric generating facilities of Cleveland Electric in commercial operation as of February 14, 1997 provide a net demonstrated capability of 4,076,000 kilowatts during the winter. These 1 l
facilities include 14 focoil-fired cteam electric generating units (2,637,000 i kilowatts) at four generation stations; ito share of three nuclear generating units (1,026,000 kilowatto); a 351,000 kilowatt chare of the Seneca Plant; two combustion turbine generating units (58,000 kilowatts) and one diesel gen- , orator (4,000 kilowatto). In addition, one fosoil-fired generating unit (245,000 kilowatts) is currently on cold standby statuo. All of Cleveland i Electric's generating faci?ities are located in Ohio and Pennsylvania. The not 60-minute peak load of Cleveland Electric's service area for 1996 was l 3,938,000 kilowatts and occurred on August 7. The capacity recources i available at the time of the 1996 peak were 3,922,000 kilowatto. Cleveland Electric's 1997 native peak load is forecasted to be 3,710,000 kilowatto, after demand-side management considerations. The capacity resourceo expected i _ to be available to serve Cleveland Electric's 1997 peak total 4,187,000 4 i kilowatts. Over the 1997-1999 period, Cleveland Electric forecasts ito I capacity margins at the time of its projected peak loada to range from 10% to ) j 12%, excluding the capacity on cold standby. Cleveland Electric owns the facilities located in the area it serves for
- transmitting and distributing power to all its customers. Cleveland Electric has interconnections with Ohio Edison, Ohio Power and Penelec. The intercon-j nections with Ohio Edison provide for the interchange of electric power with the other CAPCO Group companies and for transmission of power from the tenant- ,
in-common owned or leased CAPCO Group generating units as well as for the interchange of power with Toledo Edison. The interconnection with Penelec i provides for transmission of power from Cleveland Electric's share of the Seneca Plant. In addition, these interconnections provide the means for the interchange of electric power with other utilities. 5 ' Cleveland Electric has interconnections with each of the municipal systemo operating within its service area. i Toledo Edison , The wholly owned, jointly owned and leased electric generating facilities of Toledo Edison in commercial operation as of February 14, 1997 provide a not i demonstrated capability of 2,132,000 kilowatts during the winter. These 4 facilities include six focsil-fired steam electric generating units (925,000 kilowatts) at two generation stations; its share of three nuclear generating l units (830,000 kilowatts); leased capacity from a pumped-storage hydroelectric generating station (300,000 kilowatts) and five combustion turbine generating l units (77,000 kilowatts). Except for the lease of 300,000 kilowatts of j
- pumped-storage hydroelectric capacity located in Michigan, all of Toledo i A
Edison's generating facilities are located in Ohio and Pennsylvania. The net 60-minute peak load of Toledo Edison's service area for 1996 was 1,758,000 kilowatts and occurred on August 7. The capacity resources available at the time of the 1996 peak were 1,951,000 kilowatts. Toledo Edison's 1997 native peak load is forecasted to be 1,570,000 kilowatts, after demand-side management consideratione. The capacity resources expected to be available to serve Toledo Edison's 1997 peak total 1,951,000 kilowatts. Over the 1997-1999 period, Toledo Edison forecasts its capacity margins at the time ) of its projected peak loado to range from 18t to 19.51. Toledo Edison owns the facilitico located in the area it serves for trans-mitting and distributing power to all its customers. Toledo Edison hao interconnections with Ohio Edison, Ohio Power and Detroit Edison. Thr :- terconnection with Ohio Edison provideo for the interchange of electric power with the other CAPCO Group companico and for transmiopion of power from the tenant-in-common owned or leaced CAPCO Gro,up generating units as well ao for the interchange of power with Cleveland Electric. In addition, these inter-connectiono provide the means for the interchange of electric power with other utilities. Toledo Edison han interconnections with each of the municipal eyotemn operating within its service area. TITLE TO PROPERTY The generation ple.nts and other principal facilities of the operating Companies are located on land owned in fee by them, except as follows: (1) Cleveland Electric and Toledo Edison lease from others undivided 6.5%, 45.9% and 44.38% tenant-in-common interects in Unita 1, 2 and 3, respectively, of the Mansfield plant located in Shippingport, l Pennsylvania, and an 18.26% undivided tenant-in-common interest in Beaver Valley Unit 2 located in Shippingport, Pennsylvania. These leases extend through 2017 and are the result of sale and leaseback transactions completed in September 1987. Cleveland Electric and Toledo Edison own another 24.47% interest and 1.65% interest, respectively, in Beaver valley Unit 2 as a tenant-in-common. Cleveland Electric and Toledo Edison continue to own as a tenant-in-common the land upon which the Mansfield Plant and Beaver Valley Unit 2 are located, but have leased to others certain portions of that land relating to the above-mentioned generating unit leases. l (2) Most of the facilities of Cleveland Electric's Lake Shore Plant are situated on artificially filled land, extending beyond the natural shore-line of Lake Erie as it existed in 1910. As of December 31, 1996, the cost of Cleveland Electric's facilities, other than water intake and discharge facilities, located on such artificially filled land aggregated approximately $97,081,000. Title to land under the water of Lake Erie within the territorial limits of Ohio (including artificially filled land) is in the State of Ohio in trust for the people of the State for the public uses to which it may be adapted, subject to the powere of the United States, the public rights of navigation, water commerce and fishery and the rights of upland ownero to wharf out or fill to make use of the water. The State is required by statute, after appropriate pro-ceedingo, to grant a lease to an upland owner, such as Cleveland Elec-tric, which erected and maintained facilities on such filled land prior to October 13, 1955. Cleveland Electric does not have such a lease from the State with respect to the artificially filled land on which ito Lake l l l 1 Shore Plant facilitico are located, but Cle"aland Electric's position, on advice of counsel for Cleveland Electric, 10 that its facilities and i occupancy may not be disturbed because they do not interfere with the free flow of commerce in navigable channels and conotitute (at least in part) and are on land filled pursuant to the exercice by it of its
< property rights at owner of the land above the shoreline adjacent to the filled land. Cleveland Electric holdo permito, under federal statutes relating to navigation, to occupy such artificially filled land.
- (3) The facilities of Cleveland Electric *o Seneca Plant in Warren County, Pennsylvania, are located on land owned by the United States and occupied by Cleveland Electric and Penelec pursuant to a license losued by the I FERC for a 50-year period starting December 1, 1965 for the construction, l operation and maintenance of a pumped-storage hydroelectric plant. ,
4 l (4) The water intake and discharge facilitico at the electric generating plants of Cleveland Electric and Toledo Edison located along Lake Erie, the Maumee River and the Ohio River are extended into the lake and rivers j under their property rights ao owners of the land above the water line and pursuant to permits under federal statutes relating to navigatio'n. (5) The transmission systems of the Operating Companies are located on land,
. easements or rights-of-way owned by them. Their diotribution systems
! also are located, in part, on interests in land owned by them, but, for the most part, their distribution systems are located on lands owned by l others and on streets and highways. In most cases, permission has been obtained from the apparent owner of the property or, if the distribution system is located on streets and highways, from the apparent owner of the abutting property. Their electric underground transmission and distri-bution systems are located, for the most part, in public streets. The
- Pennsylvania portions of the main transmission lines from the seneca
- plant, the Hanofield Plant and Beaver Valley Unit 2 are not owned by l Cleveland Electric or Toledo Edison.
] All Cleveland Electric and Toledo Edison proporties, with certain exceptions, i are oubject to the lien of their respective mortgages. The fee titles which Cleveland Electric and Toledo Edison acquire ao tenant-in-common owners, and the leasehold interests they have as joint lessecs, of certain generating units do not include the right to require a partition or j, sale for division of proceeds of the units without the concurrence of all the other owners and their respective mortgage trustees and the trustees under
- Cleveland Electric's and Toledo Edison's mortgages. As discussed under " Item s 1. Business--CAPCO Group", Duquesne is attempting to partition its interest in Eastlake Unit 5.
1 4
t Item 3. Leoal Proceedinos Proceedinon Recardino an Attempt by the City of Clyde. Ohio to Remove Toledo Edison. See " Item 1. Business--Operations--Competitive Conditions--Toledo Edison". j i j City of Cleveldnd Lawsult. On August 5, 1996, the City of Cleveland filed
- with the Court of Common Pleas of Cuyahoga County a complaint against Cleveland Electric seeking an order requiring Cleveland Electric to remove a
certain lamp posts, street lights and/or utility poles and asocesing penalties for failure to take such action. Cleveland Electric has filed a motion to dismiss the complaint for lack of jurisdiction, which motion is decisional. )
)
Ducuesne Lawsuit. See " Item 1. Business--CAPCO Group". l Proceedinos before the PUCO and the FERC Recardino the Electric Service j Contract Between CPP and Medical Center Co. See " Item 1. Business-- ' Operations--Competitive Conditions--Cleveland Electric". Proceedinos before Williams County (Ohio) Common Pleas Court Relatino to ' Electric Service Beino Provided to Chase Brass by Four Municipals and AMP-Ohio. See " Item 1. Business--Operations--Competitive Conditions--Toledo Edison". I I Item 4. Submission of Matters to a Vote of Security-Holders CENTERIOR ENERGY, CLEVELAND ELECTRIC AND TOLEDO EDISON During the quarter ended December 31, 1996, no matters were submitted to a vote of security-holders. l l I I PART II Item 5. Market for Reoistrants' Common Eguity and Related Stockholder Matters The information regarding common stock prices and number of share owners required by this Item is not applicable to Cleveland Electric or Toledo Edison because all of their common stock is held solely by Centerior Energy. l Earket Information i Centerior Energy's common stock is traded on the New York, Chicago and Pacific Stock Exchanges. The quarterly high and low prices of Centerior common stock (as reported on the composite tape) in 1995 and 1996 were as follows: 1995 1996 Hioh Low Hioh Low Ist Quarter $10 $ 8-11/16 S 9-5/8 5 7-5/8 2nd Quarter 9-7/8 8-5/8 8 6-3/4 3rd Quarter 11 9-1/2 9-1/2 6-3/4 4th Quarter 11-1/4 8-1/2 10-3/4 9-1/8 Share Owners As of March 3, 1997, Centerior Energy had 121,136 common stock share owners of record. j 1 Dividends See Note 11(b) for discussions of equity distribution restrictions af fecting Cleveland Electric and Toledo Edison and Note 14 to Centerior's Financial Statements for Centerior's quarterly dividend payments in the last two years. Subject to applicable legal restrictions, future dividend action by Centerior's Board of Directors will continue to be decided on a ! quarter-to-quarter basis after the evaluation of financial results, potential earning capacity and cash flow, l At December 31, 1996, Centerior Energy had a retained earnings deficit of $334 million and capital surplus of 51.964 billion, resulting in an overall surplus of $1.63 billion that was available to pay dividends under Ohio law. Any current period earnings in 1997 will increase surplus under Ohio law. Dividends paid in 1996 on each of the Operating Companies' outstanding series of preferred stock were fully taxable. Item 6. Selected Financial Data CENTERIOR ENERGY The information required by this Item is contained on Pages F-29 and F-30 attached hereto. 4 a 4 7 CLEVELAND E_LECTRIC The information required by this Item is contained on Pages F-56 and F-57
- attached hereto.
4 TOLEDO EDISON 4 The information required by this Item is contained on Pages F-84 and F-85 attached hereto. Item 7. Manacement's Discuenion and Analysis of Financial Condition and Results of Operations CENTERIOR ENERGY The information required by this Item is contained on Pages F-2 through F-8 attached hereto. CLEVELAND ELECTRIC The information required by this Item is contained on Pages F-31 through F-37 attached hereto. TOLEDO EDISON The information required by this Item is contained on Pages F-59 through F-65 attached hereto. Item 8. Financial Statements and Supplementary Data CENTERIOR ENERGY The information required by this Item is contained on Pages F-9 through F-28 attached hereto. CLEVELAND ELECTRIC The information required by this Item is contained on Pages F-38 through F-55 attached hereto. TOLEDO EDISON The information required by this Item is contained on Pages F-66 through F-83 attached hereto. ! i I Item 9. Chances in and Disaareements With Accountants on Accountino and Financial Disclosure CENTERIOR ENERGY, CLEVELAND ELECTRIC AND TOLEDO EDISON None. 1 PART III Item 10. Directors and Executive Officero of the Reclotfants CENTERIOR ENERGY ! The information required by this Item for conterior regarding directors is - incorporated herein by reference to Pages 4 through 7 and Page 13 of r Centerior's definitive proxy statement dated April 3, 1997. Reference is also ' made to " Executive Officers of the Registrants and the Service Company" in Part I of this Report for information regarding the executive officers of t Centerior Energy. , CLEVELAND ELECTRIC Set forth below are the name and other directorships held, if any, of each director of Cleveland Electric. The year in which the director was first elected to Cleveland Electric's Board of Directors is set forth in paren-thesis. Reference is made to " Executive Officers of the Registrants and the L Service Company" in Part I of this Report for information regarding the directors and executive officers of Cleveland Electric. The directors received no remuneration in their capacity as directors. Robert J. Farlino* Hr. Farling is a director of National City Bank. (1986) Murray R. Edelman Mr. Edelman is a director of KeyBank National Association. (1993) Fred J. Lance, Jr. (1993)
*Also a director of Centerior Energy and the Service Company. ,
i' i TOLEDO EDISON Set forth below are the name and other directorships held, if any, of each , director of Toledo Edison. The year in which the director was first elected to Toledo Edison's Board of Directors is set forth in parenthesis. Reference is made to " Executive Officers of the Registrants and the Service Company" in Part I of-this Report for information regarding the directors and the executive officers of Toledo Edison. The directors received no remuneration , in their capacity as directors. Robert J. Farlina* l Mr. Farling is a director of National City Bank. (1988) Murray R. Edelman Mr. Edelman is a director of KeyBank National Association. (1993) r Fred J. Lance, Jr. , (1993) ! f
*Also a director of Centerior Energy and the Service Company.
- i 1
1 1
Item 11. Executive Comnennation CENTERIOR ENERGY, CLEVELAND ELECTRIC AND.__ TOLEDO EDISON The information required by this Item for centerior in incorporated herein by reference to the information concerning compensation of directors on Page 8 and the information concerning compensation of executive officero, stock option transactiono, long-term incentive awards and pension benefito on Pages 1997. 18 through 22 of Centerior's definitive proxy statement dated April 3, The named executive officero for Centerior are included for Cleveland Electric and Toledo Edison regardless of whether they were officers of Cleveland Electric or Toledo Edison because they were key policymakers for the Centerior System in 1996. 11pm 12. security ownernhin of Certain Beneficial ownern and Manacement ! CENTERIOR ENERoY The Anformation required by this Item is incorporated herein by reference to ; Pages 11 and 12 of Centerior's definitive proxy statement dated April 3, 1997. 1 CLEVELAND ELECTRIC I Individual directors of Cleveland Electric, the named executive officers and all directors and executive officers of Cleveland Electric as a group j beneficially owned the following number of sharea of Centerior common stock as i of March 12, 1997: Name of Beneficial Number of Common Owner Shares owned (1) Robert J. Farling 139,531 (2) Murray R. Edelman 62,010 (2) Fred J. Lange, Jr. 45,916 (2) Al R. Temple 14,700 (2) John P. Stetz 14,310 (2) Donald C. Shelton 54,503 (2) All directors and executive officers as a group (14 individuals) 473,171 (2) (1) Beneficially owned shares include any shares with respect to which voting or investment power is attributed to a director or executive officer because of joint or fiduciary ownerohip of the shares or relationship to the record owner, such as a opouse, even though the director or executive officer does not consider himself or herself the beneficial owner. On March 12, 1997, all directors and executive officers of Cleveland Electric as a group were considered to own beneficially 0.3% of Centerior's common stock and none of Cleveland Electric's serial preferred stock. Certain individuals disclaim beneficial ownership of some of those shares. I l 1 (2) Includes the following numbers of shares which are not owned but could have been purchased within 60 days after March 12, 1997 upon exercise of options to purchase sharea of Centerior common stock: Mr. Farling - 63,750; Mr. Edelman - 37,500; Mr. Lange - 31,000; Mr. Temple - 9,300; Mr. Stetz - 8,800; Mr. Shelton - 48,600; and all directors and executive i officers as a group - 282,500. None of those options have been exercised as of March 20, 1997. 5 TOLEDO EDISON Individual directors of Toledo Edison, the named executive officers and all directors and executive officers of Toledo Edison as a group beneficially owned the following number of shares of Centerior common stock as of March 12, 1997 Name of Beneficial Number of Common Owner Shares owned (1) Robert J. Farling 139,531 (2) Murray R. Edelman { 62,010 (2) Fred J. Lange, Jr. l 45,916 (2) Al R. Temple 14,700 (2) John P. Stetz 14,310 (2) ; Donald C. Shelton 54,503 (2) All directors and executive { { officers as a group (12 individuals) 442,315 (2) l i (1) Beneficially owned shares' include any shares with respect to which voting 1 i or investment power is attributed to a director or executive officer because of joint or fiduciary ownership of the shares or relationship to the record owner, such as a spouse, even though the director or executive officer does not consider himself or herself the beneficial owner. On March 12, 1997, all directors and executive officers of Toledo Edison as a group were considered to own beneficially 0.3% of Centerior's common stock and none of Toledo Edison's cumulative preferred stock. Certain individuals disclaim beneficial ownerchip of some of those shares. (2) Includes the following numbers of shares which are not owned but could have been purchased within 60 days after March 12, 1997 upon exercise of options to purchase shares of Centerior common stock: Mr. Farling - 63,750; Mr. Edelman - 37,500; Mr. Lange - 31,000; Mr. Temple - 9,300; ; Mr. Stetz - 8,800; Mr. Shelton - 48,600 and all other executive officers as a group - 268,700. None of those options have been exercised as of March 20, 1997. Item 13. Certain Relationships and Related Transactions CENTERIOR ENERGY, CLEVELAND ELECTRIC AND TOLEDO EDISON None, f j
PART IV Jtem 14. Exhibito. Financial Statement Schedulen and Reports on Form 8-K (a) Documento Piled an a Part of the Report
- 1. Financial Statemento:
Financial Statemento for Centerior Energy, Cleveland Electric and Toledo Edison are listed in the Index to Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Re-sults of Operations; and Financial Statements. See Page F-1,
- 2. Financial Statement Schedulen Financial Statement Schedulco for centerior Energy, Cleveland Electric and Toledo Edison are listed in the Index to Schedulen. See Page S-1.
- 3. Combined Pro Forma Condensed Financial Statemento (Unaudited):
Combined Pro Forma Condensed Financial Statements (unaudited) for Cleveland Electric and Toledo Edison related to their pending merger. See Pages P-1 to P-4.
- 4. Exhibits:
Exhibits for Centerior Energy, Cleveland Electric and Toledo Edison are listed in the Exhibit Index. See Page E-1. (b) Reports on Form 8-K During the quarter ended December 31, 1996, Centerior Energy, Cleveland Electric and Toledo Edison did not file any Current Reporto on Form 8-K.
.. - ---. .. - - _ . . _. ~- . .
SI_GNATURES Purauant to the requiremente of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the underoigned, thereunto duly authorized. CENTERIOR ENERCY CORPORATION Registrant March 27, 1997 By J. T. PERCIO J. T. Percio, Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this re-port has been signed below by the following persons on behalf of the regi-etrant and in the capacities and on the date indicated: Sicnature Title Date Principal Executive Officer: )
- ROBERT J. FARLING Chairman of the Board, )
President and Chief ) Executive Officer ) Principal Financial Officer: )
*TERRENCE G. LINNERT Senior Vice President, )
Chief Financial ) Officer and General ) Counsel ) Principal Accounting Officer:
*E. LYLE PEPIN Controller )
Directors: )
- RICHARD P. ANDERSON Director )
- ALBERT C. BERSTICKER Director )
- THOMAS A. COMMES Director ) March 27, 1997
- WILLIAM F. CONWAY Director )
- WAYNE R. EMBRY Director )
- ROBERT J. FARLING Director )
- RICHARD A. MILLER Director )
- FRANK E. MOSIER Director )
*SR. MARY MARTHE REINHARD, SND Director )
- ROBERT C. SAVAGE Director )
l
- WILLIAM J. WILLIAMS Director )
*By J. T. PERCIO J. T. Percio, Attorney-in-Fact SIGNATURES Pursuant to the requirciaents of Section 13 or IS(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY Registrant March 27, 1997 By J. T. PERCIO J. T. Percio, Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this re-port has been signed below by the following persons on behalf of the regi-strant and in the capacities and on the date indicated: l Sicnature Title Date Principal Executive Officer:
)
- ROBERT J. FARLING Chairman of the Board )
and Chief Executive ) Officer ) Principal Financial Officer:
)
4TERRENCE G. LINNERT Vice President and ) Chief Financial ) March 27, 1997 officer ) Principal Accounting Officer
)
- E. LYLE PEPIN Controller )
Directors:
)
- ROBERT J. FARLING Director )
- MURRAY R. EDELMAN Director )
- FRED J. LANGE, JR. Director )
- Dy J. T. PERCIO J. T. Percio, Attorney-in-Fact I
SIGNATURES Purouant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be cigned on its behalf by the undersigned, thereunto duly authorized. THE TOLEDO EDISON COMPANY Registrant March 27, 1997 By J. T. PERCIO J. T. Percio, Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this re-f port has been signed below by the following persono on behalf of the regi- ) a strant and in the capacities and on the date indicated:
)
Sionature Title Date j Principal Executive Officer: )
- ROBERT J. FARLING Chairman of the Board )
and Chief Executive ) Officer ) I i Principal Financial Officer: )
*TERRENCE G. LINNERT Vice President and )
Chief Financial ) Officer ) l Principal Accounting Officer: ) March 27, 1997
*E. LYLE PEPIN Controller )
1 Directors: ) ) ,
- ROBERT J. FARLING Director )
- HURRAY R. EDELMAN Director )
- FRED J. LANGE, JR. Director )
4
*By J. T. PERCIO J. T. Percio, Attorney-in-Fact 1
I
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INDEI TO SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION f FND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF l OPERATIONS; AND FINANCIAL STATEMENTS l ' i Ea92 l Centerior Eneroy Corporation and Subsidiaries: Management's Financial Analysis . . . . . . . . . . . . . . . . . F-2 l Report'of Independent Public Accountants . . . . . . . . . . . . . F-9 l Income Statement for the Years Ended December 31, 1996, 1995 l and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10 l Retained Earnings for the Years Ended December 31, 1996, 1995 l and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10 Dalance Sheet as of December 31, 1996 and 1995 . . . . . . . . . . F-12 l Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 . F-14 l Statement of Capitalization at December 31, 1996 and 1995 . . . . F-15 l l Notes to the Financial Statements . . . . . . . . . . . . . . . . F-18 Financial and Statistical Review . . . . . . . . . . . . . . . . . F-29 The Cleveland Electric Illuminatino Company and subsidiaries: l Management's Financial Analysis . . . . . . . . . . . . . . . . . F-31 l l Report of Independent Public Accountants . . . . . . . . . . . . . F-38 I ! Income Statement for the Years Ended December 31, 1996, 1995 , j and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-39 I ( Retained Earnings for the Years Ended December 31, 1996, 1995 j and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-39 Balance Sheet as of December 31, 1996 and 1995 . . . . . . . . . . F-40 Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 . F-42 Statement of Capitalization at December 31, 1996 and 1995 . . . . F-43 Notes to the Financial Statements . . . . . . . . . . . . . . . . F-45 Financial and Statistical Review . . . . . . . . . . . . . . . . . F-56 The Toledo Edison Company: Management's Financial Analysis . . . . . . . . . . . . . . . . . F-59 Report of Independent Public Accountants . . . . . . . . . . . . . F-66 Income Statement for the Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-67 Retained Earnings for the Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-67 j Balance Sheet as of December 31, 1996 and 1995 . . . . . . . . . . F-68 I Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 . F-70 Statement of Capitalization at December 31, 1996 and 1995 . . . . F-71 Notes to the Financial Statements . . . . . . . . . . . . . . . . F-73 Financial and Statistical Review . . . . . . . . . . . . . . . . . F-84 ! 1 i F-1
Management's Financial Analysis renewat before im I oHowing the renewals. the compa- i
" ' P " " " " * ^ ' W "d ' * * *I ""'
Outlook . mdustnal base rate revenues w as under long-term Strategic Plan con t ra c t s. In early 1994, we created a strategic plan to achieve the Northwest Ohio is recognized as one of the nation s twin goals of strengthening our financial condition and leading areas in job creation and economic growth. New l improving our competitise position. To meet these goals, and expanded operations at businesses such as l we seek to maximize share owner return, achieve profita. Delafoil/Phillips and Alcoa, as well as the development i ble revenue growth, become a leader in customer satisfac- surrounding a new, major North Star BilP Steel facility, tion, build a winning employee team and attain are adding to our opportunities for revenue growth, in increasingly competitive supply costs. During 1996, the 1996, we gained commitments on 47 cconomic develop-third year of the eight-year plan, we made strong gains ment projects, representing almost St I million in new and toward reaching some plan objectives but need significant retained annual base rate revenues and nearly 7,000 new improvement on others. and retained jobs for Northern Ohio. A major step taken to reach the twin goals was our Under the strategic plan, we are structured in six strategic agreement to merge with Ohio Edison Company (Ohio business groups to better focus on our competitiveness. Edison) to form a new holding company called During 1996, we reduced employment from about 6,800 FirstEnergy Corp. (FirstEnergy). The proposed merger, to 6,200, below our goal of 6,300. Further reduction in our combined with good operating performance, our success- work force to about 5,800 is planned by year-end 1997. ful price increase and the accelerated paydown of dcht, We also plan to reduce expenditures for operation and resulted in a significant stock price gain, such that the maintenance activities (exclusive of fuel and purchased total return to our common stock share owners during power expenses) and capital projects from 5954 million in 1996 was 33% The merger is expected to better position 1996 to approximately $900 million in 1997 by continuing both companies to meet coming competitive challenges. to streamline operations. We will continue to reduce our unit cost of fuel used for generating electricity, while Revenue growth is a key objective of our plan, from safely improving the operating performance of our genera-priemg actions as well as market expansion
- tion facilities.
In April 1996, The Public Utilities Commission of Ohio Reducing fixed financing costs is another primary objec-(PUCO) approved in full the $119 million price increases requested by our subsidiaries The Cleveland Electric uve m suengtWng our hnancial and competm posL ti n. In 1996, we reduced our fixed obligations for debt. liluminating Company (Cleveland Electric) and The
~
preferred stock and generation facihties leases (partially Toledo Edison Company (Toledo Edison) (collectively, offset by the new accounts receivable securitization) by the Operating Companics).fl.he primary purpose of the $227 million. See Notes 1(i) and 2. Interest expense and increases was to provide additional revenues to recover all preferred dividends dropped 526 million. In the last three the costs of providing electric service, including deferred costs, and provide a fair return to our common stock share years, fixed obligations were reduced by 5523 million hhich is ahead of the schedule in our strategic plan to owners. The additional revenues also provided cash t reduce these obligaticas by $1.3 billion by 2001. accelerate the redempuon of debt and preferred stock. Kilowatt-hour sales to retail customers were virtually in 1996, we reported earnings per common share of 5.82 unchanged compared to 1995 results, while wholesal'c c mpared to 51.49 in 1995. The reported decrease masks sales increased by 6.8% from 1995 as a result of the good a S.05 per share increase in basic earnings from operations availability of our generating units and a more aggressive and a significant improvement in the quality of reported bulk power marketing effort. Adjusted for weather, how- e rnings. The dechne in reported earnings is primarily ever, kilowatt-hour sales to residential and commercial attributable to the delay in implementing our price customers increased by 1% and 1.7%, respectivelv, from increase until late April, while we began at the end 'of 1995. 1995 to charge carnings for operating expenses and amor-tization of deferrals which the price increase was designed Another key element of our revenue strategy is to offer to recover. The price increase contributed approximately long-term contracts to large industrial customers who $47 million after tax, or 5.32 per share, more cash to our might otherwise consider changing power suppliers. Dur- carnings in 1996. In addition,1996 results included non-ing 1996, we renewed and extended for as long as ten cash charges against earnings of $22 million after tax, or years contracts with many of our large industrial custom- 5.15 per share, for the disposition of inventory and write-ers, including the six largest. While this strategy has down of inacthe production facilities. The full benefit of resulted in lower prices for these customers. in the long our 5119 W n price increase, substantial reductions in run, it is expected to maximize share owner value by operation ad maintenance expenses and a continuing retaining our customer base in a changing industry. Prior decline in interest charges are expected to result in to these renewals, 69% of our industrial base rate impmvement in earnings and cash flow from operations in (nonfuel) revenues under contract was scheduled for 1997 [Centerior Energy] F2 [Centerior Energy)
._ _ .- - ~ - - - - - - - - .- .- -. . .-.
Pendmg Merger with Ohio Edison ( cuena 1.ncrys paar t the merger .u dmde:d aant b31 nul nerp3 after such tmic will be de:ermmed q then On Sertember to, lW6 we announced the merger wi h respectn e IWrds a Directors I tie melper agreement Ohio I dison in a stock-for-stock transaction. Our shate lum s d.e indicated annual dnideie prior to the merger owners will receise 0.525 of a share of lirol nergy com* in Du per share of Centerior 1.netr3 common stock and , mon stock for each > hare of Centerior Lnergy common 5140 per share of Ohio I.dison common stock. See l stock owned, while Ohio Edison share ou ners will recche CapitM Resources and Liquiditv-Liquidity below.
' I one share of FirstEnergy common stock for each share of I Ohio Edison common stock owned. FirstEnergy plans to Various aspects of the merger are subject to the approval account for the merger as a purchase in accordance with of the Federal Energy Regulatory Commission (I 1:RC) generallv' accepted accounting principles.
and other regulatory authoritie.s. Common stock share owners of Centerior Energy and Ohio Edison are expected We believe that the merger will create a company that is to vote on approval of the merger agreement on better positioned to compete in the electric utility industry March 27,1997. The merger must be approved by the than either we or Ohio Edison could on a stand-alone anirmative votes of the share owners of at least two-thirds basis, enhancing long-term share owner value and provid- of the cutstanding sh.oes of Ohio I.dison common stock ing customers with reliable service at more stable and and a majority of the outstanding shares of Centerior competitive pnees. Energy common stock. The merger is expected to be ef-The combination of Centerior Energy and Ohio Edison is fcctive in late 1997. a natural alliance of two companies with adjoining service areas who already share many major generating units. FirstEnergy Rate Plan FirstEnergy expcets to reduce costs, maximize eniciencies on hy 30,1997. the PUCO approved a Rate Redue-and increase management Ocxibihty in order to enhance revenues, cash Dows and earnings and be a more c0cetive d bmd band Pin (Plw fm & competitor in the increasingly competitive electnc utik,ty Oph L'gaies m k dh gm k mw
- mdustry,
& of k - Th Plan would be null and void if the merger is not consummated. The rate order granting FirstEnergy anticipates the merger wi'l result in net the April 1996 priec increase will remain in full force and savings for the combined companies of approximately eHect during the peadency of the merger or if the merger
$1 billion over ten years,in addition to the impact of cost is not consummated. reduction programs underway at both companies. The additional savings, which we believe could not be Th Plan calls for a base rate free /c through 2005 (except to compiv with any significant changes in environmental. achieved without the merger, wil1 result primarily from the reduction of duplicative functions and positions, joint E- tE l-4 l'onmd by an immediate
$3 0 miilion (which represents a decrease of approxi-dispatch of generating facihtics and procurement enicien-
, mately 15% from current levels) base rate reduction in cies. W e expect reductions m labor cost. to comprisc . . .
slightly over half the estimated savings. In addition.
.. ,000; intenm reductions beginning seven months after consummation of the merger of $3 per month increasing FirstEnergy expects to reduce system wide debt by at . .
to $3 per month per res.dential customer by July 1,2001: least $2.5 billion through the year 2000, v. - iciding add. i-tional long-term savings in the form of lower interest $105 nu.llion for economic deselopment and energy efh. ciency programs; carnmes caps for reculatory purposes or f. - expense. ' the Operating Companies: a commit $nent b'y FirstEnergy The Operating Companies' share of the 51 billion of for a reduction, for regulatory accounting purposes, in savings will permit them to reduce prices to their custom- nuelcar and regulatory asuts by the end of 2005 of at ers as discussed below under FirstEnergy Rate Plan. least $2 billion more than it otherwise would be, through Absent the merger, the Operating Companies plan to revaluing facilities or accelerating depreciation and amor-achieve savings as well, but at a lower level, which is tization; and a freeze in fuel cost factors until Decem-expected to allow prices to be frozen at current levels until ber 31, 2005, subject to PUCO review at year-end 2002 , at least 2002 despite innationary pressures. and annual innation adjustments. The Plan permits the Ohio Edison currently has an .indicated annual common Operating Companies to dispose of generating assets subject to notiec and possible PLICO approval, and to stock dividend of 51.50 per share and C.enterior Energy currently has an indicated annual common stock dividend "" " "" # E
- I" * " "" " E # * "
of S.80 per share. FirstEnergy expects that its dividend at Total price sasings foi the Operating Companies' custom-the time of consummation of the merger will be at least ers of about 5391 million are anticipated over the term of I equivalent to an indicated annual dividend of 51.50 per the Plan as summarized below, excluding potential eco-share of Ohio Edison common stock and 5.7875 per share nomic development benefits and assuming that the of Centerior Energy common stock. Dividend action by merger takes place on December 31.1997. (Centerior Energy] F-3 lCenterior Energv] I
l h "" rem.m. der of tb.ir ausine.w. they would be required to n, 77%" w rue ot! their remaining regulatory assets and measure all
^
33 other assets for impairment. I or a discussion of the om p entena f or complying with SI AS 71, see Note 7(a).
.o
(, ;j April 1996 Rate Order
?"oi W in its April 1996 order, the PUCO granted price increases
'[ [ totaling $119 million in annualized revenues to the Oper-gg Q
~
ating Companies. The Operating Companies intend to freeze rates at existing levels until at least 2002, although Under the Pl.m's earnings cap. the Operating Companies will be permitted to earn up to an 11.5% return on they are not r!ccluded from requesting further price increases. In the order, the PUCO provided for recovery common stock equity for regulatory purposes during cal- of all regulatory assets in the approved rates, and the endar years prior to 2000,12% during calendar years 2000 Operating Companies continue to comply with the provi. and 2001. and 12.59% during calendar years 2001 through sions of SFAS 71. 2005. The regulatory return on equity is generally expected to be lower than the return on equity calculated in connection with its order. the PUCO recommended for financial reporting purposes due to the calculatmn that the Operating Companies write down certain assets methodology dehned by the Plan and, as discussed m the for rplarv purposes by an aggregate of $1.25 billion through 2001'. If the merger is consummated, we believe nest paragralyh. anticipated differences in accounting for the Plan for hnancial reporting versus regulatory purposes. acceleration of 52 billion of costs under the Plan would if for any calendar year the regulatory return on equity fully satisfy this recommendation. We agree with the
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exceeds the specified level, the excess will be credited to concept of accelerating the recognition of costs and the recovery of assets as such concept is consistent with our customers, first through a reduction in Percentage of ' Income Payment Plan (PIPP) arrearages and then as a strategic objective lo become more competitive. llowever, crecis to base rues. Pil{P is a deferred pay ment program we believe that such acceleration must also be consistent for low-income residential customers. with the reduction of debt and the opportunity for Center-ior Energy common stock share owners to receive a fair The Plan requires, for regulatory purposes a revaluation return on their investment. Consideration of whether to of or an aaderated reduction in the Operating Compa. implement a plan responsive to the PUCO's recommen-nies' investmt nt in nuclear plant and certain regulatory dation to revalue assets by 51.25 billion is pending the assets (excludmg amounts due from customers for future merger with Ohio Edison. federal income taxes) by at least 52 billion by the end of Notwithstanding the pending merger with Ohio Edison 2005. Only a p* tion of the $2 billion of accelerated costs and discussions with regulators concerning the efTect of is expected to t e charged against carnings for financial l the Plan on our nuclear generating assets, we believe it is reporting purposes by 2005. reasonable to expect that rates will be set at levels that FirstEnergy believes that the Plan will not provide for the wj11 recover all current and anticipated costs associated l full recoscry of costs and a fair return on investment u nh our nuclear operations, including all associated regu-associated with the Operating Companit J nucicar opera- latory assets, and such rates can be charged to and tions. Pursuant to the PUCO's order FirstEnergy is e llected from customers. If there is a change in our required to submit to the PUCO stalT the regula'torv naluad n f the competitive environment, regulatory l accounting and cost recovery details for implementing th'c framew rk or other factors, or if the PUCO significantly l Plan. After approval of such details bs the PUCO stafT, reduces the value of our assets or reduces the approved ' FirstEnergv expects that the Operating Companies will return on common stock equity of 12.59% and overall rate discontinue the application of Statement of Financial f return f 10M. or both, for future regulatory pur-Accounting Standards (SFAS) 71 for their nuclear oper- p ses, the Operating Companies may be required to ations if and when consummation of the merger becomes record material charges to earnings. probable. The remainder of their business is expected to l continue to comply with the provisions of Sl AS 71. At Merger of the Operating Companies the time the merger is pmbable. the Operating Compa. In October 1996, the FERC authorized the merger of nies would be required to write off certain of their regula. Toledo Edison into Cleveland Electric. The merger agree-tory assets for financial reporting purposes. The write-off ment between Centerior Energy and Ohio Edison requires amounts uould be determined at that time. FirstEnergy the approval of Ohio Edison prior to consummation of the estimates the write-oft will be approximately 5750 mil. proposed merger of the Operating Companies. Ohio ; lion. Under the Plan, some or all of this write-oft cannot Edison has not yet made a decision. be applied toward the 52 billion regulatory commitment discussed above. For financial reporting pt.rposes, nuclear Competition pencrating units are not espected to be impaired. If events Structural changes in the electric utility industry from j cause one or both Operating Companies to conclude they actions by both federal and state regulatory bodies are no longer meet the criteria for applying SFAS 71 for the continuing to place downward pressure on prices and lCenterior Energy] F-4 (Centerior Energy}
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n m i e.m .wp. .aon M as:. men t p.. , r m ic.n plant o.ameo I broup h appresso e ii.uir to-dooi can ,4.ngns w e Nense* l e t reaaned opemau co t r.un mi s si. o ' . . cm u lh des.ity custe'niers (ti' hase been succento! m hnutmy the number of comer-31 3CJim \li re t'. cent l), th ' i slims e d ( jeg eland l.lcelfle L u stimlet s 14e (' leg el.lfid l'ubllc Ieder.d Inerps 1 % e3 Al of IW2 mi sated broadet Pouet (( Pp) under its ongoing esp.msnin plan. ( PP h ascess hi ..tlhls t l .His t ' n u!i t!I u s.lenn al'd, in l'ND. [he lhe jarpeQ munge pg] suppher g3 geur syn gy pre,n, lp I LRC adopted rules relaimp to open-access transmission l IW6. we scached apreements to sene a number et large j senices.1he open-accee rules require utihties to dehser Cleveland commercial customers, meludmp some presi-i power f rom other utilities or pencration source to their ousl3 sened by CPP. uholes.de customers at nondiscriminatory prim In the Toledo I.dison senice area, all esisting customers A number of states base enacted transition legislation in the Cit) d Clyde now hme the right to choose between l uhich prmides for intmduction of competition for retail the municipal supplier and Toledo 1:dison. as a result of a
- clectric business and reemery of stranded imestment.
Nmember 1990 referendum overturning a Clyde ordi. Several groups in Ohio are studying the possible introdue-nance limiting such choice. In Toledo. City Council tion of retail wheehnp and stranded investment recovery. funded a consultant's study of ahernathes to Toledo Retail wheeling occurs when a customer obtains power Ldison service. Municipal expansion activity continues in from a utihty company other than its local utility. The areas surrounding several tow ns serviced by municiral l serm " stranded imestment" pencrally refers to Used costs sy stems in the 'loledo Edison serviec area. We continue to appnwed for recovery under traditional regulatory meth-pursue legal remedies to hah illegal municipal espansion ods that would become untcem erable, or ". stranded", as a in both senice areas. I resuk of legislathe changes which allow for widespread l ' competition. The Pl!CO is sponsoring discussions among Our nura with Ohio Edison and the benelits of the Plan a proup of business, utility and consumer interests to to our cuuones are expected to bcWr position us to deal esplore wap of promoting competitive options without with the simetural changes tak,ng i place in the industry l unduly harming the interests of utility company share and to improve our competitive position with respect to ow nn - or customers. The Pt ICO also has introduced two mumcipab/ation. pilot piojects, both intended as initial steps to introduce l competiti e elements into the Ohio electric utilit,v Nuclear Operations business. i 4 We have interests in three nuclear pencrating units- { Davis-llesse Nuclear Power Station (Davis-llesse). Perry A bill to restructure the electric utih.ty industry m Ohi ~ has been imroduced in the Ohio liouse of Representa- Nuclear Power Plant Unit I (Perry Unit I) and Heaver tives. A bipartisan committee from both leynlative houses Vdkv Power Station Unit 2 (Heaver Valley Unit 2)- and $ grate the Urst tun j has been formed to study the issue. We presented our model for customer choice, called linergy Choice, to the All three units were out of service temporarily for refuel-l PUCO discussion group in August 1996. Under our ing during 1996; thus, plant :.wailabil ty factors for Davis-model, full retail competition should be introduced by Hesse, Perry Unit I and Be:ver Val:ey Unit 2 were 85%, 2002, but two essential elements, recovery of stranded 76% and 701 respecti cly, fa, i996. The 1994-1996 t i investment and levelization of tas burdens among energy availability factors for the units were 91%,721 and 851 l suppliers. must be resobed in the interim to assure share for Davis-Besse Perry Unit I and Beaver Valley Unit 2, i owners' recovery of and a fair return on their investments. re pectively. The comparable industry averages for a I Although competitive pressures are increasing, the trad." three-vear period (as of August 31,1996) are h2' for
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l pressuri/cd water reactors such as Davis-Besse and lica-l tional regulatory framework remains in place and is expected to continue for the foreseeable future. We can- ur VWkv Unit 2 and 7W for boiling water reactors such ( as Perr ' Unit 1. Davis-llesse established a plant record l not predict when and to what estent retail whccling or ' l other forms of competition will be allowed. We believe with its 509-das continuous run at or near full capacity ! that pure competition (unrestricted retail wheeling for all before shutting dow n for its scheduled refueling outare in AprH 1996, customer classifications) is at least several years aw as and that any transition to pure competition viil be in pliasci A signiheant part of our strategic plan intohes ongoing The FERC and the PUCO have acknowledged the need efforts to inucase the availability and louer the cost of to provide at least partial reemery of stranded investment production of our nuclear units. In 1996. we continued our as prcater competition is permitted and, therefore, we propress toward increasing long term unit availability nelieve that there will be a mechanism developed for the while continuing to lower production costs. The goal of recovery of at least some stranded investment. However, our nuclear improvement program is to replicate Davis-l due to the uncertainty inwhed, there is a risk in connee- Besse's operational excellence and cost reduction gains at tion with the introduction of retail wheeling that some of Perry Unit I, while improving performance ratings. j our nssets may not be fully recovered. Our nuclear units may be impacted by activities or events Competition from municipal electric suppliers for retail beyond our control. Operating nuclear units have exper-business in both Operating Companic.s' service areas is ienced unplanned outages or extensions of scheduled producing both fasorable anJ unfavaable results in our outages because of equipment problems or new regulatory i (Centerior Energv] Y-5 (Centerior Energr}
l reya:Nments A t?ue r u enier l .G ' h ie tiwuds o4 ! c!hnes fPuttiem.am i t iect rh sers ex arn! to , 1 anw r cc in the w ond snid eme ine Ucar Raul+ comph unh o i ernm. u icy:.ianorn ()ut wh t onstrue-tors ( onumswin to inm! of pn hu n tnt oWunon o: no espendn;ae !. ' ded Kof mdhon m I"% S201 nul-h c e w r. . id ans domesu, nnelca' umi Il n el o n hon in lous .u.d %I'l mdh.c. ni 1905 ()a debt and nuelcar t. mis is talce out of sersiec lor .m estended period pref erred simL m.ourities and sinkmp land rei unements hir ;my reason, including an accident at such umt or any tot.ded Silo milhon in 1994. S.U4 milhon in 1995 and other nuelcar faciht) ue cannot predict whether regula- $2M milhon in 1996. In addition. we optionally redeemed tory authorities would mipme unhoorable rate treatment. 552$ million of sceurities in the 1994-1996 period. includ-Such treatment could inslude taking our allected unit out ing 52 U million of tauesempt issues ref unded in 1995, of rate b.ne. thereby not permittiny us to reemer our investmem in and earn a return on it. or disalhming in July 19% (~enterior l'unding Corporation (Centerior l unding h a w holh sm ned subsidiary of Clescland filec-certain construction or maintenance costs. An estended outage coupled wilh uni.norable rate treatment could trie. issued $l50 million in \ A A-rated accounts receiva-hase a material ads crse cileet on our knancial condition. ble-backed imestor certilicates due in 2001 with an cash ihm s and results of operations i remature plant interest rate of .2% . Net proceeds fmm the accounts recchable secunti/ation weie used to redeem hipher-cost closings could also hm e a nuterial adscrse ell'ect on om financial (ondition, cash nosu and results of operations securities and foi peneral corporate purposes. because the estimated cost to decommission .a plant As a resuh of these actisities, the embedded cost of the esceeds the current f.u ndm.p m the decommissioning trust. . . Operating (.ompames debt at the end of. itN6 dech.ned to h.926< versus b.9W in 1995 and 9.12':, in 1994. Hazardous Waste Disposal Sites The Operating Companies have been named as "poten. We renewed a 5125 million rewhing credit facility in lially responsible parties" ( PRPs) for three sees listed on May 1990 for a one-> car term. In 19% ponions of our the Superfund National Priorities I ist (Superfund I.ist ) nuelcar fuel lease knancing s chieles matured. Sh4 million and are aware of their poteniial inwltement in the of mtermediate-term notes in September and a S150 mil-eleanup of sescral other sites. Allegations that the Oper- tion letter of credit supporting short-term bornming in atiny Companies disposed of ha/ardous waste at these October. These facilities were replaced by $100 million of sites, and the amount involved. are of ten unsubstantiated intermediate-term notes and a $100 million tw o-year and subject to dispute. I ederal law pimides that all PRPs letter of credit. ~1 he net reduction in the facility si/e for a particular site be held hable on a joint and sescral results from lower nuclear f uel knancing requirements. basis, if the Operating Companies were held liable for 100% of the cleanup costs of all the sites relerred to 1997 and Beyond Cash Requirements abm e. the cost could be as high as $415 million. Ilow-ever, ue believe that the actual cleanup costs uill be Our anticipated 1997 cash requirements for construction substantially lower than $415 million, that the Operating are S!!O million for Cleveland Electric and $61 million Companies' share of any cleanup costs will be substan- for Toledo Edisen. Debt and preferred stock maturities tially less than 1009 and that most of the other PRPs are and sinking fund requirements are $145 million for Cleve-Hnancially able to contribute their share. The Operating land Electrie and $51 million for 'Ioledo Edison. Of these Companies have accrued a liability totaling $10 million at amounts. 570 million for (leveland Electric and 510 mil-December 31, 1996 hased on estimates of the costs of lion for Toledo Ldison are tas-esempt issues sceured by cleanup and their proportionate responsibility for such hrst mortpape bonds and subiect to optional tender by the costs. We believe that the ultimate outcome of these ouners on Nmember 1.1997, which we espect to replace matters will not have a material adverse c0cet on our with similar issues at substantialh lower interest rates. hnancial condition, cash !!ows or results of operations. \\ c espect to meet remainmp requirements with internal cash generation and cash reserves We also espect to be A new Statement of Position nsued bs the Accountine Standard, Executhe Committee of the Amen.ean Insti-able to optionalk redeem more debt and prel. erred stock in 1997 than we did m. 199n. tute of C ertihed Public Acwuntants. inc. ch.ectn e .lanu-ary 1.1997 provides guidance on the recognmon and We espect w meet all os our 199h-2001 cash require-disclosure of environmental remediation liabihties. AdoP- ments with internal cash generation. Estimated cash tion of the statement in 1o97 is not espected to hme a trouirements for our con truction program during this material adverse ed'eet on our knancial conditi m or period total 549n milhon for Clescland Llectric and resuhs of operations. 5213 milhon lor ' Toledo Edison. Debt and preferred stock maturities and sinking fund requirements total 5445 mil-Capital Resources and Liquidity lion and s207 million for Cleveland Electric and Toledo 1994 1996 Cash Requirements non. respdeh. W the same pedod U mnomicah additional securities may be redeemed with funding We need cash for normal corporate operauons (including expected to be prouded through internal cash peneration. the payment of dividends). retirement of maturing securi. Esternal funding may be required to support investments ties. and an onpoing program of constructing and imprm- in nonreputated business opportunities. [Centcriar Energv] l ^-6 (Ccmcriar Energe]
l ( 'ons u m ma tion of the merge' u itii (6' i dmin is 'lhe ( %7.m g ( m p us a % g ugg g espeqcd to reduce the ()peraung ( 'omp.;tues' cash con-i st nwhon reomremen t s .md miprm e their ahdin to f und ( ememn i t gp. coomm M hWeM redeem hsed obhgan.."' peiny daidos na Weir Np h m%m % L u M is held solth N ('em. rim i mg i gg a py, i the ()peratmp ( ompames f rom p.n mp dn idends out of Liquidity capital accounts. I ach ()perating ('ompany has since i Nel cash tion f rom operating aethilies in 199(i w as ' '" d
- pa preferred stock dnidends. and signibeanth increased from 1995 b 3 implementation of
"" "" h"'. also degared and paid common n o l the pnee inereases effccuve in April IW6. Most of the net yp pnM cunent net income i
proci.,eds from our accounts receivable sceuritization of. meluded in retained earmnps. At the times of such decia-
$143 million were used to redeem other higher-cost ranons and pay ments, each Operating (.ompany had a securities. producing nel savings in our overall cost of_ (;cheit in its retained earnings. At I)ecember 31. 1996' borrow.mp. In 1996, we reduced our h. sed obligations for (.levehmd Electne and 'loledo Edison had SI TO mdlion debt, preferred stock and generation laedities leases (par. and 5223 million. respectivelv, of appropriated retained tially, oil.sel bs the new accounts recei able securitizationi carnings for the pay ment of disidends. loledo Edison also has by 5227 million. At year-end 1996, we had Sl3h milh.
- on .m a provision in its mortgage applicable to approsi-cash and temporarv cash investments, dow n f. rom 5179 match. 594 milhon of. outstanding hrst mor:page honds (531 million of. which mature in August 1997) that million at year-end 1993.
requires common stock disidends to be pm.d out of ils Additional hrst mortpape bonds may be issued by the total balance of retained earnings. w hich had been a l Operating Companies under their respective mortgages delicil from 1993 through November 1996 l on the basis of property additions, cash or refundable lirst mortpape bonds. If the applicable interest coverage test is pan o a . n audn.. the i liRC. .is conudering a met, each Operating Company may issue lirst mortpape statement w hich H requested and recched Irom Cleveland bonds on the hasn. of property add.. mons and, under Electric supporting the payment of dividends out of. certain circumstances. refundable bonds. At I)ecem- appropriated current net income included in retained carnings while total retained earnings were a dehen..A l her 31,1996. Cleveland Electne and Toicdo E.dison would . . ; hase been permitted to issue approumately 5666 m. h.d on sumlar request has been made of .loledo Edison. At I ! and 5148 m. h.d on of additional first mortgage bonds. December 31, 1996 Cleveland Electne o retained earn-r respectively. Fir.stE.nergy has not dec.ded ings deb. .en was $276 mdh.on and .l oledo 1:dn.on s total . i w hether tu . . . apply purchase accounting to the Operating Companies il relamed earnings were 53 million. 'Ihe knal disposinon of the merger with Oh.io Edison is completed. If such this issue is a factor expected to be considered by h..rstEnergy in dec.i ding whether to apply purchase l accounting is applied to the Operatmg C,ompanies, the.ir first mortgage bond capacities would be adversely accounting to the Operating Companies, one effect of afTected. dich would be to reset deheit retained earnings to /cro, Il the merger is not consummated or if h..rstEnergy Cleveland Electric is able to issue preferred and prefer- determines not to apply purchase accounting to the Oper-ence stock and Toledo Edison is able to issue preference ating Companies, the Operating Companies intend to l stoel Centerior Energy may raise funds through the sale continue to support their position and pursue all available j of common stock under various employee and share ahernatives to allow them to continue the declaration and j ow ner plans. pay ment of divdends. The Operatine Companies have 5273 million in financing l vehicles to support their nuclear fuel leases. 583 million of flesults of Operations l uhich mature in 1997 Replacement financing for the 1996 vs.1995 l maturing issues may not be needed in 1997. We plan ta renew the 5125 million revolving creth! facility which I actors contributing to the 1.5"i increase in 1996 operat-matures in May 1997. ing revenues are as follows: l ] waions
- Current credit ratines for the Operating Companies are as innene d a rmo m mermne Pnenoc- s lun.m IO!IO" S Hast kate- $N NrY NrI r w m.m sen we. Ing WH h*'
h holesale Resenues
""* ""d M " O*
1I i ucl Lou Recoscr> knenues th) first mortpre honds HH Ha2 Mneglianco,.s Retemic3, j Subordmak dcht sur t iesciand L.lcctnc _ Bt H.d l otal 2 l l Suhordinate debt for Tuledu I dnan H+ HI The increase in 1996 base rates resenues resuhed pruna-l'rchrred stock H 12 . nly from the April 1996 rate order issued by the PUCO Following the FirstEnerp> merger announcement, both for the Operating Companies as discussed under Outlook-
- rating agencies placed the Operating Companies'sceuri- April 1996 Rate Order and in Note H b). Renepotiated ties on credit watch with positive impheations. contracts for certain large industrial customers resulted in 1
l [Centerior Energe) F7 lCenterior Energr} i l l
a deere.nc m ime reienues w hwh partully oilset the Interest charge > and prelerred dmdend requirements ; I decre.tsed m 1990 because of the redemption of securities elleet of the general price merece i or the lourth ) car m and relumbnps at 1.norable terms in 19% and 1995. a rom mduurul kilowatt hour sales increased. l he mcrease m 1+m was 0.9%. as mercased s. des to petroicum retmeries. large chemical industry customers and the 1995 vs.1994 broad based smaller industrial customer group were par-tially otiset by fewer sales to large automotise manufac- Factors contributing to the 3.9% increase in 1995 operat- ; turing and steel indu stry customers. Commercial ing resenues are as follows: M hns Lilowatt-hour sales increased onh 0.1% and residential " '"""* kilowatt-hour sales decreased 1.75 primarily because of 1 "* " *" " ) '" ""'"""" H "#E WH Sales Wlume and Mn Di the cooler summer weather in 1996. On a weather- D normali/ed basis, residential and commercial sales M"lesA Reiene inercased 1% ami 1.79 respectively. Other sales (([']{ "'"" g [( inercased 3.8% as a 6.8% mcrease m, wholesale sales was .g - partially oilset by a 5.2% decrease in sales to pubbe ' authorities. Good availability of our generating units and a Industrial kilowatt hour sales increased 0.H% in 1995 but more aggressive hulk power marketing effort helped sales grew 2.2% excluding reductions at two low-margin increase wholesale sales. l.ower 19% fuel cost recovery steel producers (representing 5% of industrial revenues). revenues resuhed from a decrease in the f uel cost factors itesidential and commercial kilowatt-hour sales increased for Cleveland Electric. The weighted average of these fuel 3.5% and 2.8% respectisely, primarily because of the hot cost factors decreased 3% for Cleveland Electric but summer weather, although there was about 1% increased IG for Toledo Edison. nonweather-related growth in commercial kilowatt-hour sales. Other sales increased 26% because of a 43% For 1996, operating revenues were 32% residential. 30% increase in wholesale sales due principally to the hot commercial. 30% industrial and 8% other, and kilowatt- summer and good availability of our generating units. hour sales were 23% residential 25% commercial. 40% Weather accounted for approximately $38 million of the industrial and 12% other. The average prices per kilowatt- $61 million increase in 1995 base rate revenues. Iligher hour for residential, commercial and industrial customers 1995 fuel cost recovery revenues resulted from an increase were Il.38. 9.44 and 6.33 cents, respectively, in the fuel cost factors for Cleveland Electric. The weighted average of these fuel cost factors increased 7% Operating expenses increased 5.8% in 1996. The cessation for Cleveland Electric but decreased 6% for Toledo of the Itate Stabilization program deferrals and the com- Edison, mencement of their amortization in December 1995 resulted in the decrease in deferred operating expenses. For 1995. operating revenues were 32% residential. 30% See Note 7(d). Depreciation and amortization expenses commercial. 31% industrial and 7% other, and kilowatt-I increased primarily because of a 512 million net increase hour sales were 23% residential. 25% commercial. 409 in depreciation related to changes in depreciation rates, as industrial and 12% other. The average prices per kilowatt-discussed in Note 1(d) and the cessation of the acceler- hour for residential, commercial and industrial customers ated amortization of unrestricted investment tax credits were i 1.02. 9.70 and 6.39 cents, respectively. The changes under the 1(ate Stabilization program, which was from 1994 were not significant. reported in 1995 as a $10 million reduction of deprecia- ! tion. Other operation and maintenance expenses in 1996 Operating expenses increased 4.5% in 199.. Fuel and included a 523 million one-time charge for the disposition purchased power expenses increased as higher fuel of inventory as part of a reengineering of the supply chain expense was partially ofTset by lower purchased power process. Itcengineering the supp!) chain process increases expense. The higher fuel expense was attributable to the use of technology. consolidates warehousing and uses inercased pencration and more amortization of previous!)
.iust-in-time purchase and delivery. Federal income taxes deferred fuel costs than the amount amortized in 1994.
decreased as a result of lower pretax operating income. The higher other operation and maintenance expenses resulted primarily from charges for an ongoing inventory A nonoperating loss resuhed in 1996 primarily from reduction program and the recognition of costs associated Toledo Edison's SI1 million write-down of two inactive with preliminary engineering studies. Federal income production facilities, as discussed in Note 14. and merger- taxes increased as a result of higher pretax operating related expenses. The deferral of carrying charges related income. Taxes, other than federal income taxes. increased to the 1(ate Stabilization program ended in November primarily due to property tax increases resulting from j 1995. The federal income tax credit for nonoperating plant additions, real estate valuation increases and a i income increased in 1996 accordingly, nonrecurring tax credit recorded in 1994. i [Cemenor Energy] F8 (Cemerior Energy)
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i Report of Independent in our opinion. ihe Im. mci.d st.nements referred to abmc ' Public Accountants present iairi3 . in all maiai.d respects. ihe rm. mad posi. ! lo the Sharc Duners and lion of Centenor Lnergy Corporanon and subsisaries as l lioard of ihrectors of of Deamba 31.1% and 19n and the resuhs of their ' Centerior 1.nergy Corporation opa.uions and their cash llows for each of the three years ; in the period ended December 31. 1996 in conformit) ' We hase audited the accompanying consolidated balance with generally accepted accounting principles. sheel and consolidated statement of capitali/ation of l Centerior Energy Corporation (an Ohio corporation) and Our audits were made for the purpose of forming an subsidianes as of December 31.1996 and 1995, and the opinion on the basic financial statements taken as a related consolidated statements of income, retained earn- w hole. The schedule of Centerior Energy Corporation and ings and cash flows for each of the three years in the subsidiaries listed in the index to Schedules is presented period ended December 31, 1996. These financial state- for purposes of complying with the Securities and i ments and the schedule referred to below are the respon- Exchange Commission's rules and is not part of the basie sibility of the Company's management. Our responsibility financial statements. This schedule has been subjected to is to express an opinion on these financial statements the auditing procedures applied in the audits of the basic based on our audits. financial statements and, in out opinion, fairly states in all
%.c conducted our audits m accordance with generally material respects the financial data required to be set
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accepted auditing standards. Those standards require that forth therein in relation to the basie financial statements we plan and perform the audo. to obtain reasonable taken as a whole. assurance about w hether the financial statements are free of material misstatement. An audit includes euunining. l on a test basis, evidence supporting the amounts and ' disclosures m. the finanem. l statements. An audit also AltTilUlt ANDEllSEN LLP : includes assessing the accounting principles used and I significant estimates made by management, as well as esaluating the overall financial statement presentation. Cleveland. Ohio We believe that our audits provide a reasonable basis for 17ebruary 14,1997 our opinion. l lCenterior Energr} F-4 lCenterior Energv]
income Statsment c ." - t ~"n o t~~' - .s s ^"'w~ lbr the scars ended December 31. 1996 1995 1994 timllons of dollarn. csecpl per sharc amountn) Operating Resenues M $2.516 $2.421 Operating Expenses Fuel and purchased power 465 465 442 Other operation and maintenance 635 617 595 Generation facilities rental expense, net 159 160 160 Total operation and maintenance 1,259 1,242 1,197 Depreciation and amoitization 304 281 278 Taxes, other than federal income taxes 320 322 309 Amortization of deferred operating expenses, net 43 (53) (55) Federal income taxes 11l 1,1s ll4 2.037 1.927 1.843 Operating lucome 516 5x9 578 Nonoperating income (loss) Allowance for equity funds used during construction 3 3 5 Other income and deductions, net 6 (17) 8 Deferred carrying charges - 43 40 Federal income taxes-credit (expense) 9 (5) (6) (5) 47 47 income liefore Interest Charges and Preferred Diiidends SI1 636 _,Q interest Charges and Preferred Diiidends Debt interest 337 358 361 Allowance for borrowed funds used during construction (3) (3) (6) Preferred dividend requirements of subsidiaries 56 61 66 390 416 421 Net income $ 121 $ 220 $ 204 Aterage Number of Common Shares Outstanding (millions) 14R 0 14R 0 147 R Earnings Per Common Share 5 R2 $ I 49 5 i 1R Diiidends Declared Per Common Share $ R0 $ K0 $ R0 Retained Earnings For the years ended December 31. 1996 1995 1944 (millions of dollars) Hetained Earnings (Deficit) at fleginning of Year $f336) 5(43S) $(523) Additions Net income 121 220 204 Deductions Common stock dividends (118) (118) (118) Other, including preferred stock redemption expenses of subsidiaries (1) - (1) Net increase 2 10; 85 Retained Earnings (Deficit) at End of Year S(134) S(116) t(4tR) The accompanying notes are an integralpart of these statements. [Centerior Energv} F.10 [Centerior Energy]
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i a ?' 4 4 lTiiss PAGE INTR:NTIONAny Lgg7 })L4gg) i I I l I
\
[Centerior Energ) p_ g [Centerior Energy)
Balance Sheet I)ecember 3I m 1996 1995 I milln.ns of ti.dl.nq ASSETS l'roperty. I'lant and Equipment Utility plant in service $ 9,867 $ 9,768 Less: accumulated depreciation and amortization 3.272 3.036 6,595 6,732 Construction work in progress 79 10[ 6,674 6,833 Nuclear fuel, net of amorti/ation I89 200 Other property, less accumulated depreciation 89 102 6.9 52 7.135 Current Assets Cash and temporary cash investments 138 179 Amounts due from customers and others, nel 201 223 Unbilled revenues 12 100 Materials and supplies, at merage cost Ow ned 85 1.' l Under consignment 34 - Taxes applicable to succeeding years 250 255 Other 24 18
. 744 926 .
Hegulatory and Other Assets Regulatory assets 2,278 2,375 Nuclear plant decommissioning trusts 140 114 Investment in partnership 23 - Other 73 93 2.514 2.582 l Total Assets Slo.?lo $ 10 641 1 l The accompanying notes are an integral part of this statement. \ l l
)
l l l l l l l l [Centerior Energv] F-l2 [Centerior Energv]
< < or r. r,.,,1,,. co c,,,p, raw,,, a,a .susus,a,i,..
_l)ecsmberli m 1996 1995 ( emlhorn id dollars) CAPITALIZATION AND LIABILITIES Capitalisation I Comnwn stock equity 5 i,987 $ i,984 l' referred stock With mandatory redemption provisions 189 220 Without mandatory redemption provisions 448 45) Long-term debt 3.444 _j 734 6.068 6.389 Current 1. labilities l current portion of long-term debt and preferred stock 196 235 Current portion of nuclear fuel lease obligations 88 95 Accounts payable 138 153 1 Accrued taxes 389 374 Accrued interest 75 83 Other 86 x7 1 972 1 027 I l
!)eferred Credits and Other 1.iabilities l Unamortized investment tax credits 252 263 Accumulated deferred federal income taxes 1,877 1,875 Unamortized gain from Bruce Mansfield Plant sale 475 499 Accumulated deferred rents for Bruce Mansfield Plant and Beaver Valley Unit 2 138 145 Nuclear fuel lease obligations 123 137 Itetirement benefits 184 179 Other l'd .129 1.]70 3 227 Total Capitalization and Liabilities $10 210 S10441 i
O lCenterior Energy] 7.g3 (Centerior Energy]
Cash Flows t -,- i -. < +-e ms %./- l'or the 3 cars ended December 11,_ 1996 ,M 1994 (nulhon of dollm) Cash I' lows from Operating Actiiities (1) Net lneome $ 121 $ 220 1.J14 Adjustments to Reconcile Net Income to Cash from Operating Actisities: - Depreciation and amortization 304 281 278 Deferred federal income taxes 42 72 95 Unbilled revenues (3) (7) 31 Deferred fuel 17 6 (17) Deferred carrying charges - (43) (40) Leased nuclear fuel amortization 79 125 98 Amortization of deferred operating expenses, net 43 (53) (55) Allowance for equity f unds used during construction (3) (3) (5) Changes in amounts due from customers and others, net (10) (12) 10 Net proceeds from accounts receivable securitiration 143 - - Changes in materials and supplies 32 17 - 3 Changes in accounts payable (15) 9 (44) Changes in working capital alTecting operations 6 (10) - Other noncash items (18) 9 14 l Total Adjustments _(d7 391 365 Net Cash from Operating Activities 738 6lI 569 Cash Flows from Financing Actisities (2) First mortgage bond issues - 542 77 Common stock issues - - 12 Maturities, redemptions and sinking funds (363) (683) (214) Nuclear fuel lease obligations _ (90) (102) (l10) Common stock dividends paid (118) (118) (118) Premiums, discounts and expenses (1) (17) (1) Net Cash from Financing Activities (s7?) (378) (354) Cash Flows from Iniesting Actisities (2) Cash applied to construction (151) (201) (205) Interest capitalized as allowance for borrowed funds used during construction (3) (3) (6) 1 Contributions to nuclear piant decommissioning trusts (22) (24) (26) Investment in partnership (23) - - Other cash applied (8) (12) (17) Net Cash from investing Activities (207) (240) (254) l Net Change in Cash and Temporary Cash Imestments (41) (7) (39) t Cash and hmporary Cash Ir.iestments at Heginning of Year _ 179 186 225 Cash and Temporary Cash Insessments at End of Year S I18 $ 179 s 186 (l) Interest paid (nel of amounts capitali:cd) $ UR $ 406 $ thn Federal income taxes paid $ Jn S x0 S n (2) Increases in Nuclear Fuel and Nuclear Fuel Lease obligations in the llalance Sheet resulting from the noncash capitali:ations under nmlearfuel agreements are excludedf om this statement. The accompanying notes are an integral part of this statement. l l l [Centerior Energe] F.14 (Centerior Energe]
Statement of Capitalization r ,,u,.,,,,, r,, ,,, c,,,y,,o,,,,,, ,,,a s # ,s ..., DecembeOJ 19u6 l ts t (milhons of di.tlaro CO%1N10N STOCK EQt'ITY: Common shares, without par value (stated value of $357 millien for both 1996 and 1995): 180 million authorized,148 milhon (excluding .2.7 million shans in 7reasury) outstanding in both 1995 and 1994 $2,321 $2.320 Retained earnings (deficit) (334) (3%) Total Common Stock Equity 1.987 1.9x4 Current 1996 Shares Call Price Outstandine Per Share PREFl:RRED STOCK: Ciescland Electric Without par value, 4.000,000 preferred shares authorized Subject to mandatory redemption:
$ 7.35 Series C 120,000 $ 101.00 12 13 88.00 Series E 12.000 1,011.48 12 15 9.125 Series N 150.000 100.00 15 30 91.50 Series Q 53,572 1,000.00 54 64 88.00 Series R 50,000 -
50 50 90.00 Series S 74,000 - 73 73 i 216 245 Less: Current maturities 30 . To 186 21 Not subject to mandatory redemption: 4
$ 7.40 Series A 500.000 101.00 50 50 7.56 Series 11 450.000 102.26 45 45 '
Adjustable Series L 474.000 100.00 46 49 42.40 Series T 200,000 - 97 97 238 241 4 Toledo Edison
$100 par value, 3.000,000 preferred shares authorized,
$25 par value, 12.000,000 preferred shares authorized Subject to mandatory redemption:
$100 par $9.375 50,200 100.99 5 7 5 7 Less: Current maturities 2 2 3 5 Not subject to mandatory redemption:
$100 par $4.25 160,000 104.625 16 16 4.56 50,000 101.00 5 5 4.25 100,000 102.00 10 10 8.32 100,000 102.46 10 10 7,76 150,000 102.437 15 15
{ 7.80 150,000 101.65 15 15 10.00 190.000 101.00 19 19 25 par 2.21 1,000,000 25.25 25 25 2.365 1,400,000 27.75 35 35 Series A Adjustable 1,200,000 25.00 30 30 Series B Adjustable 1,200,000 25.00 30 30 210 210 Centerior Energy Without par value, 5,000,000 preferred shares authorized, none outstanding - - Total Preferred Stock, with Mandatory Redemption Provisions 189 ._23! Total Preferred Stock, without Mandatory Redemption Provisions 448 451 The accompanying notes are on integralpart of this statement. [Centerior Energy) F-15 (Centerior Energy)
I Statoment of Capitalization (conia. o December 31. December 31. December 31. 1996 1995 1996 1995 1996 1995 (nulhons of doll.in) (millionn of dollan) (nuthons of doll. irs) 1.ONG-TEint DI:llT: Cleieland Electric Toledo 1 dison First mortgage Imnds: 7.625% due 2002 $ 195 $ 245 6.125% duc 1997 5 31 $ 31 7.375% duc 2003 100 100 7.250% duc 1999 85 100 9.5007 due 2005 300 300 7.500% due 2002 26 26 8.750% duc 2005 75 75 8.fXXYL duc 2003 36 36 10.8k0% due 2006 - 50 7.875% duc 2004 145 145 9.250% duc 2(K)9 50 50 E.375% duc 2011 125 125 h.375% dt.e 2012 75 75 9.375% due 2017 300 300 10.(MXn duc 2020 100 100 9.0(K4 due 2023 _ 150 150 1.470 1J70 _M 338 1,793 1,908 Tut-exempt issues secured by first mortgage bonds: 7.000% duc 2006-09_ 64 64 10.000% duc 1998 I i 6.00(f4 due 2011" 6 6 3.700% duc 2011** 31 31 6 000% due 2011" 2 2 8.000% duc 2019 67 67 6.2(KYL duc 2013 48 48 7.625% due 2020 45 45 8 0(KYL duc 2013 79 79 7.750% due 2020 54 54 3.5(Kn due 2015" 40 40 7.400% due 2022 31 31 6 000% due 2017" 1 I 9.875% due 2022*" _ 10 10 3.5(K4 due 2018" 73 73 7.550% duc 2023 37 37 6.fKXn due 2020" 41 41 6.875% duc 2023 20 20 6.000% due 2020" 9 9 8.000% duc 2023 50 50 9.750% duc 2022"* _ 70 70 6 850% due 2023 30 30 8.0(K4 due 2023 73 73 7.625% duc 2025 54 54 7 750% duc 2025 45 45 7,700% duc 2025 44 44 679 679 346 346 1,025 1,025 Medium-term notes secured by first mortgage bonds: 8.700% due 1996 - 20 9.050% due 1996 - 10 9.100% duc 1996 - 32 9.000% due 1996 - 3 9.110% due 1996 - 13 9.300% due 1998 26 26 9.000% duc 1996 - 13 8.000% due 1998 7 7 ) 9.140% due 1996 - 12 7.940% due 1998 5 5 1 9.050% due 1996 - 10 8.470% duc 1999 4 4 8.950% due 1996 - 40 7.720% duc 1999 15 15 9.450% due 1997 43 43 7.500% due 2000 *
- 9.000% due 1998 5 5 7.380% duc 2000 14 14 8.870% due 1998 10 10 7.460% due 2000 17 17 l 8.260% duc 1998 2 2 9.500% duc 2001 21 21 S.330% due 1998 25 25 8.500% duc 2001 8 8 S.170% duc 1998 II i1 8.620% duc 2002 7 7 8.150% due 1998 8 8 S.650% due 2002 5 5 8.160% duc 1998 5 5 8.180% due 2002 17 17 i 9.250% due 1999 52 52 7.820% duc 2003 37 37 l 9.300% due 1999 25 25 7.850% due 2003 15 15 7.670% due 1999 3 3 7.760% due 2003 5 5 7.250% due 1999 12 12 7.910% duc 2003 3 3
)
7.850% due 1999 25 25 7.780% due 2003 I I ? l 7.770% duc 1999 17 17 10.000% duc 2021 15 15 y I 8.290% duc 1999 10 10 9.220% due 2021 15 15 9.200% duc 2001 15 15 7.420% due 2001 10 20 9.050% duc 2001 5 5 l [Centerior Energ] F-16 [Centerior Energ]
i Stctam nt of Capitalization icoa.,ousal December 31. December 31. Deccmber 31. l 1996 1995 1996 1995 1996 1995 l a tudhons of dull. irs) { nulhons of dall.ir4 t nullions of doll. irs) 1 ONG-TERM DEllT: (Continued) Cicsciand Electric Toledo Edison Medium term notes i.ecured by first mortgage bonds: (Continued) 8.680% duc 2001 15 15 8.540% due 2001 3 3 8.560% duc 2001 4 4 8.550% duc 2001 5 5 7.850% due 2002 5 5 8.130% due 2002 28 28 , 7.750% due 2003 15 15 l 9.520% duc 2021 8 _ ,H l 366 516 D7 250 603 766 l' Tax-exempt notes: 6.500% duc 1996 - 3 5.750% due 2003 4 4 5.500% due 1997 J0.00(YE duc 2010 t t 6.700% duc 2006 20 21
=
5.700% due 2008 7 8 6.700% duc 20ll 6 6 5.875% duc 2012 14 14 47 g 5 5 52 57 Ilank loans secured by subordinate mortpge: 7.500% duc 1996 - 2 9.050% due 1996 - 25 7.5(KYk due 1996 - 2 2 - 27 - 29 Notes secured by subordinate mortgage: 10.060% due 1996 - 14 8.750% due 1997 N II , 8 U 8 25 l Debentures: l 8.700% due 2002 135 135 135 135 Unamortized premium (discount), net: (6) (6) (2) (2) (8) (8) 2.556 1813 1,052 1,124 3,608 3,937 Less: Current maturities 115 147 49 56 164 203 Total Long-Term Debt 12 441 $2 666 $ 1003 $t n6s 3.444 3.734 TOTAL CAPITAllZATION $6.06H $6189 i l
- Denotes debt ofless than $1 million. l
" Denotes variable rate issue with December 31,1996 interest rate shown. i
*" Subject to optional tender by the owners on November 1,1997.
i l l L l l l l [Centerior Energv] F-17 [Centerior Energv] i l
1 l Notes to the Financial Statements (b) asv:nu2s ) (7) Summary of Significant Accounting Customers are billed on a monthly cycle basis for their Policies energy consumption based on rate schedules or contracts 1 authorized by the PUCO or on ordinances of indisidual j (a) General municipalities. An accrual is made at the end of each I month to record the estimated amount of unbilled reve- i Centerior Energy is a holding company with two electric nues for kilowatt-hours sold in the current month but not utikty subsidiaries, Cleveland Electric and Toledo Edison-billed by the end of that month. with service areas in Northern Ohio. The consoodated h.nancial statements also .melude the accounts of Center- A fuel factor is added to the base rates for electric service. nor E.nergy s wholly owned subsidiary, Centerior Service This factor is designed to recover from customers the C,ompany (Service Company), and its three other whdiv costs of fuel and most purchased power,11 is reviewed and owned subsidiaries, which m. the aggregate are not mate; adjusted semiannually in a PUCO proceeding. See Man-agement's Financial A nalysis - Outlook-First Energy nal. The Serv. ice Company provides management, finan-cial, administrative, engineering. legal and other serv.ices Rate Plan. at cost to Centerior Energy, the Operating Companies (c) Fuel Expense and the other subsidiaries. The Operating Companies operate as separate companies, each serving the custom- De et of f ssH fuelis charged to fuel expense based on ers in its service area. The preferred stock, first mortgage inventory usage. The cost of nuclear fuel, including an bonds and other debt obligations of the Operating Com- interest component, is charged to fuel expense based on panics arc outstanding securities of the issuing utility. All the rate of consumption. Estimated future nuclear fuel significant intercompany items have been eliminated in disposal costs are being recovered through base rates. c nsolidation. The Operating Companies defer the differences between actual fuel costs and estimated fuel costs currently being Centerior Energy and the Operating Companies follow-recosered from customers through the fuel factor. This the Uniform System of Accounts prescribed by the matches fuel expenses with fuel-related revenues. FERC and adopted by the PUCO. Rate-regulated utili-ties are subject to SFAS 71 which governs accounting for Owners of nuclear generating plants are assessed by the the efTects of certain types of rate regulation. Pursuant to federal government for the cost of decontamination and l SFAS 71, certain incurred costs are deferred for recovery dec mmissi ning f nuclear enrichment facilities oper-m f.uture rates. See Note 7(a). The Serv. ice C,ompany ated by the United States Department of Energy, The follows the Uniform System of Accounts for Mutual assessments are based upon the amount of enrichment Service Companies prescribed by the Securities and seMees used in pdor years and cannot & impM for . Exchange Commission (SEC) under the Public Utih.ty more than 15 years (to 2007).The Operating Companies ! Holding Company Act of 1935. have accrued the liability for their share of the total assessments. These costs have been recorded as a regula-The preparation of financial statements in conformity tory asset since the PUCO is allowing the Operating with generally accepted accounting principles requires Companies to recover the assessments through their fuel management to make estimates and assumptions that c st factors. See Note 7(a). affect the reported amounts of assets, liabilities, revenues (d) Depreciation and Decommissioning and expenses, and the disclosure of contingent assets and liabilities. The estimates are based on an analysis of the The cost of property, plant and equipment is depreciated best information available. Actual results could differ over their estimated useful lives on a straight-line basis. ' from those estimates. In its April 1996 rate order, the PUCO approved changes in depreciation rates for the Operating Companies. An j l The Operating Companies are members of the Central increase in the depreciation rate for nuclear property from ' ) Area Power Coordination Group (CAPCO). Other 2.5% for both Operating Companies to 2.88% for Cleve- 1 l members are Duquesne Light Company, Ohio Edison and land Electric and 2.95% for Toledo Edison increased ' l its wholly owned subsidiary, Pennsylvania Power Com- annual depreciation expense approximately $2l million pany. The members have constructed and operate genera- for Centerior Energy. A reduction in the composite depre-tion and transmission facilities for their joint use. ciation rate for nonnuclear property from 3.34% to 3.23% (Centerior Energy) F.l8 [Centerior Energy]
for Cleveland Liectne and from 336% to 3.1% for includes 5155 million of decomminioning costs presi-Toledo Edison decreased annual depreciation expense by ously expensed and the carnings on the external trust approximately 55 million for Centerior linergs The funding. This amount exceeds the llalance Sheet amount changes in depreciation rates were cliective in April 1996 of the external Nuclear Plant Decommissioning Trusts and resulted in a 512 million net increase in 1996 depreci- because the reserve began prior to the external trust ation expense. funding. The trust earnings are recorded as an increase to The Operating Companies accrue the estimated costs of the trust assets and the related component of the decom-i decommissioning their three nuclear generating units. nssi ning reserve (included in Accumulated Deprecia-The accruals are required to be funded in an external ti n and Amortization). trust. The PUCO requires that the expense and payments The stalf of the SEC has questioned certain of the current to the external trusts be determined on a levelized basis accounting practices of the electric utility industry, by dividing the unrecovered decommissioning costs in including those of the Operating Companies, regarding current dollars by the remaining years in the licensing the recognition, measurement and classification of period of each unit. This methodology requires that the decommissioning costs for nuclear generating stations in net earnings on the trusts be reinvested therein with the the financial statements. In response to these questions, intent of having net earnings olTset inflation. The PUCO the Financial Accounting Standards lioard (FASB) is requires that the estimated costs of decommissioning and reviewing the accounting for removal costs, including the funding level be reviewed at least every five years. decommissioning. If current accounting practices are in April 1996, pursuant to the PUCO rate order, the changed. the annual provision for decommissioning could Operating Companies decreased their annual decommis, increase; the estimated cost for decommissioning could be sioning expense accruals to $22 million from the $24 mil- recorded as a liability rather than as accumulated depreci-tion level in 1995. The accruals are reflected in current ati n; and trust fund income from the external decommis-rates. The accruals are based on adjustments to updated, si ning trusts could be reported as investment income site-specific studies for each of the units completed in rather than as a reduction to decommissioning expense. 1993 and 1994. These estimates reflect the DECON The FASB issued an exposure draft on the subject on method of decommissioning (prompt decontamination), February 7,1996 and continues to review the subject. and the locations and cost characteristics specific to the (e) Property, Plant and Equipment units, and include costs associated with decontamination and dismantlement for each of the units. The estimate for Pr peny, pl nt and equipment are stated at original cost Davis-Besse also includes the cost of site restoration. The less amounts disallowed by the PUCO. Construction costs adjustments to the updated studies which reduced the include related payroll taxes, retirement benefits, fringe { annual accruals beginning in April 1996 were attributable benefits, management and general overheads and allow-to changed assumptions on radioactive waste burial cost ance for funds used during construction ( AFUDC). estimates and the exclusion of site restoration costs for AFUDC represents the estimated composite debt and Perry Unit I and Beaver Valley Unit 2. After the decom- equity cost of funds used to finance construction. This missioning of these units in the future, the two plant sites n neash aHowance is credited to income. The AFUDC l may be usable for new power production facilities or other rates averaged 10.2% in 1996, i1.5% in 1995 and 9.8% in industrial purposes. I994-The revised estimates for the units in current dollars and Maintenance and repairs for plant and equipment are in dollars at the time of license expiration, assuming a 4% charged to expense as incurred. The cost of replacing annual inflation rate, are as follows: plant and equipment is charged to the utility plant License accounts. The cost of property retired plus removal costs, Genmnne Unit A moun} o it after deduCling any Salvage Value, is charged to the (rnithons of accumulated provision for depreciation. dollars) Davis-Besse 2017 5342 5 877 Perry Unit i 2026 217 791 (f) Deferred Gain and Loss from Sales of Utility Beaver Valley Unit 2 2027 _92 %9 Plant Total m6 57 m7 The sale and leaseback transactions discussed in Note 2 The classification, Accumulated Depreciation and Arnor- resulted in a net gain for the sale of the Bruce Mansfield tization .in the Balance Sheet at December 31, 1996 Generating Plant (Mansfield Plant) and a net loss for the (Centerior Energy) F-19 lCenterior Energy]
.- . ~ - - . .. - . - - . . - - - - - - _ _ _ . . - - - ~ . _ . - ~
sale of Beaser Valley Unit 2. T he nel gain and net loss ment for financial reporting purpoi.cs. Costs associated l , were deferred and are being amorti/ed over the terms of with the sale totaling $5 million in 1996 are included in the leaset See Note 7(a). These amorti/ations and the Other income and Deductions. Net in the income State- i lease expense amounts are reported in the income State- ment.These costs are expected to he $11 million annually ; ment as Generation Facilities Rental Expense, Net. over the remaining period. (g) Interest Charges (j) Materials and Supplies Debt Interest reported in the income Statement does not in December 1996, the Operating Companies sold sub. l include interest on obligations for nuclear fuel under stantially all of their materials and supplies and fossil fuel ! construction. That interest is capitalized. See Note 6. inventories for certain generating units and other storage l locations to an independent entity at book value. The Losses and gains realized upon the reacquisition or buyer now provides all of these inventories under a con-redemption of long-term debt are deferred, consistent signment arrangement. In accordance with SFAS 49 with the regulatory rate treatment. See Note 7(a). Such accounting for product financing arrangements, the inven- ; losses and gains are either amortized over the remainder tories continue to be reported as assets in the Balance l of the original life of the debt issue retired or amortized Sheet even though the buyer owns the inventories since over the life of the new debt issue when the proceeds of a the Operating Companies have guaranteed to be buyers of new issue are used for the debt redemption. The amorti- g i 9 7.ations are included in debt interest expense. (k) AT&T Telecommunications Partnership (h) FederalIncome Taxes in April 1996, a wholly owned subsidiary of Centerior h We use the liability method of accounting for income Energy and an AT&T Wireless Services (Wireless) sub-taxes in accordance with SFAS 109. See Note 8. This sidiary entered into a 25%/75% partnership called AT&T method requires that deferred taxes be recorded for all PCS Cleveland, LLC. The partnership will operate a temporary differences between the book and tax bases of ( personal communications services network which will I assets and liabilities. The majority of these temporary provide wireless communications services to Northeast j difTerences are attributable to property-related basis dif- Ohio and Western Pennsylvania pursuant to licenses l ferences. Included in these basis differences is the equity owned by Wireless. The total investment of the Centerior l component of AFUDC, which will increase future tax . Energy subsidiary in the partnership at December 31, 5 expense when it is recovered through rates. Since this 1996 is $23 million. component is not recognized for tax purposes, we must record a liability for our tax obligation. The PUCO (2) Utility Plant Sale and Leaseback ! permits recovery of such taxes from customers when they Transactions I become payable. Therefore, the net amount due from i customers through rates has been recorded as a regulatory The Operating Companies are co-lessees of 18.26% (150
)
asset and will be recovered over the lives of the related megawatts) of Beaver Valley Unit 2 and 6.5% (51 mega- i w tts),45.9% (358 megawatts) and 44.38% (355 mega-assets. See Note 7(a). watts) of Units 1, 2 and 3 of the Mansfield Plant, investment tax credits are deferred and amortized over respectively. These leases extend through 2017 and are the lives of the applicable property as a reduction of the result of sale and leaseback transactions completed in depreciation expense. 19g7, (i) Accounts Receivable Securitization Under these leases, the Operating Companies are respon-sible for paying all taxes, insurance premiums, operation in May 1996, the Operating Companies began to sell on a and maintenance expenses, and all other similar costs for daily basis substantially all of their retail customer their interests in the units sold and leased back. They mav accounts receivable and unbilled revenue receivables t incur additional costs in connection with capital improve-Centerior Funding pursuant to a five-year asset-backed ments to the units. The Operating Companies have securitization agreement. options to buy the interests back at certain times at a in July 1996, Centerior Funding completed a public sale premium and at the end of the leases for the fair market of $150 million of receivables-backed investor certificates value at that time or to renew the leases. The leases in a transaction that qualifies for sale accounting treat- include conditions for mandatory termination (and possi- j i (Centerior Energy] F.20 [Centerior Energe]
ble repurchase ut the leaschuld interests) upon certain ncrship h Lquipment esents of default, Mcpwatts itslume of Accumulahd
^""""" ' ^# """""
I utuf e minimum lease pa}ments under the operating (milhuns of dollars) Icases at 1)ccember 31,1996 are summari/ed as follows: seneca rumped smrm _ 3M n0M ) 5 65 5 N Year
~
A mount LahilAe Unit 5 411 (6uo) 161 - (milhons of Perry Unit i 609 ($102) 2.h:2 636 dollars) licaver Valley Unit 2 and 1997 5 163 Common racihtics im 165 (Note 2) 214 (26.12) L4% 377 1999 178 To:.J $4 un u n17 2000 187 2001 ik6 Depreciation for Eastlake Unit 5 has been accumulated Laier Yean, 2A66 with all other nonnuclear depreciable property rather than Total Future Minnnum Lease Payments 5 0 .17 , hy specih.c umts of deprec.ia ble property. Rental expense is accrued on a straight-line basis over the terms of the leases. The amount recorded in 1996,1995 (4) Construction and Contingencies and 1994 as annual rental expense for the Manslicld Plant (a) Construction Program leases was $115 million. The amounts recorded in 1996, The estimated cost of our construction program for the 1995 and 1994 as annual rental expense for the Beaver 1997 2001 period is $905 million, including AFUDC of Valley Unit 2 lease were $63 million, $63 million and
$25 million and excluding nuclear fuel.
564 million, respectively. See Note 1 (f). Amounts charged to expen.se in excess of the lease payments are The Clean Air Act Amendments of 1990 (Clean Air
^ "4 * " "* E * " ' " " E *' * ' E * ""' ' ""
classified as Accumulated Deferred Rents in the Balance the emission of sulfur dioxide and nitrogen oxides by fossil-fueled generating units. Our strategy provides for Toledo Edison is selling 150 megawatts of its Beaver compliance primarily through greater use of low-sulfur Valley Unit 2 leased capacity entitiement to Cleveland coal at some of our units and the use of emission Electric. We anticipate that this sale will continue allowances. Total capital expenditures from 1994 through indefinitely. 1996 in connection with Clean Air Act compliance amounted to $36 million. The plan will require additional (3) Property Owned with Other Utilities capital expenditures over the 1997-2006 period of approx-and Investors imately 542 million for nitrogen oxide control equipment The Operating Companies own, as tenants in common -and other plant process modifications. In addition, higher with other utilities and those investors who are owner- fuel and other operation and maintenance expenses will participants in various sale and leaseback transactions be incurred. Recently proposed particulate and ozone (Lessors), certain generating units as listed below. Each ambient standards have the potential to increase future onner owns an undivided share in the entire unit. Each compliar w costs.' - ouner has the right to a percentage of the generating capability of each unit equal to its ownership share. Each (b) Hazardous Waste Disposa! Sites utility owner is obligated to pay for only its respective ne Operating Companies are aware of their potential share of the construction costs and operating expenses. involvement in the cleanup of three sites listed on the Each Lessor has leased its capacity rights to a utility Superfund List and several other sites. The Operating uhich is obligated to pay for such Lessor's share of the Companies have accrued a liability totaling $10 million at construction costs and operating expenses. The Operating December 31, 1996 based on estimates of the costs of Companies' share of the operating expenses of these cleanup and their proportionate responsibility for such generating units is included in the income Statement. costs. We believe that the ultimate outcome of these The Balance Sheet classification of Property, Plant and matters will not have a material adverse effect on our Equipment at December 31,1996 includes the following financial condition, cash flows or results of operations. See facilities owned by the Operating Companies as tenants in Management's Financial Analysis-Outlook-Hazardous common with other utilities and Lessors: Waste Disposal Sites. [Cemerior Energy] F 21 (Cemerior Energy]
j (5) Nucisar Operations and 104 weeks. The amount and duration of extra expense
- Contingencias could substantially eseced the insurance coverage.
(a) Operating Nuclear Units 1 (6) Nuclear Fuel
- Our three nuclear units may be impacted by activities or Nuclear fuel is financed for the Operating Companics
{ events beyond our control. An extended outage of one of through leases with a special-purpose corporation. The i our nuclear units for any reason, coupled with any unfa. total amount of financing currently available under these i vorable rate treatment, could have a material adverse lease arrangements is $273 million ($173 million from l cfTect on our financial condition, cash flows and results of intermediate-term notes and $100 million from bank operations. See the discussion of these and other risks in credit arrangements). The intermediate-term notes
- Management's Financial Analysis - Outlook-Nuclear mature in the 1997 through 2000 period. The bank credit Operations. arrangements terminate in October 1998. The special-i l
purpose corporation may not need alternate financing in 1
- (b) Nuclear insurance 1997 to replace $83 million of maturing intermediate-
- t J
term notes. At December 31,1996, $216 million of i The Pn.ce-Anderson Act limits the public liabih.ty of the 4 4 owners of a nuclear power plant to the amount provided nuclear fuel was fmanced. The Operating Companies a severally lease their respetive portions of the nuclear fuel
- by private insurance and an m. dustry assessment plan. In
!' . . and are obligated to pay for the fuel as it is consumed in a the event of a nuclear m.eident at any unit m the United States resultmg m losses m. excess of the level of private reactor. The lease rates are based on various intermedi-i .
ate-term note rates, bank rates and commercial paper insurance (currently $200 million), our maximum poten-j tial assessment under that plan would be $155 million per l incident. The assessment is limited to $20 million per year The amounts fmanced include nuclear fuel in the Davis-
- for each nuclear incident. These assessment limits assume Besse, Perry Unit I and Beaver Valley Unit 2 reactors j the other CAPCO companies contribute their proportion- with remaining lease payments of $92 million, $77 million j ate share of any assessment for the generating units that and $32 million, respectively, at December 31,1996. The l they have an ownership or leasehold interest in. nuclear fuel amounts financed and capitalized also j
included interest charges incurred by the lessors amount- } The utility owners and lessees of Davis-Besse, Perry and ing to'$4 million in 1996, $5 million in 1995 and $11 mil-l Beaver Valley also have insurance coverage for damage t lion in 1994. The estimated future' lease amortization property at these sites (including leased fuel and cleanup payments based on projected consumption are $88 million
; costs). Coverage amounted to $1.3 billion for Davis-Desse in 1997, $69 million in 1998, $67 million in 1999 and and $2.75 billion for each of the Perry and Beaver Valley
$62 million in both 2000 and 2001.
j sites as of January 1,1997. Damage to property could exceed the insurance coverage by a substantial amount. If (7) Regulatory Matters { it does, our share of such excess amount could'have a (a) Regulatory Accounting Requirements and { material adverse effect on our fmancial condition,' cash Regulatory Assets L flows and results of operations. In addition, we can be I assessed a maximum of $22 million under these poh. .cies The Operating Companies are subject to the provisions of i during a policy year if the reserves available to the insurer SFAS 71 and have complied with its provis. ions. SFAS 71 . i , are inadequate to pay claims arising out of an accident at provides, among other th.mgs, for the deferral of certain ' any nuclear facility covered by the insurer. incurred costs that are probable of future recovery in j rates. We monitor changes m. market and regulatory We also have extra expense insurance coverage.' It conditions and consider the efTects of such changes in includes the' incremental cost of any replacement power assessing the continuing applicability of SFAS 71. Crite- l purchased (over the costs which would have been ria that could give rise to discontinuation of the applica-incurred had the units been operating) and o'ther inciden- tion of SFAS 71 include: (1) increasing competition tal expenses after the occurrence of certain types of which significantly restricts the Operating Companies' accidents at our nuclear units. The amounts of the cover- ability to charge prices which allow them to recover age are 100% of the estimated extra expense per week operating costs, earn a fair return on invested capital and during the 52-week period starting 21 weeks after an recover the amortization of regulatory assets and (2) a accident and 80% of such estimate per week for the next significant change in the manner in which rates are set by [Centerior Energ] F-22 (Centerior Energy)
the PUCO from cost-based reputation to some other form resaluation of assets. The PUCO invited the Operating of regulation. Regulatory assets represent probable future Companies to hic a proposal to efTectuate the Pl:CO's res enue.s to the Operating Companies associated with recommendation and esprewed a willingnew to consider certain incurred costs, which thev will recover from cus-alternatives to its recommendation. The Pl:CO stated in tomers through the rate-making process. its order that failure by the Operating C.ompanies to follow the recommendation could result in a PUCO-Effective January 1,1996, the Operating Companies ordered write-down of assets for regulatory purposes. The adopted SFAS 121 which imposes stricter criteria for PUCO appmved a return on common stock equity of carrying regulatory assets than SFAS 71 by requiring that 12.59% and an overall rate of return of 10.06% for both such assets be probable of recovery at each halance sheet Operating Companies. Ilowever, the PUCO also indi-date. The eriteria under SFAS 121 for plant assets require cated the authorized return could be lowered by the such assets to be written down if the book value exceeds PUCO if the Operating Companies do not implement the the projected net future undiscounted cash flows. recommendation. In August 1996, various intervenors Regulatory assets in the Balance Sheet are as follows: appealed the PUCO rate order to the Ohio Supreme Daember it. Court.The Operating Companies did not appeal the order two tws to the Ohio Supreme Court. In connection with the tmgns of PUCO order discussed in Management's Financial Amounts due from customers for future federal Analysis - Outlook-FirstEnergy Rate Plan, certain par-ineame tases, net 51.025 51.n67 ties agreed to request a stay of their appeals until comple-Unamurtiicd loss from Heaver Valley Umt 2 sale _ 92 96 Unamortiecd loss on reacquired debt b2 k9 tion of the pending merger with Ohio Edison. Pre-phase-in deferrals' 535 553 Rate Stabilization Program deterrals 480 500 Other 64 70 (c) Assessment Total 5? ?w s? m The Operating Companies agree with the concept of
- Represent deferrals of operating capenses und carrying charges for accelerating the recognition of costs and recovery of assets Perry Unit I and Beaver Valley Unit 2 in 1987 and im which are as such concept is consistent with the strategic objective being amortized over the hves of the related property.
m However, the Operating As of December 31, 1996, customer rates provide for Companics believe that such acceleration must also he recovery of all the above regulatory assets. The remaining consistent with the reduction of debt and the opportunity ; recovery periods for about $1.9 billion of the regulatory for Centerior Energy common stock share owners to assets approximate 30 years. The remaining recovery receive a fair return on their investment. Consideration of periods for the rest of the regulatory assets generally range whether to implement a plan responsive to the PUCO's from about two to 20 years. Regulatory liabilities in the recommendation to revalue assets by $1.25 billion is Balance Sheet at December 31,1996 and 1995 totaled pending the merger with Ohio Edison. 537 million and $21 million, respectively. The Operating Companies have evaluated their markets, regulatory conditions and abilities to bill and collect the (b) Rate Order approved prices, and conclude that they continue to On April 11, 1996, the PUCO issued an order for the comply with the provisions of SFAS 71 and their regula-Operating Companies granting price increases aggregat-tory assets remain probable of recovery. If there is a ing $119 rnillion in c.nnualized revenues ($84 million for change in the Operatine Companies' eaaluation of the Cleveland Electric and 535 million for Toledo Edison). competitive environmeni, regulatory framework or other The PUCO rate order provided for recovery of all costs t factors, or if the PUCO significantly reduces the value of provide regulated services, including amortization of regu-the Operating Companid assets or reduces the approved latory assets,in the approved prices. The new pnces were return on common stock equity of 12.59% and overall rate implemented in late April 1996. The average price of retum of 10.06%, or both, for future regulatory pur-increase for Cleveland Electric and Toledo Edison cus- poses, the Operating Companies may be required to tomers was 4.9% and 4.7%, respectively, with the actual record material charges to carnings. In particular, if we percentage increase depending upon the customer class. determine that the Operating Companies no longer meet The Operating Companies intend to freeze prices through the criteria for SFAS 71, we would be required to record a at least 2002, although they are not precluded from before-tax charge to write off the regulatory assets shown requesting further price increases. above. In the more likely event that only a portion of The PUCO also recommended that the Operating Com- operations (such as nuclear operations) no longer meets panies reduce the value of their assels for regulatory the criteria of SFAS 71, a write-off would be limited to purposes by an aggregate $1.25 billion through 2001. This regulatory assets that are not reflected in our cost-based I represents an incremental reduction beyond the normal prices established for the remaining regulated operations. level in nuclear plant and regulatory assets. Implementa- In addition, we would be required to evaluate whether the tion of the price increases was not contingent upon a changes in the competitive and regulatory environment [Centerior Energy] F 23 (Centerior Energv] l
4 which led to discontinuing the application of Si AS 71 to %I1 m%d,.it ] some or all of our operations would also resuh in a write-gn,t , ,u,,, gc g,,, , ,3,,,, , ,com, ., , , sg w, ,, , [ down of property. plant and equipment pursuant to g g _ % ~~ [p{ ; ! U^b I23-Increase (Decre.v.c) m Tac jI 'Pl"f",$,;,, p,,,,,, 1 See Management's Financial Analysis - Outlook- j gyh , l, FirstEnergy Rate Plan for a discussion of a regulatory other nems _; ; ,,,_!2 ,_2 plan for the Operating Companics and its efTect on their Toial Federai lneume Tax Expense . E g g ' , compliance with SFAS 71. For tax reporting purposes, the Perry Nuclar Power c (ci) Rate Stabilization Program Plant Unit 2 (Perry Unit 2) abandonment was recognized The Rate Stabih.zation Program that the PUCO approved in 1994 and resulted in a $327 million loss with a :
. t corresp(mding $114 m.lh.on reduction m federal .mcome i -
in October 1992 allowed the Operat.ing Compam.es to defer and subsequently amortize and recover certain costs tax liability. llecause of the alternative minimum tax (AMT), $65 million of the $114 million was realized in i not bemg recovered m rates at that time. Recovery of both the costs no longer being deferred and the amortization of 1994. The remaining $49 million will not he reatiecd until the 1992-1995 deferrals began m late April 1996 with the 1999. Additionally, a repayment of approximately i 529 m.ll.i ion of previously allowed .investment tax credits implementat. ion of the price increases granted by the ! was recognized in 1994 PUCO as discussed above. The cost deferrals recorded m , 1995 and 1994 pursuant to the Rate Stabilization Pro- i gram were $115 million and $112 million, respectively. Under SFAS 109, temporary differences and carryfor-
- The amortization of the deferrals began in Decem- wards resulted in deferred tax assets of $582 million and .
ber 1995. The total amortization was $20 million and deferred tax liabilities of $2.459 billion at December 31, ;
- $2 million in 1996 and 1995, respectively. 1996 and deferred tax assets of $604 million and deferred tax liabilities of $2.479 billion at December 31, 1995. !
The regulatory accounting measures under the Rate Sta- These are summarized as follows bilization Program also provided for the accelerated December 31- ! amortization of certain benefits during the 1992-1995 period. The total annual amount of such accelerated dollars) [r' j benefits was $46 million in both 1995 and 1994. Propeny, plant and equipment 52.094 52.095 ; Deferred carrying charges and operating cxpenwn ,,,, 218 224 ! (8) Federallocome Tax Net operating loss carryforwards (44) (113) f Investment tax credits (139) (145) l The components of federal income tax expense recorded sale and leaseback transactions (t21) (127) { in the income Statement were as follows: other (IM) 69) l 3YD E D Net deferred tax habihty $1 R77 $1 k75 ! (milhons of dollars) ; Operating Expenses: ! Current 5 79 5 88 5 70 For tax purposes, net operating loss (NOL) carryforwards Deferred ! J 47 44 of approximately $125 million are available to reduce e Total Charged to Operatmg Expense %,,,,,, _L),1 L1 !,14 Nonoperating locome: k be d W #m b M h M { Curreni (19) (20) (45) tax effect of the NOLs is $44 million. Additionally, AMT , Dercrred - 10 -E 21 credits of $275 million that may be carried forward ! Total Expense (Credit) to Nunoperating Income indefinitely are available to reduce future tax. I _L9 ) m ,,,,,,,ft Total Federal Income Tax Expense Sin? S t .tn 5t?n l (9) Retirement Benefits t The deferred federal income tax expense results from the , temporary dilTerences that arise from the different years (a) Retirement income Plan ; when certain expenses are recognized for tax purposes as ! opposed to financial reporting purposes. Such temporary We sponsor a noncontributmg pension plan which covers ! differences relate principally to depreciation and deferred all employee groups. The amount of retirement benefits ; operating expenses and carrying charges. generally depends upon the length of service. Under ; certain circumstances, benefits can begin as early as age ! Federal income tax, computed by multiplying the income 55. Our funding policy is to comply with the Employee l before taxes and preferred dividend requirements of sub- Retirement Income Security Act of 1974 guidelines. l sidiaries by the 35% statutory rate, is reconciled to the amount of federal income tax recorded on the books as Pension costs (credits) for 1994 through 1996 were com-follows: prised of the following components: ! [Centerior Energ) F 24 (Centerior Energ] n ..,- - - - - ~ , ., , , - , ,, -ns. -n-. ----m.. - - - - - - - - - - - - - - . - - - -
. - . _.- - .-- .. ~
g g The aceumulated pntretirement beneht obligation and scrse et for benchb carned donny the accrued postretirement benthi cost are as follows: penod 5 13 5 10 5 13 December 31, interest uu on pround bcncht ohhp. mon ,_ 2h 20 20 g y, q ue
%taal rc: urn on plan aun ($0l I$i; (2i milbons of Net amoruf au,m and dcferral 2 9 _ Q4 ) dollM Net costs (creditu 5 f 7) i fx) s 4 Accumulated poureurement bencht ubtipuun attnbutable to:
The following table presents a reconciliation of the funded Reured parucipants som s(2no) status of the plan. ruli> chrible active plan parucipants. (4) (3) December 31. Other active plan participants (31) _, g ) J 9uf. J.99,1 Accumulated postrebrement benc64 obhpiion (212) (231) (mdbons of Unrecogni/cd net pin Inim variance between dollars) auumptions and c Apenence (44) (21) Actuarial present value of benefit obhyauont Unamurtired transition obhyation 120 12M Vested benchis $326 1304 Accrued postrctirement benchi cost mcluded in Nonvested benchu _Jk J Retirement Henchis m tbc hatance Shret- if116) 5(174) Accumulated bencht obhgation 342 306 rifect of future compensation levels S _f.4 A September 30 measurement date was used for 1996 and Plan a$e1s fa$rci aS 19% rep rting. At December 31,1996 and 1995, the runded status 26 34 settlement rate and the long-term rate of annual compen. Unrecogni/cd nel pm from vanance between sation increase assumptions were the same as those dis-assumphans and expenence (56) (68) Unrecornued pnur service cost 14 15 cussed for pension reporting in Note 9(a). At Transinun assei at January 1,190 bems amoruied December 31,1996, the assumed annual health care cost over 19 scars 'Q2) ft) Net accrued pension habikiy included in trend rates (applicable to gross eligible charges) were Reurement Benehts in the Halance Sheet 5fdk) Si") 7.5% for medical and 7% for dental in 1997. Both rates reduce gradually to a fixed rate of 4.75% by 2003. Ele-A September 30 measurement date was used for 1996 and ments of the obligation afTected by contribution caps are 1995 reporting. At December 31, 1996, the settlement . . ugnificantly less sensitive to the health care cost trend (discount) rate and long-term rate of return on plan rate than other elements. If the assumed health care cost assets assumptions were 7.75% and I1% respectively. The trend rates were increased by one percentage point in long-term rate of annual compensation increase assump-each future year, the accumulated postretirement benefit tion was 3.5% for 1997 and 4% thereafter. At Decem-obligation as of December 31, 1996 would increase by ber 31,1995, the settlement rate and long-term rate of 56 m.llion i and the aggregate of the service and interest return on plan assets assumptions were 89o and 11%. cost components of the ahnual postretirement benefit cost respectively. The long-term rate of annual compensation would increase by 50.5 m.llion. i increase assumption was 3.5% for 1996 and 1997 and 4% thereafter, (10) GUBranteOS Plan assets consist primarily of investments in common The Operating Companies have guaranteed certain loan stock, bonds, guaranteed investment contracts, cash and lease obligations of a coal supplier under a long-term equivalent securities and real estate. coal supply contract. At December 31,1996, the principal am unt of the loan and lease obligations guaranteed by (b) Other Postretirement Benefits the Operating Companies under the contract was We sponsor a postretirement benefit plan which provides $30 million. all employee groups certain health care, death and other The prices under the contract which includes certain postretirement benefits other than pensions. The plan is contributory, with retiree contributions adjusted annually. minimum p yments are sufficient to satisfy the loan and The plan is not funded. Under SFAS 106, the accounting le se bligations and mine closing costs over the life of standard for postretirement benefits other than pensions, the contract. If the contract is terminated early for any the expected costs of such benefits are accrued during the reason, the Operating Companies would attempt to employees' years of service. reduce the termination charges and would ask the PUCO
~
to allow recovery of such charges from customers through The components of the total postretirement benefit costs the fuel factor of the respective Operating Company. for 1994 through 1996 were as follows: See Management's Financial Analysis - Outlook-J3fr 12.5 MS! FirstEnergy Rate Plan. (milhons of dollars) Service cost for benchts carned dunng the period 52 $2 $2 Interest cost on accumulated postreurement benefit ubhpuon 18 th Ib Amortizat on of transmon obhFauon at January 1,1993 of 5167 mahon over l 20 years 7 7 8 l Amortization of pm _--- J) _-- Total costs 577 5?6 5?it [Centerior Energr} F-25 [Centerior Energy)
(11) Capitalization shares at an escreise price of 514.55. In 1994. options (a) Capital Stock Transactions and Common were issued for 264.9tK) shares at an escreise price of 513.20 but options for 9.5(x) and 0.M)0 shares were Shares Reserved for issuance surrendered in 1995 and 1996. respectisely. The options Shares sold, retired and purchased for treasurs during the
~
" ' I""
- Y* """
# E. rant and vest over three scars ended December 31, 1996 are listed in the '"#" """'"
following table, un er mpensa nl l g yng iyya formula, generally 0.5% of{ anshares. outstanding eachShares
> carofis determm I abousands of shares) common stock required for the Compensation Plan may Cenicriar Energy Conunon Stock:
'"'"""'"" be either issued as new shares, issued f rom treasury stock l,d'"M'ili ,n m or acquired in' the open market specifically for distribution Emplo>cc Saungs pian - -
239 under the Compensatwn Plan. No compensation cost has { Empk.3ce Purchase Plan - - letal Common Siock Salci - - 9xs been recognized for the options issued. Computing com-i pensation cost for the options consistent with SFAS 123 ' ct nr t oecrea!c) -) -) would not have materially affected net income in 1996 Preferred Siock of Subsiduries Subicct i and 1995, and earnings per common share reported m Mandatory Redempuun. oth years would not have changed. Clesciand I lectne Retirements 5 7.M Series C (10) (10) (10) Upon consummation of the pending merger of Centerior Adu eres ht (Il ) (1 Energy and Ohio Edison, outstanding options will become l 9125 Series N (150) (111) (Is9) exercisable for shares of FirstEnergy common stock with 91.50 Senes Q _ _ (11) (11) - the prices and number of shares adjusted to reflect the Toted Id i R tirement, exchange ratio. Limitations on restricted common stock sloo par 59 375 (17) (17) (17) awarded under the Compensation Plan will lapse auto-25 par 2.h1 - 1400) nool Preferred Stock of Subudianes Not matically upon consummation of the merger. Subject to htandatory Redemption: Cleveland I'lectric Retirements (b) Equity Distribution Restrictions Adjustahic Series L _Cf;) - - Net (Decrease) CD g) (8t19) The Operating Companies can make cash available to Shares of common stock required for our stock plans in fund Centerior Energy's common stock dividends by 1996 wcrc acquired in the open market. paying dividends on their respective common stock, which is held solely by Centerior Energy. Federal law prohibits in addition to such stock plan-related purchases, the the Operating Companies from paying dividends out of Board of Directors has authorized the purchase in the capital accounts. Each Operating Company has since open market of up to 10% of our common stock shares 1993 declared and paid preferred stock dividends, and outstanding until June 30,1997. No such purchases base Cleveland Electric has also declared and paid common been made. stock dividends, out of appropriated current net income The number of common stock shares reserved for issu- included in retained earnings. At the times of such decla-ance under the Employee Savings Plan and the Employee rations and payments, each Operating Company had a Purchase Plan was 1,702,475 and 423,797, respectively, at dehcit in its retamed earnings. At December 31, 1996, December 31,1996, Cleveland Electric and Toledo Edison had 5130 million and S223 million, respectively, of appropriated retained , in June 1996, the Board of Directors adopted a share earnings for the payment of dividends. Toledo Edison also I owner rights plan under which Centerior Energy common has a provision in its mortgage applicable to approxi-stock share owners of record on July 8,1996 were granted mately 594 million of outstanding first mortgage bonds a right to purchase one five-hundredth of a share of (531 million of which mature in August 1997) that . Centerior Energy preferred stock for each share of com- requires common stock dividends to be paid out of its mon stock owned on that date. The Board of Directors total balance of retained earnings, which had been a will decide if the rights will be exercisable in the event of deficit from 1993 through November 1996. At Decem-an unsolicited takeover attempt that the Board deter- ber 31,1996, Toledo Edison's total retained earnings were mines not to be in the best interest of Centerior Energy or 55 million. See Management's Financial Analysis - its share owners. Capital Resources and Liquidity-Liquidity. Under an Equity Compensation Plan (Compensation Plan) adopted in 1994, options to purchase shares of (c) Preferred and Preference Stock common stock and awards of restricted common stock were granted to management employees. In 1996, options Amounts to be paid for preferred stock which must be were issued for 619,800 shares at an exercise price of redeemed during the next five years are $32 million in $11,00 but options for 4,000 shares were subsequently 1997,516 million in 1998,535 million in 1999,533 mil-surrendered. In 1995, options were issued for 285,000 lion in 2000 and $80 million in 2001. l [Centerior Energv] F 26 (Centerior Energr]
l he annual mandatory redemption prm isions are as . lune 1999. ~l he letters of credit are in an aggregate follow s: amount of approsimately $225 million and are secured by T Re&cmni ncymme m
"[>" '
Shec first mortgage bonds of Clesciand Llettrie and Toledo Ldison in the proportion of 4(G and 6W;. respecti cly. At ( lculand i lutoc hcicnot December .41, 1996. Toledo Edison had outstanding 5 7.M Scne, C 10.00u 19s4 i Hui hk 00 Senes i 3.00n 19si U N'n $8 milhon of. notes secured by subordinated mortgage , 9.125 Senes N 150.txin 1993 hio collateral.
- 91.50 Series Q 10.714 1995 1.000
$*$ c ?.$sG yj (12) Short-Term Borrowing Arrangements l Toledo I dmn Preferred. Centerior Energy has a $125 million revolving credit stoo pu sw375 H.Asu 1985 100 fa ility through May 1997. Centerior Energy and the
- All outstandmg shares iu be redeemed on December 1. 2001.
Service Company may horrow under the facility, with all in 1995, Cleveland Electric purchased 1,000 shares of borrowings jointly and sescrally guaranteed by the Oper-Scrial Preferred Stock, 590 00 Series S, which reduces ating Companies. Centerior Energy plans to transfer any the 2002 redemption requirement shown in the above of its borrowed funds to the Operating Companies. The table, credit agreement is secured with Urst moripage bonds of Cleveland Elcetrie and Toledo Edison in the proportion of The annuali/ed preferred dividend requirement for the 40% and 60%, respectivelv. The credit agreement also Operating Companies at December 31, 1996 was ' pmvides the participating banks with a subordinate mort- , $55 milhon. gage security interest on the Operating Companies' The preferred dividend rates on Cleveland Electric's properties. The banks' fee is 0.625% per annum payable Series L and Toledo Edison's Series A and 11 Iluctuate quarterly in addition to interest on any borrowings. There based on prevailing interest rates and market conditions. were no horrowings under the facility at December 31 The dividend rates for these issues averaged 7E 7.11% 1996. Also, the Operating Companies may borrow from and 7.75% respectively, in 1996. cach other on a short-term basis. Preference stock authorized for the Operating Compa- . nies are 3,000,000 shares w. it hout par value for Cleveland (13) Fm.ancial Instruments Electric and 5,000.000 shares with a 525 par value for The estimated fair values at December 31,1996 and 1995 Toledo Edison. No preference shares are currently out. of financial instruments that do not approximate their standing for either company. carrying amounts in the Balance Sheet are as follows: December 31. With respect to dividend and liquidation rights, each n,w, ioy3 Operating Company's preferred stock is prior to its prefer- Carrying Fair carrymr Fair 1 ence stock and common stock, and each Operating Com- ^ *"""'n ),'j [ ^(('"\ ""'"" pany's preference stock is prior to its common stock. capiiahuiion and t.iabihiies- < Preferred Stod. unh Mandatory (d) Long-Term Debt and Other Borrowing Redemption Prudsions s 221 5 225 5 252 5 239 Arrangements ""8 #"' U" 3# 3 '* 3#d3 3#" Noncash imestments in the Nuclear Plant Decommis. Long-term debt which matures or is subj.ect to put sioning Trusts are summarized m. the following table. options during the next five years is as follows: 5164 m.l- i n,.n.mgy, 3 g lion in 1997,$107 million in 1998,$253 million in 1999, jyp e 536 million in 2000 and 592 million in 2001. (mithons or dollarq The mortgages of the Operating Companies constitute 3.hN#[0r'i f'I direct first liens on substantially all property owned and rederal Governmeni s 24 547
. franchises held by them. Excluded from the liens, among $hcr .
other things, are cash, securities. accounts receivable. 32 72 4" fuel, supplies and, in the case of Toledo Edison. automo-tive equipment. [ g Certain credit agreements of the Operating Companies [u'jh n ne ca s g s contain covenants relating to fixed charge coverage ratios Due in m to lo >c'ars 7 :4 and limitations on secured financing other than through D"' " h ' " ""* 8 2 Total s l' m I first mortgage bonds or certain other transactions. The -- " 1 Operating Companies were in compliance with all such The fair value of these trusts is estimated based on the covenants as of December 31,1996. The Operating Com- quoted market prices for the investment securities and panies have letters of credit in connection with the sale approximates the carrying value. The fair value of the and leaseback of Beaser Valley Unit 2 that expire in Operating Companies' preferred stock, with mandatory [Centerior Energv] F-27 (Centerior Energv]
cdemption proudons. and long term debt n estimated (15) Pending Mergsr of Centarior Energy h.ned on the quoted market prices for the respective or and Ohio Edison similar ioues or on the h.nis of the discounted value of future c.nh llow s. T he dneounted ulue used current On September 13. 1996 Centerior 1.nergy and Ohio dividend or interest rates (or other appropriate rates) for Edison entered into an agreement and plan of merger to similar inues and loans with the same remaining form a new holding company, FirstEnergy. Following the maturities merger, FirstEnergy will directly hold all of the issued and The estimated fair values of all other financial instru- outstanding common stock of the Operating Companies . ments approximate their carrying amounts in the Balance and all of the issued and outstanding Ohio Edison com-Sheet at December 31.1996 and 1995 because of their mon stock. As a result of the merger, the common stock short-term nature. share ownus of Centerior Energy and Ohio Edison will own all of the issued and outstanding shares of Firc-(14) Quarterly Results of Operations Energy common stock. Centerior Energy share owncis (Unaudited) will receive 0.525 of a share of FirstEnergy common stock The following is a tabulation of the unaudited quarterly f r each share of Centerior Energy common stock owned. results of operations for the two ' years ended Ohio Edison share owners will receive one share of December 31,1996. FirstEnergy common stock for each share of Ohio Edison ouariers t nded common stock owned. FirstEnergy plans to account for March 3I c {gh RedL the merger as a purchase in accordance with generally except per share amounN accepted accountmg prmciples. Im Operating Resenues $605 $6n9 $727 $612 in addition to the approvals by the share owners of IIo#mc'" Centerior Energy and Ohio Edison common stock, vari-7 $ $ 2 Average Commun Shares ous aspects of the merger are subject to the approval of t nnihong 148 o tax.o i48.0 t ax.0 the FERC and other regulatory authorities. A rate reduc-Earni Per common 3 g4 3 3 gg 3 3 tion and cennomic development plan for the Operating thvidends Paid Per Companies hes been approved by the PUCO. Frem the Common Share $ .20 $ .20 $ .20 5.20 date of consuramation of the merger through 2006, the plan provides for rate reductions, frozen fuel cost factors. peraung Revenues $5hs $607 $74o ' $581 Operating income $130 $137 $205 $lix economic development incentive prices, an energy-Net income $ 38 5 44 $109 $ 29 efliciency program, an earnings cap and an accelerated Average Common Shares , (milhons) 14 a.0 148.0 14x 0 148.0 reduction in nuclear and regulatory assets for regulatory J Earninp Per Common purposes. The plan will require the Operating Companies D d nds Paid Per e n gubW mb M & be k Common Share 5.20 $ .20 5.20 5.20 merger becomes probable, which is expected to be after i Earnings for the quarter ended March 31,1996 were btaining the aforementioned approvals of the merger, decreased by $7 million, or 5.05 per share, as a result of The write-oft amount to be charged against earnings, Toledo Edison's $11 million write-down of the net book esti ated by FirstEnergy to be approximately 5750 mil-value of two inactive production facilities. The write-down li n, will be determined based upon the plan's regulatory resulted from a decision that the facilities are no longer acc unting and cost recovery details to be submitted by expected to provide revenues. FirstEnergy to the PUCO stafT for approval. Earnings for the quarter ended September 30.1996 were if the merger is not consummated, the plan would be null decreased by $15 million. or $.10 per share, as a result of and void. See Management's Financial Analysis - Out-a $23 million charge for the disposition of materials and look-Pending Merger with Ohio Edison and -FirstEnergy supplies inventory. The sale and disposal ofinventory was Rate Plan for a discussion of the proposed merger and the part of the reengineering of the supply chain process. plan. [Centerior Energ] F-28 [Centerior Energ]
Financial and Statistical Review j i I l i Operaling Resenues (millions of delLirs) Tot.d Total Total Sicam Operatmp i car Remicemal Com meraal Industrul Ot her Retad Wholesale f leuric lleatmy H evenues 1996 $808 765 777 133 2 483 70 2 553 -
$2 553 1995 797 747 777 136 2 457 59 2 516 -
2 516 l 1994 758 722 758 137 2 375 46 2 421 - 2 421 1993 768 716 754 143 2 381 93 2 474 - 2 474 1992 732 706 766 143 2 347 91 2 438 - 2 438 1986 $99 517 676 80 1872 19 1891 13 l904 Operating Expenses (millions of dollars) Oiher (icncraison Amortuation of l uct & Operatum 1.icilmes Depreuaiam l a ncs. DcIerred Federal Toial Purchawd & R ental & Other 1 han Operating income Operatirip Year l'..w c r M.unien mcc I spenw Net A mortuanon l lT I mpenses. Nei lases Ennenws 1996 $465 635 159 304 320 43 l11 $2 037 1995 465 617 160 281 322 (53) 135 1927 1994 442 595 160 278 309 (55) 114 I 843 1993 474 924(a) 159 258 312 23(h) lI 2 161 1992 473 623 161 256 318 (52) 122 1901 19#6 $30 551 - 141 195 - 138 1 555 Income (Imss) (millions of dollars) ; F ederal income l Other Deterred Income ( Loss) Income & Carrvmg Tanca- hetore Opcratmg A l l 'DC- Deductions. Ch.trges. C redit Interest Dcht Year Income I uom Net Net il noense } Charpes Interesi l 1996 $516 3 (17) - 9 511 337 1995 589 3 6 43 (5) 636 358 1994 578 5 8 40 (6) 625 361 1993 313 5 (589)(c) (649)(b) 398 (522) 359 1992 537 2 9 100 (7) 641 365 1986 349 308 (8) - 116 765 406 income (l.oss) (millions of dollars) Common Stock (dollars per share & %) Return on Preferred & Average Average Preference Net Shares Common Al UDC- Stock income Outniandmg Earnmgs Stock Dmdends Book
\ car Dc ht Ihvidends ( Los* > (mdhom b (Loni Lounty Declared Value 1996 $ (3) 56 $ 121 148.0 $ .82 6.1% $ .80 $13.42 1995 (3) 61 220 148 0 1.49 11.4 .80 13.40 1994 (6) 66 204 147.8 1.38 11.1 .80 12.71 '- 1993 (5) 67 (943) 144.9 (6.51 ) (40.3 ) 1.60 12.14 1992 (1) 65 212 141.7 1.50 7.4 1.60 20.22 1986 (lI8) 85 392 128.9 3.04 13.7 2.49 22.13 lut includes early retreement program expenses and other charges of $272 mdhon.
11.) includes u ritr-off of phase-in deferrab of $U7 mdhun. conmung of $172 mdlwn of deferred operatmg expenses and $70$ milhon of deferred carrrang charges 1 (Centerior Energy) F-29 (Centerior Energy]
Centerior 1:ncrgy Corporation and MI,udram . Electric Sales (millions of KWil) 1:lectric Customers Residential Usage (thousands at year end) Ascrape A verage A verayc PrNc Rescnue Year keudential Industnal k % ll l'cr Per Per Commerual Industnal Wholesale Other Total Reddential Commercial A Other l oial C ustomer k % Il Couomer 1996 7 103 7 698 12 278 2 804 1 011 30 894 925 98 II I 034 7 685 11.38e $874.53 1995 _ 7 227 7 694 12 168 2 626 1 050 30 765 930 99 i! l 040 7 791 I l .02 858.66 1994 _ 6 980 7 481 12 069 1 842 1 074 29 446 925 98 II I 034 7 556 10.86 820.89 1993 _ 6 974 7 306 11 687 3 027 1 022 30 016 924 97 12 1033 7 546 11.01 830.99 1992 6 666 7 086 11 551 2 814 1 011 29 128 925 97 13 1 035 7 227 10.98 793.68 1DN6 6 527 6 239 11 409 359 909 25 443 899 88 l2 999 7 108 9. I 8 654.99 Load (MW & %) Energy (millions of KWil) I?uct Net Scamal Peak Capacity Load ',"*P""Y b.'"d Lilkienes-Year Canahihty Purchawd I uct Coo 11111 P'c r Lo.id Margm I acior l unil t dJ N uclear Total Power l otal Per KWil KWil 1996 5 873 5 679 3.3% 61.2% 19 584 12 404 31 988 817 32 805 1.32e 10 336 1995 5 924 5 779 2.4 60.0 17 260 14 936 32 196 338 32 534 1.38 10 447 1994 6 226 5 291 15.0 63.9 18 000 1I 824 29 824 922 30 746 1.35 10 454 1993 6 226 5 397 13.3 61.6 21 105 10 435 31540 273 31 813 1.39 10 276 1992 6 463 5 091 21.2 63.4 17 371 13 814 31 185 (122) 31 063 1.45 10 395 19#6 5 535 5 021 9.3 63.0 22 613 22 637 24 4 669 27 306 1.79 10 292 Imestment (millions of dollars) Construcimn Work in Total Utdity Accumulated Progress Nacicar Property, Uuhty Plant in Depreciation & Net & Perry f uel and icar Semce A monvatmn Plant Plant und Plani lotal Unit 2 Ot he r I.quinmeni Additions Ancis 1996 $9 867 3 272 6 595 79 278 $6 952 $ 160 $10 210 1995 9 768 3 036 6 732 101 302 7 135 210 LO 643 1994 9 770 2 906 6 864 129 343 7 336 197 10 691 1993 9 571 2 677 6 894 181 385 7 460 218 107 t o 1992 9 449 2 488 6 961 781 424 8 166 200 12 071 1936 4 640 1 368 3 272 5 144 653 9 069 l 134 9 918 Capitalization (millions of dollars & %) Prcierred & Preference Preferred biock without Stock. with Mandatory Mandatory Redemption Year Common Stock Eauitv Redemption Provisions Provisorn 1 ang-Term Dchi Toi.il 1996 $1 987 33% 189 3% 448 7% 3 444 57% $6 068 1995 1 984 31 220 3 451 7 3 73 59 6 389 1994 I882 30 253 4 451 7 3 69 59 6 283 1993 1785 27 313 5 451 7 4 015 61 6 568 1992 2 889 39 364 5 354 5 3 694 51 7 301 1986 2 991 39 488 7 404 5 3 793 49 7 676 tch includes wnte-of of Perry Unit 2 of $533 nulhon. 4dt Reduced by net energv used by the Seneca Pumped Storage Plantfo pumping. l I [Centerior Energ] F-30 [Centerior Energ]
Manacement's Financial Analysis e rs. includmg the me largesi. u ie tan strate n has resulted in lower prices for these customers. m the long Outlook run. it is t weeted io maimize shae owner uue h Strategic Plan retaining our customer base in a eh.mpmp industry. I nor to these renew als. 619 of our industrial base r.ite In early 1994. Centerior Energy Corporation (Centerior ( nonfuel) res en ues under contract w as scheduled for Energy), along with The Cleveland Electric illuminating renewal before 1999. Followine' the renewals, the compa-Company (Company) and The Toledo Edison Company rable percentage is 18% At > ear-end 19%. 51"6 of our (Toledo Edison), created a strategic plan to achieve the ndustrial base rate revenues was under long-term twin goals of strengthening their fmancial conditions and contracts. improving their competitive positions. The Company and Toledo Edison are the two wholly owned electrie utility Our continued emphasis on economie desclopment actisi-subsidiaries of Centerior Energy. The plan's objectises ties is adding to our opportunities for resenne growth. In relate to the combined operations of all three companies. 1996, we gained commitments on 24 cconomic develop-To meet these goals, we seek to maximi /c share owner ment projects. representing almost 56 million in new and return on Centerior Energy common stock, achieve profit. retained annual base rate revenues and nearly 4 (KK) 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-increasingly competitive supply costs. During 1996, the iaries are structured in six strategie business groups to third year of the eight-year plan, we made strong pains better focus on competitiveness. During 1996, the Com-toward reaching some plan objectives but need sigmhcant pny reduced employment from about 3.600 to 3,300. improvement on others. g;urther 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 streamline price increase and the accelerated paydown of debt. operations. We will continue to reduce our unit cost of resulted in a significant stock price gain, such that the fuel used for generating electricity, w hile safely imnroving total return to Centerior Energy common stock share the operating performance of our generation facilities. owners during 1996 was 33% The merger is expected to 1 better position the merged companies to meet coming Reducing fixed financing costs is another primary obj.ec-competitive challenges. tive m strengthening our financial and competitne post-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 pricing actions as well as market expansion. offset by the new accounts receivable securitit.ation) 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 5119 million price increases preferred dividends dropped $10 million. In the last three requested by the Company and Toledo Edison (584 mil- years, fixed obligations were reduced by $246 million. lion and $35 million, respectivelv). The primary purpose of the increases was to provide additional revenues to in 1996. wc reported earnings available for common stock ; recover all the costs of providing electric service, includ- I Sn m,lh,on i compared to S141 mdhon m 1995. The ' dech.ne m reported earnings is primarily attributable to ing deferred costs, and provide a fair return to Centerior Energy common stock share owners. The additional reve-the delay m, implementing our price increase until late nues also provided cash to accelerate the redemption of April, while we began at the er'd of 1995 to charge earnings f r perating expenses and amorti7ation of defer-debt and preferred stock. rals which the price increase was des.icned to recover. The For the second year in a row, the Company's total price increase contributed approxiinatelv 533 million ' kilowatt-hour sales increased. Although kilowatt-hour (after tax) more cash to our earnings in 1996. The change sales to our retail customers decreased by 1% compared t in regulatory accountine measures resulted in an 585 mil-1995 results, our wholesale sales increased by 27% from lion decrease in reporteE carnings for 1996 versus 1995. In 1995 as a result of the good availability of our generating addition,1996 results included a noncash charge against
% units and a more aggressive bulk power marketing effort. carnings of SI1 million after tax for the disposition of Adjusted for weather, kilowatt-hour sales to residential inventory. Excluding these factors, basic carnings from and commercial customers increased by 1% and 0.8%, operations in 1996 were the same as in 1995: however, the respectively, from 1995. quality of reported earnings improved. The full benefit of Another key element of our revenue strategy is to otter our 584 million price increase, substantial reductions in long-term contracts to large industrial customers u ho 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 improvement in carnings and cash flow from operations in years contracts with many of our large industrial custom- 1997.
[ Cleveland Electric] F-3I l Cleveland Electric)
Pending Mgrgnr with Ohio Edison least $2.5 billion through the year 2t00. yielding addi-n ng m np in funn of lower interest On September 16, Iw6, Centerior Energy announced its merger with Ohio I dison in a stock-for-stock transaction. " Y" "" ' Centerior Energy share owners will recci e 0.525 of a The Company's share of the 51 billion of sasings will share of FirstEn rgy common stock for each share of permit the Company to reduce prices to its customers as Centerior Energy common stock owned, while Ohio discussed below under FirstEnergy Itate Plan. Absent the lidison share owners will receive one share of FirstEnergy merger, the Company plans to achieve savings as well, but common stock for each share of Ohio Edison common at a lower level, which is expected to allow prices to be stock owned. Following the merger. FirstEnergy will frozen at current levels until at least 2002 despite infla-directly hold all of the issued and outstanding common tionary pressures. stock of the Company, Toledo Edison and Ohio Edison. Various aspects of the merger are subject to the approval FirstEnergy plans to account for the merger as a purchase of the Federal Energy Itegulatory Commission (FERC) in accordance with generally accepted accounting princi- and other regulatory authorities. Common stock share ples. If FirstEnergy elects to apply, or " push down", the owners of Centerior Energy and Ohio Edison are expected clTects of purchase accounting to the financial statements to vote on approval of the merger agreement on of the Company and Toledo Edison, the Company and March 27,1997. The merger must he approved by the Toledo Edison would record adjustments to: (1) reduce aflirmative votes of the share ou ners of at least two-thirds the carrying value of nuclear generating plant by of the outstanding shares of Ohio Edison common stock
$1.25 billion to fair value; (2) recognize goodwill of and a majority of the outstanding shares of Centerior $865 million; (3) reduce common stock equity by Energy common stock. The merger is expected to be $401 million; (4) reset retained earnings of the Company e!Tective in late 1997.
and Toledo Edison to zero; and (5) reduce the related deferred federal income tax liability by $438 million. FirstEnergy Rate Plan These amounts reflect FirstEnergy's estimates of the pr On January 30,1997, the PUCO approved a ltate Reduc-forma combmed adjustments for the Company and Toledo Edison as of September 30, 1996. The actual tion and Economic Development Plan (Plan) for the Company and Toledo Edison to be efTective upon the adjustments to be recorded could be materially difTerent consummation of the Centerior Energy and Ohio Edison from these estimates. FirstEnergy has not decided merger. The Plan would be null and void if the merger is uhether to push down the effects of purchase accounting not consummated. The rate order granting the April 1996 to the financial statements of the Company and Toled Edison if the merger with Ohio Edison is completed, nor price increase will remain in full force and effect during has FirstEnergy estimated the allocations between the the pendency of the merger or if the merger is not consummated. two companies if push-down accounting is elected. The Plan calls for a base rate freeze through 2005 (except We believe that the merger will create a company that is to comply with any significant changes in environmental, better positioned to compete m the electnc utihty mdustry than either Centerior Energy or Ohio Edison could on a regulatory or tax laws), followed by an immediate stand-alone basis, enhancmg long term share owner value $310 million (which represents a decrease of approxi-mately 15% from current levels) base rate reduction in and providing customers with reliable service at more 2006 (the Company's share is expected to be 5217 mil. stable and competitive pnces. I on); interim reductions beginning seven months after The combination of Centerior Energy and Ohio Edison is consummation of the merger of 53 per month increasing a natural alliance of two companies with adjoining service to 55 per month per residential customer by July 1,2001; areas who already share many major generating units, $105 million for economic development and energy effi-FirstEnergy expects to reduce costs, maximize efficiencies ciency programs (the Company's share is expected to be and increase management flexibility in order to enhance $70 million); earnings caps for regulatory purposes for the revenues, cash flows and earnings and be a more efTective Company and Toledo Edison; a commitment by First-competitor in the increasingly competitive electric utility Energy for a reduction, for regulatory accounting pur-industry. poses, in nuclear and regulatory assets by the end of 2005 FirstEnergy anticipates the merger will result in net f at least $2 billion more than it otherwise would be, savings for the combined companies of approximately through revalu,ngi facilities or accelerating depreciation Si billion over ten years, in addition to the impact of cost and amortization; and a freeze in fuel cost factors until reduction programs underway at both companies. The December 31,2005, subj,ect to PUCO review at year-end additional savings, which probably could not be achieved 2002 and annual inflation adjustments. The Plan perrnits without the merger, will result primarily from the reduc- the Company and Toledo Edison to dispose of generatmg tion of duplicative functions and positions. joint dispatch assets subject to notice and possible PUCO approval, and of generating facilities and procurement efficiencies. to enter into associated power purchase arrangements. FirstEnergy expects reductions in labor costs to comprise Total price savings for the Company's customers of about slightly over half the estimated savings. In addition, $280 million are anticipated over the term of the Plan, as FirstEnergy expects to reduce system-wide debt by at summarized below, excluding potential economic devel- [ Cleveland Electric] F-32 [ Cleveland Electric]
opment benehts .md awuming th.it the merger takes place the ( ompany and 'lo;edo Edson will total approumately ; on l>cccmber 31.1+C ~l he soul price s.n mps for cuw 57?O milhon. l he ( ompanis share of the u rih-on is l tomers of the ( omp.m3 and 'loledo I dison are espected espected to be about two thuds el this amount. l'nder the to be about $391 milhon. Plan. some or all of this u nte-ofl cannot be apphed s i .a w. .w tou.ud ihe $2 bilhon regulatory comimtment discusstd i nan...m ui abuse.1 or hn.meial reporting purposes. nuclear peneral-d"H W ing units are not expected to be imp.iired. if events cause cither the Company or 'loledo Edison or both companies n w [ 5 [] h to conclude they no longer meet the criteria for applying an .w Si AS 71 for the remainder of their business, they would y y y be required to write off their remaining regulatory assets and measure all other assets f or impairment. For a discus-f
- ou3 3 sion of the criteria for complying with SFAS 71, see Note Tout y 7(a).
Under the Plan's carnings cap. the Company and Toledo Edison will be permitted to earn up to an i1.5% return on April 1996 Rate Order common stock equity for regulatory purposes during cal- In its April 1996 order, the PUCO pranted price increases endar years prior to 2000,12% during calendar years 2(KK) of 584 million and $35 million in annualized revenues to and 2001, and 12.59% during calendar > cars 2001 through the Company and Toledo Edison. respectively. The Com. 2005. The regulatory return on equit) is generall} pany and Toledo Edison intend to freeze rates at existing > cxpected to be lower than the return on equity calculated lesels until at least 2002, although they are not precluded for financial reporting purposes due to the calculation be ting further price increases. In the order. the methodology dehned by the Plan and as discussed m the PUCO prtnided for recovery ol all regulatory assets in the
~
next paragraph. anticipated differences in accountmp for approved rates, and the Company and Toledo Edison the Plan for knancial reportmp versus regulatory purpo.scs. continue to comply with the provisions of SFAS 71. If for any calendar year the regulatory return on equity exceeds the specified 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) arrearapes and then as a assets for regulatory purposes by an aggregate of credit to base rates. PIPP is a deferred payment program 51.25 billion through 2001. If the merger is consum-for lou-income residential customers. mated, the Company and Toledo Edison believe accelera- , ti n f $2 billion of costs under the Plan would fully The Plan requires, for regulatory purposes, a revaluation
~
satisfy this recommendation. The Company and Toledo + of or an accelerated reduction in the mvestrrmt ., Edison agree with the ancept of accclerating the recogni-nuclear plant and certain reputatory asse's of ths Jorm tion of costs and the recovery of assets as such concept is pany and Toledo Edison (excluding amotets due from consistent with the strategic objective to become more customers for future federal income taxes) bv at least
$2 billion by the end of 2005. FirstEnergy has not yet competitive. Ilowever, the Company and Toledo Edison i determined each company's estimated share of the 52 bil, believe that such acceleration must also be consistent "ith the reduction of debt and the opportunity for Center-lion. Only a portion of the $2 billion of accelerated costs is ior Enerp) common stock share owners to recci e a fair expected to be charged against the two companies' earn, ings for financial reporting purposes by 2005.
return on their investment. Consideration of whether to implement a plan responsive to the PUCO's recommen-FirstEnergy believes that the Plan will not provide for the dation to revalue assets by 51.25 billion is pending the full recovery of costs and a fair return on investment merger with Ohio Edison. associated vith the nuclear operations of the Company and Toledo Edison. Pursuant to the PUCO's order. Notwithstanding the pending merger with Ohio Edison FirstEnergy is required to submit to the PUCO sta!T the and discussions with regulators concerning the' effect of regulatory accounting and cost recosery details for imple- the Plan on the Company's nuclear pencrating assets. we menting the Plan. After approcal of such details by the beliese it is reasonable to expect that rates will be set at PUCO stafT. FirstEncrp) espects that the Company and levels that will recover all current and anticipated costs Toledo Edison will discontinue the application of State- associated with the Company's nuclear operations, ment of Financial Accounting Standards (SFAS) 11 for including all associated regulatory assets, and such rates I their nuclear operations if and w hen consummation of the can he charged to and collected from customers. If there , merger becomes probable. The remainder of their busi- is a change in our evaluation of the competitive environ-l ness is espected to continue to comply with the provisions ment, regulatory framework or other factors. or if the , t of SFAS 71. At the time the merger is probable the PUCO significantly reduces the value of the Company's Company and Toledo Edison would be required to write assets or reduces the approved return on common stock oft certain of their regulatory assets for financial reporting equity of 12.59% and overall rate of return of 10.06% or purposes. The write-c'T amounts would be determined at both, for f uture regulatory purposes. the Company may be that time. FirstEnergy estimates the write-olT amounts for required to record material charpes to earnings. [ Cleveland Electric] F-33 (Cleveland Electric)
19terger of Toledo Edison into the Company th.a pure wmpeanon t unrestricted retail w hcchng for all In October lum the ITRC authoriecd the merger of '"""* O""*"U""" "! b" .w ral y cars aw ay and 1oledo 1.dnon into the Company. The merger agreement h between Centerior l_ncrg3 and Ohio Ldison requires the b"'"I") i e """a ' *"" * " P" '" adnowledged O haw
- P' U """ the
" I need I I h' i" P " h -
approval of Ohio Edison. prior to consummation of the to provide at least partial reemer) of stranded intestment l proposed merger of Toledo Edison into the Compans. ' as ymaM emnpetqon is permitted and. therefore, we e e that thm uW be a muhanism developed for the Ohio Edison has not yet made a decision. See Note 16. recovery of at least some stranded imestment. Ilowever. Competition due to the uncertaint3 invohed. there is a risk in connec-tion with the introduction of retail uheeling that some of i Structural changes in the electne utih.ty mdustry from the Compan3's assets may not be fully recovered. I 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 I nuclear plant licenses have required open-access trans. and unlasorable results in our business. Through aggres-i mission for its wholesale customers for 20 3 ears. More sive 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 transmis.sion systems and, in Clevel.md Public Power (CPP) under its ongoing expan-1996, the FERC adopted rules relating to open-access sum plan. CPP is the largest municipal supplier in our l transmission services. The open-access rules require utili, service area. In 1996, we reached agreements to serve a , ties to deliver power from other utilities or pencration number of large Cleveland commercial eustomers. includ- J sources to their u holesale customers at nondiscriminaturv ~ ing some previously served by CPP. We continue to j prices. pursue legal remedies to halt illegal municipal expansion 1 in our service area. A number of states have enacted transition legislation j 1 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 cunomer.s are expected to better position us to deal l Several groups in Ohio are studying the possible introdue- uith the structural chr.npes taking place in the industry J tion of retail uheeling and stranded investment recovery. and to improu our competitive position with respect to Retail whccling occurs when a customer obtains power inunicipalization. from a utilit3 company other than its local utility. The term " stranded investment" generally refers to hxed costs ckar Opmations l approved for recovery under traditional regulatory meth- The Company has interests in three nuclear generating i ods that would become unrecoverable, or " stranded". as a I units - Davis-liesse Nucicar Power Station (Davis-result of legislative changes which allow for widespread liesse). Perry Nuclear Power Plant Unit I (Perry Unit !) competition. The PUCO is sponsoring discussions among and Beaver Valley Power Station Unit 2 (Beaver Valley ) a group of business, utility and consumer intere.st< to Unit 2). Toledo Edison operates Davis Besse and the l explore ways of promoting competitive options without Company operates Perry Unit 1. ( undulv harming the interests of utility company share l 1 All three units were out of service temporarih, for refuel. - i owners or customers. The PUCO also has m.troduced two . ing during 1996; thus, plant availabih.ty factors for Davis-pdot projects, both intended as mitta
. . . l steps to introduce competitive elements into the Ohio electnc utihty Besse. Pern Unit I and Beaver Vallei Unit 2 were 85%
"""'" 76% and 7'01 respectively, for 1996. The 19941996 availability f actors for the units were 91172% and 85%
l A bill to restructure the electric utility industry in Ohio for Davis-Besse. Perry Unit I and Beaver Valley Unit 2, i has been introduced in the Ohio House of Representa- respectively. The comparable industry averages for a tises. A bipartisan committee from both legislative houses three-> car 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-t presented the Company's model for customer choice. ver Valley Unit 2 and 78% for boiling water reactors such called Energy Choice. to the PUCO discussion group in as Perry Unit 1. Davis-Bene established a plant record August 1996. Under this model.. full retail competition with its 509-day continuous run at or near full capacity should be introduced by 2002. but two essential elements, before shutting down for its scheduled refueling outage in recovery of stranded investment and levelization of tax April 1996. burdens among ' energy suppliers, must be resolved in the A significant part of the strategic plan involves ongoing interim to assure share owners recovery of and a fair return on their investments. elloris to increase the availabilitt and lower the cost of production of our nuclear units. In' 1996, we continued our i
, Although competitive pressures are increasing, the tradi- progress loward increasing long term unit availability tional regulatory framework remains in plaec and is while continuing to lower production costs. The goal of expected to continue for the foreseeable future. We can- our nuclear improvement program is to replicate Davis-not predict when and to what extent retail wheeling or liesse's operational excellence and cost reduction gains at other forms of competition will be allowed. We believe Perry Unit 1. while improving performance ratings.
[ Cleveland Electric] F-34 [ Cleveland Electric]
Our nuclear umts may be imp.icted by aetnities or events meni of futu re com mon stock dhidends is at the beyond our control. Operating nuclear units base esper. diseretion of the Companis lhurd of Directors. sub.ieet to 1 ienced unplanned outapes or extensions of scheduled appheable legal restrictions. In 1994 Centerior I:nergy outages because of equipnant problems or new regulatory lowcred its common stock divi &nd which reduced its requirements A major accident at a nuclear facility cash outflow by oser $110 mill on annually. This action. anywhere in the uorld could cause the Nuclear Regula- in turn, reduced the common stock cash dividend demand ] tory Commission (NRC) to limit or prohibit the opera- on the Company. Thc Company used the increased tion or licensing of any domestic nuclear unit. If one of retained cash to redeem debt and preferred stock more our nuclear units is taken out of service for an extended quickly than would otherwise be the case. in 1996, period for any reason, including an accident at such unit Centerior Energy increased its common stock cash disi-or any other nuclear facility, we cannot predict whether dend demand on the Company to fund its common stock < regulatory authorities would impose unfavorable rate dividend and other corporate activities. See Capital treatment. Such treatment could include taking our Resourecs and Liquidity-Liquidity below. afTected unit out of rate base, thereby not permitting us to . I recover our investment in and earn a return on it, or Capital Resources and liquidity disallowing certain construction or maintenance costs. An 1994 1996 Cash Requirements extended outage coupled with unfavorable rate treatment We need cash for normal corporate operations (including could have a material adverse elTect on our financial
, the payment of dividends), retirement of maturing securi-condition, cash flows and results of operations. Premature ties, and an ongoing program of constructing and improv-
- plant closings could ydso have a material adverse clTect on
' ing facilities to meet demand for electric service and to our financial condition, cash flows and results of opera- w lv with government regulations. Our cash construc-tions because the estimated cost to decomnyission a plant tion cipenditures totaled $164 million in 1994, $148 mil-exceeds the current funding in the decomnussiomng trust. lion in 1995 and $104 million in 1996. Our debt and Hazardous Waste Disposal Sites preferred stock maturities and sinking fund requirements totaled $62 million in 1994, 5282 million in 1995 and The Company has been named as a "potentially responsi-
$176 million in 1996. In addition, we optionally redeemed ble party" (PRP) for three sites listed on the Superfund 5341 million of securities in the 1994-1996 period,includ-q National Pnonties List (Superfund List) and is aware of ing 5143 million of tax-exempt issues refunded in 1995.
1 its potential mvolvement m the cleanup of several other ~ sites. Allegations that the Company disposed of hazard- In July 1996, Centerior Funding Corporation (Centerior ous waste at these sites, and the amount involved, are funding), the Company's wholly owned subsidiary, often unsubstantiated and subject to dispute. Federal law issued $150 million in AAA-rated accounts receivable- { provides that all PRPs for a particular site be held liable hacked investor certificates due in 2001 with an interest j on a joint and several basis. If the Company were held rate of 7.2%. The Company's share of the net proceeds liable for 100% of the cleanup costs of all the sites fr m the accounts receivable securitization was used to referred to above, the cost could be as high as $300 mil. redeem higher cost securities and for general corporate purposes. lion. However, we believe that the actual cleanup costs will be substantially lower than $300 million, that the As a result of these activities, the embedded cost of the Company's share of any cleanup costs will be substan. Company's debt at the end of 1996 declined to 8.83% tially less than 100% and that most of the other PRPs are versus 8.88% in 1995 and 8.96% in '1994. financially able to contribute their share. The Company The Company also utilized short-term borrowings to help i has accrued a liability totaling $7 million at December 31, meet its cash needs. The Company had SI12 million of 1996 based on estimates of the costs of cleanup and its notes payable to affiliates at December 31,1996. proportionate responsibility for such costs. We believe The Company is a party to a $125 million revolving credit that the ultimate outcome of these matters will not have a facility uhich was renewed in May 1996 for a one-year
; material adverse efTect on our financial condition, cash term. In 1996, portions of the nuclear fuel lease financing i
flows or results of operations. vehicles for the Company and Toledo Edison matured: A new Statement of Position issued by the A'ccounting 584 million of intermediate-term notes in September and Standards Executive Committee of the American Insti- a $150 million letter of credit supporting short-term tute of Certified Public Accountants, Inc. effective Janu- borrowing in October. These facilities were replaced by ary 1,1997 provides guidance on the recognition and $100 million of intermediate-term notes and a $100 mil-disclosure of environmental remediation liabilities. Adop- lion two-year letter of credit. The net reduction in the tion of the statement in 1997 is not expected to hav: a facility size results from lower nuclear fuel financing material adverse effect on our financial condition or requirements. results of operations. 1997 and Beyond Cash Requirements Common Stock Dividends Our anticipated 1997 cash requirements for construction Centerior Energy's common stock dividend has been are 5110 million. Debt and preferred stock maturities and funded in recent years primarily by common stock divi- sinking fund requirements are $145 million. Of this dends paid by the Company. The declaration and pay- amount,570 million are for a tax-exempt issue secured by (Cleveland Electric] F-35 (Cleveland Electric]
hrst mortgage bonds and subject to optional tender by the Current uedit ratmp3 lor the Company are as follows: owners on November 1.1997. w hich we espect to replace W A"J hO with a similar issue at a substantially lower interest rate. We expect to meet remaining requirements with internal h j,,',n d ',[ (([ cash generation and cash reserves. We also eppect to he ["# able to optionally redeem more debt and preferred stock ggg g g 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 ca:h generation. Estimated cash watch with poskive implications. requirements for our construction program during this period total $496 milh,on. Debt and preferred stock matu- Rdml W prohibits the Compwy from paying dividends rities and sinkmg fund requirements total 5445 milh,on for om M capital accounts. T he Company has since 1993 declared and paid preferred and common stock dividends the same renod.1f economical, add,tional i securities may l be redeemed w,th i funding expected to be provided e d a propriated current net income included in i through internal cash generation. retained earnings. At the times of such declarations and l payments, the Company had a delicit in its retained l Consummation of the merger with Ohio Edison is carnings. At December 31 1996, the Company had l expected to reduce the Company's cash construction $130 million of appropriated retained earnings for the i requirements and improve its ability to redeem fixed payment of dividends. I 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 - dividends out of appropriated current net income included l Net cash flow from operating activities in 1996 was in retained earnings while total retained earnings were a I significantly increased from 1995 by implementation of deficit. At December 31,1996, the Company's retained l the price increase elTective in April 1996. Most of the net ' proceeds from our accounts receivable securitization of earnings delicit was $276 million. The final disposition of l
$65 milliort were used to redeem other higher-cost sceuri.
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 l accounting to the Company and Toledo Edison, one efTect ing. In 1996, we reduced our fixed obligations for debt, of which would be to reset deficit retained carnings to i preferred stock and generation facilitics leases (partially l zero. If the merger is not consummated or if FirstEnergy ofTset by the new accounts receivable securitization) by
$145 million. At year-end 1996, we had $30 million in determines not to apply purchase accounting to the two companies, the Company and Toledo Edison intend to cash and temporary cash investments, down from 570 continue to support their position and pursue all available milhon at year-end 1995.
alternatives to allow 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
~
Results of Operations applicable interest coverage test is met, the Company 1996 vs.1995 may issue first mortgage bonds on the basis of property Factors contributing to the 1.2% increase in 1996 operal-additions and. under certain circumstances, refundable ing revenues are as follows: bonds. At December 31,1996, the Company would have MiHions been permitted to issue approximately 5666 million of increase mecrene) in Oxratin Roency of Dou,g additional first mortgage bonds. If FirstEnergy elects to tuse Rates s si apply purchase accounting to the Company if the merger Kwu s. des volume and Mn pi) with Ohio Edison is completed, the C'ompany's first $ df j g"* "g _ mortgage bond capacity would be adversely affected. MhccHancous Rnenues _t Totai 5 71
~
The Company also is able to raise funds through the sale of preferred and preference stock. There are no restric- The increase in 1996 base rates revenues resulted prima-tions on the Company's ability to issue preferred or rily fr m the April 1996 rate order issued by the PUCO
~
preference stock. f r the Company as discussed under Outlook-April 1996 Rate Order and in Note 7(b). Renegotiated contracts for The Company and Toledo Edison have $273 million in certain large industrial customers resulted in a decrease in financing vehicles to support their nuclear fuel leases $83 base revenues which partially olTset the efTect of the million of which mature in 1997. Replacement financing general price increase. For the second year in a row, total for the maturing issues may not be needed in 1997. The kilowatt-hour sales increased. Total sales increased 1.3% Company is a party to a 5125 million revolving credit because of a 27% increase in uholesale sales, the result of facility which is expected to be renewed when it matures the Food availability of our generating units and a more in May 199,7. aggressive bulk power marketing efTort. Residential and [ Cleveland Electric] F-36 (Cleveland Electric) ~.
commeretal kilowatt-hour sales deereased 2.1% and OW. 1995 vs.1994 respeethch, primarih because of the cooler summer weather m 19% On a weather-normali/cd hasis, residen- !. a on wntnbuting to the 4.24 increase in IWS operat-tial and commercial sales increased 19 and 0 8% respec- *E'""#'"'""'I""""' stin. ,,m In c!) . Industrul kilowatt-hour sales decreased 0.21 ingsp#cese,.,gyn. u a,nm primarily because of fewer sales to large automotive kw n uies volumc and Mn $n manufacturers. Lower 1996 fuel cost recovery revenues wim icule ucienut., ii resulted from favorable changes in the fuel cost factors. I uct CW Recoven Revenues 19
'T he weighted average of these fuel cost factors decreased % cuancous Revenues g l "
approximately 3% Miscellaneous revenues increased in 12.l. 1996 primarily because of new revenues relating to a Industrial kilowatt-hour sales increased 0.3% in 1995, hut generating plant lease agreement in elTect for four months sales grew 2.4% excluding reductions at two low-margin during the year. The parties canceled the agreement steel producers (representing 7.6% of industrial reve-because the FERC insisted on terms which were not nues). Residential and commercial kilowatt-hour sales economic to the parties. increased 2.8% and 3% respectisely, primarily because of the hot summer weather, although there was about 2% For 1996, operating revenues were 32% residential,32% nonweather related growth in commercial kilowatt-hour commercial,29% industrial and 7% other, and kilowatt-sales. Other sales increased 36% because of a 58% hour sales were 23% residential, 28% commercial. 37% increase in wholesale sales due principally to the hot mdustrial and 12% other. The average prices per kilowatt-summer and good availabilitv of our generating units. hour for residential, commercial and industrial customers Weather accounted for appro$imately $24 million of the were i1.34,9.67 and 6.57 cents, respectively.
$41 million inercase in 1995 base rate revenues. liigher Operating expenses increased 4.4% in 1996. The cessation 1995 fuel et recovery revenues resulted from an increase of the Rate Sabilization Program deferrals and the com- in the fuel et factors. The weighted average of these fuel mencement of their amortization in December 1995 c st factors increased approximately 7% Miscellaneous resulted in toe increase in the net amortization of deferred revenues decreased in 1995 primarily because the 1994 operating e,penses. See Note 7(d), Depreciation and am unt included the billings to other utility owners and j amortization expenses increased primarily because of a $7 lessees for overhead expenses related to the 1994 refueling l million net increase in depreciation related to changes in and maintenance outage of the jointly owned Perry depreciation rates, as discussed in Note 1(c), and the Umt 1.
cessation of the accelerated amortization of unrestricted For 1995, operating revenues were 32% residential. 32% investment tax credits under the Rate Stabilization Pro- commercial, 29% industrial and 7% other, and kilowatt-gram, which was reported in 1995 as a $6 million reduc- hour sales were 24% residential, 28% commercial, 38% tion of depreciation. Other operation and maintenance industrial and 10% other. The average prices per kilowatt- ! expenses in 1996 included a $17 million one-time charge hour for residential. commercial and industrial customers for the disposition of inventerv as part of a reengineering were i1.04,9.47 and 6.54 cents. respectively. The changes of the supply chain process. Reengineering the supply from 1994 were not significant. chain process increases the use of technology, c msoli- Operating expenses increased 5.3% in 1995. Fuel and dates warehousing and uses just-in-time purchase and purchased power expenses increased as higher fuel delivery. Federal income taxes decreased as a result of expense was partially ofTset by lower purchased power lower prelax operatmg mcome. expense. The higher fuel expense was attributable to A nonoperating loss resulted in 1996 primarily from costs increased generation and more amortization of previously related to the accounts receivable securitization. as dis- deferred fuel costs than the amount amortized in 1994. cussed in Note 1(j), and the Company's share of merger. The higher other operation and maintenance expenses related expenses. The deferral of carrying charges related resulted primarily from charges for an ongoing inventory
~
to the Rate Stabilization Program ended in November reduction program and the recognition of costs associated 1995. The federal income tax credit for nonoperating with preliminary engineering studies. Federal income income increased in 1996 accordinclv. taxes increased as a result of higher pretax operating income. Taxes, other than federal mcome taxes, increased Interest charges and preferred dividend requirements primarily due to property tax increases resulting from decreased in 1996 because of the redemption of securities plant additions, real estate valuation increases and a and refundings at favorable terms in 1996 and 1995. nonrecurring tax credit recorded in 1994 [ Cleveland Electric] F 37 (Cleveland Electric)
Report of Indep@ndent In our opinion. the fmancial statements referred to above Public Accountants present fairly. in all material respects. the financial posi. tion of The Cleveland Electric illuminating Company and Io the Share Owners and subsidiaries as of December 31,1996.and 1995, and the floard of Directors of 't he Cicseland Electric illuminating Company: results of their operations and their cash Dows for each of the three years in the period ended December 31,1996,in We have audited the accompanying censolidated balance . . . . conform.ity with generally accepted accountmg principles. sheet and consolidated statement of capitalization of The Cleveland Electric Illuminr'ing Company (a wholly Our audits were made for the purpose of forming an owned subsidiary of Centerior Energy Corporation) and opinion on the basic financial statements taken as a subsidiaries as of December 31,1996 and 1995, and the whole. The schedule of The Cleveland Electric illuminat-related consolidated statements of income, retained earn. ing Company and subsidiaries listed in the Index to ings and cash Hows for each of the three years in the Schedules is presented for purposes of complying with the period ended December 31, 1996. These financial state- Securities and Exchange Commission's rules and is not ments and the schedule referred to below are the respon. part of the basic financial statements. This schedule has sibility of the Company's management. Our responsibility been subjected to the auditing procedures applied in the is to express an opinion on these financial statements audits of the basic financial statements and, in our opin-based on our audits. ion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic We conducted our audits in accordance with generally financ.ial statements taken as a whole. accepted auditing standards. Those standards require that we p;aa and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and ARTHUR ANDERSEN LLP disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Cleveland, Ohio We believe that our audits provide a reasonable basis for February 14,1997 our opinion. [ Cleveland Electric] F-38 [ Cleveland Electric] \ l I
, . _ _ _ _ _ ...__.____-.m- .-mm..- . ._._.m._.m ...._ _ ._ _ .. ..._._ _ .-._. _ .-...______._.
InCOmo Statement m ms ,,s um,. m,,,, u,,e c ,,,,,,r ,,s .uus.,o For the years endsd_.Ihttwhsdl _ 1996 l995 1994 (tmthons ni didiarsl Operating Retenues $ 1.790 $ 1.769 $ 1.698 Operating Expenses Fuel and purchase;l power (1) 408 413 391 Other operation and maintenance 426 418 394-Generation facilities rental expense, net 56 56 56 Total operation and maintenance 890 887 841 , Depreciation and amortization 210 196 195 i Taxes, other than federal income taxes 230 230 218 i Amortization of deferred operating expenses, net 26 (36) (34) Federal income taxes 75 94 82 l 1.431 1371 1302 l Operating income 359 398 396 ) Nonoperating income (loss) Allowance for equity funds used during construction 2 2 4 , Other income and deductions, net (10) 2 6 Deferred carrying charges - 29 .25 ) Federal income taxes-credit (expense) 6 (2) (4) (2) 31 31 Income Hefore Interest Charges 357 429 427 Interest Charges j Debt interest 242 248 247 ! I Allowance for borrowed funds used during construction (2) (3) (5) 240 74,5 242 . Net Income 117 184 185 ! Preferred Disidend Requirements 39 43 45 i Earnings Available for Common Stock $ 7R $ 141 $ 140 - (1) Includes purchased power expense of $105 million. $102 million and $111 million in 1996.1995 and 1994
. respectively, for all purchases from Toledo Edison.
I Retained Earnings i For the years ended December 31. f 1996 1995 1o94 l (millions of dollars) Retained Earnings (Deficit) at Beginning of Year $1!91) 5(262) $1EQ) i Additions Net income 117 184 185 Deductions Dividends declared: Common stock (161) (74) (122) Preferred stock (39) (41) (45) Net increase (Decrease) (83) 69 18 Retained Earnings (Deficit) at End of Year $(276) $(191) $(262) The accompanying notes are an integral part of these statements. i l l [ Cleveland Electric) F-39 l Cleveland Electric)
Balanco Shoct ; I)ecember 31 m 1996 1995 (nullions of dollars) ASSETS l'roperty. I'lant und Equipment Utility plant in service $6.938 $6.872 Less: accumulated d:preciation and amortization 2.252 lQ94 4,686 4,778 Construction work in progress 57 73 4,743 4,851 Nuclear fuel, net of amortization i13 122 Other property, less accumulated depreciation 54 58 l 4.910 5.031 l l Current Assets l Cash and temporary cash investments 30 70 Amounts due from customers and others, net
)
181 152 l Amounts due from affiliates 6 5 Unbilled revenues 9 79 Materials and supplies, at average cost , Ow ned 42 101 j Under consignment 24 - j Taxes applicable to succeeding years 182 184 j Other 14 7 498 598 Regulatory and Other Assets Regulatory assets 1,350 1,398 Nuclear plant decommissioning trusts 76 61 Other 44 64 1.470 1.523 Total Assets $6.R78 $7.152 The accompanying notes are an integralpart of this statement. l I l l i [ Cleveland Electric] F 40 [ Cleveland Electric]
The (1neland Electru !!!umananng ( .mupans and khdJwenes I)ecember 31. 1996 1995 L 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 43 2.666 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 I Accrued taxes 316 296 Accrued interest 52 59 Other 59 56 l 878 796 Deferred Credits and Other Liahilities l Unamortized investment tax credits 176 184 l Accumulated deferred federal income taxes 1,306 1,298 Unamortized gain from Bruce Mansfield Plant sale 296 311 Accumulated deferred rents for Bruce Mansfield Plant 99 92 Nuclear fuel Icase obligations 74 86 Retirement benefits 73 65 Other 66 71 2 090 2.107 Total Capitalization and Liabilities $6,R7R $7.1 s2 [ Cleveland Electric] F.4l [ Cleveland Electric]
Cash Flows n cioaa a n. m, mu ,n un .,x c,-u-n a,a sui ~sa,o I or the years ended Desember 31 m _,_ 19 % 1995 1994 (milhons of dollars) Cash Flows from Operating Actitities (1) Net income $ i17 $ 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) Leased nuclear fuel amortization 46 71 55 Amortization of deferred operating expenses, nel 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) l (34) Changes in working capital alTecting operations iI (17) 3 Other noncash items (7) - 4 Total Adjustments 401 246 229 Net Cash from Operating Activities $18 430 414 Cash Flows from Financing Actisities (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) (i17) (142) Premiums, discounts and expenses (1) (!!) (1) Net Cash from Financing Activities (436) (256) (215) Cash Flows from Iniesting Actiiities (2) Cash applied to construction (104) (148) (164) Interest capitalized as allowance for borrowed funds used during construction (2) (3) (5) Contributions to nuclear plant decommissioning trusts (12) (13) (14) Other cash applied (4) (6) (27) Net Cash from investing Activities (122) (170) (210) Net Change in Cash and Temporary Cash Intestments (40) 4 (11) Cash and Temporary Cash Intestments at Beginning of Year 70 66 77 Cash and Temporary Cash Insestments at End of Year 5 30 $ 70 S 66 (1) Interest paid (net of amounts capitali:cd) $ 237 $ ?!.1 $ 2nR Federalincome taxes paid $ 30 $ 66 $ 15 (2) Increases in Nuclear Fuel and Nuclear Fuel Lease Obligations in the Balance Sheet resulting from the noncash capitali:ations under nuclearfuel agreements are excludedfrom this statement. The accompanying notes are an integralpart of this statement. 1 1 1 (Cleveland Electric] F-42 (Cleveland Ele:tric]
Stat: ment of Capitalization n uc, aan.wn,,,c mu ,,,,,,,nx o.,,is,,,i ,,,,s . sun.,s,,,,c. Dycembyy 31.
, 199f, pg (nullions of d..II.iro CO\l%10N STOCK I QLTI):
Common shares, uithout par value.105 million authorized. 79 6 nulhon outstandmg in 1996 and 1995 $ 1,241 $ 1.241 Other paid-in capital hu 79 Retained earnings (deficit) (276) (1931 Total Common Stock Equit) 1.045 1.127 1996 Current Shares Call Price putstandjng Per Sharer _ PREFERRED STOCK: Without par value. 4.000.000 preferred shares authoriicd Subject to mandatory redemption:
$ 7.35 Senes C 120.000 $ 101.00 12 13 88.00 Series E 12,000 1.011.48 12 15 9.125 Series N 150.000 100.00 15 30 91.50 Series Q $3.572 1.000.00 54 64 88.00 Series R 50.000 -
50 50 90.00 Series S 74.000 - 73 73 216 245 Less: Current maturities 30 30 Total Preferred Stock, with Mandatory Redemption Provisions 186 215 ; Not subject to mandatory redemption: I
$ 7.40 Series A 500,000 101.00 50 50 7.56 Series 11 450.000 102.26 45 45 Adjustable Series L 474.000 100.00 46 49 4 42.40 Series T 200.000 - 97 97 !
Total Preferred Stock, without Mandatory l Redemption Provisions 238 241 LONG-TERM DEBT: First mortgage bonds: 7.625% duc 2002 195 245 7.375% duc 2003 100 100 9.500% due 2005 300 300 8.750% duc 2005 75 75 10.880% duc 2006 - 50 l 9.250% duc 2009 50 50 8.375% duc 2011 125 125 8.375% duc 2012 75 75 l i 9.375% due 2017 300 300 l 10.000% duc 2020 100 100 9.000% duc 2023 150 150 1.470 1.570 Tax-exempt issues secured by first mortgage bonds: 7.000% due 2006-2009 64 64 6.000% due 2011" 6 6 6.000% due 2011" 2 2 l 6.200% duc 2013 48 48 8.000% duc 2013 79 79 3.500% due 2015" 40 40 6.000% due 2017" l I i 3.500% duc 2018" 73 73 ' 6.000% due 2020" 41 41 6.000% due 2020" 9 9 9.750% due 2022"' 70 70 6.850% due 2023 30 30 S.000% 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 accompanying notes are on integral part of this statement. [ Cleveland Electric] F-43 (Cleveland Electric]
Statement of Capitalization <comm o)
!)cegmber 31.
t wt, Iw5 ( tmllhun of dollarq l ONG 'I LIO1 til'lil': (Continued ) N1edium term notes secured by first mortgage bonds: 8.700% due 1996 - 20 9.100'% due 1996 - 9.ll(G dae 1996 - 910YE duc 1996 - 9.140'"
# duc 1996 -
9.050% due 1996 - iJ H.950'L duc 1996 - 40 9.4$0% duc 1997 43 43 9fXKT4, duc 1998 5 5 8.870% due 1998 10 10 8.260'L duc 1998 2 2 8.330% duc 1998 25 25 8.170% due 1998 11 11 8.150% duc 1998 8 8 N.160% duc 1998 5 5 9.25(YL due 1999 52 52 9.300% duc 1999 25 25 7.670% duc 1999 3 3 7.250% due 1999 12 12 7.850% duc 1999 25 25 7.77(G. due 1999 17 17 H.290% due 1999 10 10 9.200% due 2001 15 15 7.420% due 2001 10 20 9.050% due 2001 5 5 R.680% due 2001 15 15 8.540% due 2001 3 3 H.560% duc 2001 4 4 E.550% duc 2001 5 5 7.850% duc 2002 5 5 8.130% duc 2002 28 28 7.750% duc 2003 15 15 9.520% due 2021 8 8 366 516 Tax-exempt notes: 6.500% duc 1996 - 3 5.500% due 1997 6.700% due 2006 20 21 5.700% duc 2008 7 8 6.700% duc 2011 6 6 5.875% due 2012 14 14 47 52 Itink loans secured by subordinate mortgage: 7.500're due 1996 - 2 Unamortized premium (discount), net (6) (6) 2.556 2.813 Less: Current maturities 115 147 Total Long-Term ikbt 2.44) 2.666 10TAL CAPITAL.lZATION $1 olo $4 ?ao
- Derwies debt of len than Si million.
" Denotes sariable rate issue with December 31. 1996 interest rate shown.
*" Subject to optional tender by the owners on November 1.1997.
t I [ Cleveland Electric] F-44 [ Cleveland Electric] l
Notes to the Financial Statements accounts receivabic securiti<aiion ror the Company and (1) Summary of Significant Accounting Toledo Edison. l Policies centerior Sen ice company (Service company), a ! (a) General wholly owned subsidiary of Centerior Energy, provides l The Company is an electric utility serving Northeast Ohio management. linancial, administrative, engineering, legal L and a wholly owned whsidiary of Centerior Energy. The nd other services at cost to the Company and other Company's financial statements have historically included a0iliated companies. *1iie Service Company billed the , the accounts of the Company's u holly owned subsidiaries. Company $149 milli n. $141 mdli n and $136 million in j which in the aggregate were not material. In 1995, the 1996.1995 and 1994, respectively, for such services. j 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 securitir.ation completed m. 1996 as energy consumption based on rate schedules or contracts '
discussed in Note I(j). In 1994, the Company transferred 3
. . . . . authon. zed by the PUCO. An accrual is made at the end its mvestments m three wholly owned subsidianes to of each month to record the estimated amount of unbilled Centerior E.nergy at cost (526 million) v.ia property d.ivi-
. revenues for kilowatt-hours sold in the current month but dends. All s.tynificant intercompany items have been eh. m-
. . not billed by the end of that month, mated m. consolidation. -
c A fuel factor is added to the base rates for electric service. ,
.The Company follows the Uniform Splem of Accounts
- prescribed by the FEl(C and adopted by the PUCO.
gne n cm m cutomers th
. costs of fuel and most purchased powcr. It is reviewed and 1(ate-regulated utilities are subject to SFAS 71 which .
adjusted semiannually in a PUCO proceeding. See Man- + governs accounting for the elTects of certain types of rate r regulation. Pursuant to SFAS 71, certain incurred costs agement's Financial Analysis - Outlook-FirstEnergy ! Rate Plan. are deferred for recovery in future rates. See Note 7(a). l The preparation of financial statements in conformity (d) Fuel Expense with generally accepted accounting principles requires The cost of fossil fuel is charged to fuel expense based on management to make estimates and assumptions that inventory usage. The cost of nuclear fuel, including an I alTect the reported amounts of assets, liabilities, revenues 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 disposal costs are being recovered through base rates. best information available. Actual results could difTer The Company defers the difTerences between actual fuel from those estimates. costs and estimated fuel costs currently being recovered l 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 Light Company, Ohio Edison Owners of nuclear generating plants are assessed by the - and its wholly owned subsidiary, Pennsylvania Power ! federal government for the cost of decontamination and Company. The members have constructed and operate decommissioning of nuclear enrichment facilities oper- l generation and transmission facilities for their joint use. ated by the United States Department of Energy. The ;
. (b) Related Party Transactions assessments are based upon the amount of enrichment t Operating revenues. operating expenses and m, terest services used in prior years and cannot be imposed for i
charges m. elude those amounts for transactions with aflil- more than 15 years (to 2007). The Company has accrued ; i a liabih.ty for its share of the total assessments. These ; iated companics in the ordinary course of business ' operations. costs have been recorded as a regulatory asset since the i 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). i marily for firm power, interchange power, transmission ' line rentals and jointly owned 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 1(j), beginning in May 1996. Centerior Funding over their estimated useful lives on a straight line basis. i began serving as the transferor in connection with the in its April 1996 rate order, the PUCO approved changes j (Cleveland Electric] F-45 (Cleveland Electric]
in depreciation rates for the Company. An increase in the The classihcation. Accumulated Depreciation and Amor-depreciation rate for nuclear property from 2.5% to 2.8W ti/ation. in the Halance Sheet at December 31,19% increased annual depreciation e spense approsimately includes Sh5 milhon of decommissioning costs presiously
$13 million. A reduction in the composite depreciation espensed and the earnings on the external trust funding.
rate for nonnuclear property from 3.34% to 3.23% This amount exceeds the Balance Sheet amount of the decreased annual depreciation expense by approximately external Nuclear Plant Decommissioning Trusts because
$3 million. The changes in depreciation rates were elrec- the reserve began prior to the external trust funding. The tive in April 1996 and resulted in a $7 million net increase trust earnings are recorded as an increase to the trust in 1996 depreciation expense, assets and the related component of the decommissioning The Company accruckhe estimated costs of decommis- reserve (included in Accumulated Depreciation and sioning its three nuclesr generating units. The accruals ^ "I'"li "h are required to be funded in an external trust. The PUCO The stafT of the Securities and Exchange Commission requires that the expense and payments to the external has questioned certain of the current accounting practices trusts he determined on a levelized basis by dividing the of the electric utility industry, including those of the unrecovered decommissioning costs in current dollars by Company, regarding the recognition, measurement and the remaining years in the licensing period of each unit. classification of decommissioning costs for nuclear gener-This methodology requires that the nel carnings on the ating stations in the financial statements. In response to trusts be reinvested therein with the intent of having net these questions, the Financial Accounting Standards carnings ofTset innation. The PUCO requires that the Board (FASB) is reviewing the accounting for removal estimated costs of decommissioning and the funding level costs, including decommissioning. If current accounting be reviewed at least every five years. practices are changed, the annual provision for decom-In April 1996, pursuant to the PUCO rate order, the missi ning c uld increase; the estimated cost for decom.
Company decreased its annual decommissioning expense issi ning c uld be recorded as a liability rather than as accruals to $12 million from the $13 million levelin 1995. accumulated depreciation; and trust fund income from The accruals are renected in current rates. The accruals the external decommissioning trusts could be reported as are based on adjustments to updated, site-specific studies investment income rather than as a reduction to decom-for each of the units completed in 1993 and 1994. These missioning expense. The FASB issued an exposure draft ; estimates reflect the DECON method of decommission- n the subject on February 7,1996 and continues to I ing (prompt decontamination), and the locations and cost review the subject. characteristics specific to the units, and include costs (f) Property, Plant and Equipment associated with decontamination and dismantlement for Pr perty, plant and equipment are stated at original cost each of the units. The estimate for Davis-Besse also ) s am u a we num n cons includes the cost of site restoration. The adjustments to . the updated studies which reduced the annual accruals include related payroll taxes, retirement benefits, fringe benefits, management and general overheads and allow-beginning in April 1996 were attributable to changed assumptions on radioactive waste bun.a l cost estimates ance for funds used during construction (AFUDC). and the exclusion of site restoration costs for Perry Unit I AFUDC represents the estimated composite debt and and Beaver Valley Unit 2. After the decommissioning of eq ycu u s use nance c numetbn. Es these um.ts in the future, the two plant sites may be usable noncash allowance is credited to income. The AFUDC - rate was 10.32% in 1996,10.33% in 1995 and 9.68% in for new power production facih. . ties or other m . dustrial 1994. pu rposes. Maintenance and repairs for plant and equipment are The revised estimates for the units in current dollars and m dollars at the time oflicense expiration, assuming a 4%. charged to expense as incurred. The cost of replacing annualinflation rate, are as follows: plant and equipment is charged to the utility plant I 1
% accounts. The cost of property retired plus removal costs, j Eniraiion ruture after deducting any salvace value, is charged to the Generating Umt Year A mou nt Amount ' '
(milhons of dollars) accumulated provision for depreciation. Davis Besse 2017 $176 $ 451 Perry Unit i 2026 132 482 Beaver Valley Unit 2 2027 d4 203 Total g $1 tu [ Cleveland Electric] F-46 (Cleveland Electric)
(g) D.afarred G2in from Sala of Utility Plznt in July 1996. Centerior Funding completed a public sale of $150 million of receivables-backed investor certificates The sale and leaschack transactmn discussed in Note 2 . . resulted in a net gain for the sale of the liruce Mansfield m a transactmn that qualifies for sale accounting treat- , i ment for financial reporting purposes. Costs associated l G,enerating Plant (Mansfield Plant). The net gain was deferred and .is bem.g amortized over the term of the with the sale totaling $5 million in 1996 are included in leases. The amortization and the lease expense amounts Other income and Deductions. Net in the income State-ment. These costs are expected to be $1I milhon annually are reported m. the income Statement as Generat. ion over the remaining period. Facilities 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 Losses and gains realized 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 Balance 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 issue when the proceeds of a anteed to be a buyer of last resort. new issue are used for the debt redemption. The amorti-zations are included in debt interest expense. (2) Utility Plant Sale and Leaseback (i) Federal income Taxes Transactions The Company uses the liability method of accounting for The Company and Toledo Edison are co-lessees of income taxes in accordance with SFAS 109. See Note 8. 18.26% (150 megawatts) of Beaver 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 44.38% (355 megawatts) of Units I, 2 and 3 of the of assets and liabilities. The majority of these temporary Mansfield Plant, respectively. These leases extend differences are attributable to property-related basis dif. through 2017 and are the result of sale and leaseback ferences, included in these basis differences 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 recovery 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 connec%n 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 time or to renew the leases. The investment tax credits are deferred and amortized over leases m. elude conditions for mandatory termination (and the lives of the applicable property as a reduction of . . possible repurchase of the leasehold interests) upon cer-depreciation expense.
tain events of default. (j) Accounts Receivable Securitization As co-lessee with Toledo Edison, the Company is also i In May 1996, the Company and Toledo Edison began to obligated for Toledo Edison's lease payments. If Toledo sell on a daily basis substantially all of their retail cus- Edison is unable to make its payments under the Beaver 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 securitization agreement. payments have been made on behalf of Toledo Edison. [ Cleveland Electric] F-47 (Cleveland Electric]
. - - ~ . - --- - .-.- - .- .._.- -- -- --.. ..
i l uiure minimum lease payments under the operating hi.nMlnD leases at December 31.1996 are summari/cd as follows: Q'{,'j'll j y'["J."y gmgg I or i or Osryyinr 1'mt W Shard S.lep I utli 1)entreuhon the 1okdd (nuthons of dollard year Comp 3 1.dmm Sencea Pumped Sturge , 351 (80.utn ) 5 65 5 24 (nulhuns of dollard I;aulAe l' nit $ 4ll (6khn) 161 -- 1997 5 61 5 102 g >.nis.Hewe 454 ($1.38) 711 250 199H 63 102 Perry Una 1 371 (31.111 1.774 392 1999 7n 10x lic.ncr Valley Uni 2 and 2000 D III Common I^acihties 20nl 75 1tI (Note 2) 201 (24.47) 1.279 11.9 l.ater Years l .17n 1J 96 .g pg gng Total I uture Minimum Lease ' Pa3 menis om 5 ? "" Depreciation for Eastlake Unit 5 has been accumulated l with all other nonnuclear depreciable property rather than < Rental expense is accrued on a straight-I.me basis over the . . I
- terms of the leases. The amount recorded in 1996,1995 by specih.c umts of depreciable property.
l and 1994 as annual rental expense for the Manslicid Plant (4) Construction and Contingencies { leases was $70 million. See Note 1(g). Amounts charged ! (a) Construction Program I to expense in excess of the lease payments are classified as I l Accumulated Deferred Rents in the Balance Sheet. The estimated cost of the Company's construction pro- l gram for the 1997-2001 period is $624 million, includmg l The Company is buying .150 megawatts of Toledo AFUDC of $17 million and excluding nuclear fuel. l Edison's Heaver 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 l $99 million,598 million and $108 million in 1996,1995 ' the emission of sulfur dioxide and nitrogen oxides by and 1994. respectively. We anticipate that this purchase rossii. fueled generating units. Our strategy provides for will continue indefinitely. The future minimum lease compliance primarily through greater use of low-sulfur payments through 2017 associated with Beaver Valley coal at some of our units and the use of emission Unit 2 aggregate 51.265 billion. allowances. Total capital expenditures from 1994 through 1996 in connection with Clean Air Act compliance (3) Property Owned with Other Utilities amounted to $32 million. The plan will require additional ! and Investors capital expenditures over the 1997 2006 period of approx. 1 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 l i utilities and those investors u ho are owner-participants in fuel and other operation and maintenance expenses will various sale and leaseback transactions (Lessors), certain be 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 generating 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 which is obligated several other sites. The Company has accrued a liability j to pay for such Lessor's share of the construction costs totaling 57 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 l the income Statement. The Balance Sheet classification outcome of these matters will not have a material adverse of Property, Plant and Equipment at December 31,1996 elTect on our financial condition, cash flows or results of includes the following facilities owned by the Company as operations. See Management's Financial Analysis-a tenant in common with other utilities and Lessors: Outlook-Hazardous Waste Disposal Sites. l l 1 l Cleveland Electric] F-48 l Cleveland Electric]
(5) Nuclear Operations and 104 weeks. The amount and duration of extra expense Contingencies could substantially execed the insuranec coverage. (a) Operating Nuclear Units (6) Nuclear Fuel The Companfs three nuclear units may be impacted by Nuclear fuel is financed Dr the Company and Toledo 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 adverse effect on our financial condition, cash flows from intermediate-term notes and $100 million from bank and results of operations. See the discussion of these and credit arrangements). The intermediate-term notes , other risks in Management's Financial Analysis-Out. mature in the 1997 through 2000 period. The bank credit look-Nuclear Operations. arrangements terminate in October 1998. The special- l purpose corporation may not need alternate financing in j (b) Nuclear Insurance 1997 to replace $83 million of maturing intennediate- ! term notes. At December 31,1996, $129 million of The Pn,ce-Anderson Act limits the public liability of the nuclear fuel was h.nanced for the Company. The Com-owners of a nuclear power plant to the amount provided pany and Toledo Edison severally lease their respective i by private insurance and anindustry assessment plan, in portions of the nuclear fuel and are obligated to pay for i the event of a nuclear .meident at any unit m the United the fuel as .ti is
. consumed m. a reactor. The lease rates are States resultmg m losses m. excess of the level of private based on various intermediate-term note rates, bank rates insurance (currently $200 million), 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 amounts financed include nuclear fuel in the Davis. < $11 million per year for each nuclear incident. These Besse, Perry Unit I and Beaver Valley Unit 2 reactors assessment limits assume the other CAPCO companies with remaining lease payments for the Company of 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 , leasehold interest in, and capitalized also included interest charges incurred by l the lessors amounting to $3 million in 1996, $4 million in The utility owners and lessees of Davis-Besse, Perry and 1995 and $7 million in 1994. The estimated future lease Beaver Valley also have insurance coverage for damage to . amortization payments for the Company based on pro-property at these sites (including leased fuel and cleanup
. jected consumption are $52 million in 1997,$40 million costs). Coverage amounted to $1.3 billion for Davis-Besse
" 538 milli n in 1999,$35 million in 2000 and $34 and $2.75 billion for each of the Perry and Beaver Valley .
sites as of January 1,1997. Damage to property could 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 efTect on its financial condition, Regulatory Assets cash flows and results of operations. In addition, the The Company is subject to the provisions of SFAS 71 and Company can be assessed a maximum of $12 million has complied with its provisions. SFAS 71 provides, under these policies during a policy year if the reserves am ng ther things, for the deferral of certain incurred available to the insurer are inadequate to pay claims c sts that are probable of future recovery in rates. We - arising out of an accident at any nuclear facility covered m nitor changes in market and regulatory conditions and hv the insurer. consider the effects of such changes in assessing the The Company also has extra expense insurance coverage. continuing applicability of SFAS 71. Criteria that could it includes the incremental cost of any replacement power give rise to discontinuation of the application of SFAS 71 purchased (over the costs which would have 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 tal expenses after the occurrence of certain types of allow it to recover operating costs, carn 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 which 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 [ Cleveland Electric] F-49 [ Cleveland Electric]
represent probable future resenues to the Compan) asso- and 'loledo I dison to hic a proposal to effectuate the ciated with certain incurred costs, which it will recover I'l CON recommendation and espressed a wilhngness to f rom customers thmugh the rate-making pmeess. consider altern.itbes to its recommendation. The PlTO E0cetise January 1,1996, the Company adopted SFAS stated in b mh tM fadure by the Company and Toledo 121 w hich imposes stricter criteria for earrying reputatory Edison to follow the recommendation could result in a assets than Sl'AS 71 by requiring that such assets be PUCO-ordered write-down of assets for regulatory pur-probable of recoverv at each balance sheet date. The poses. The PUCO approved a return on common stock criteria under SI'AS 121 for plant assets require such equh f 12M and an omaH rate of mtum of m fm W cmnpanies. H wever, the PUCO also indicated assets to be written down if the book value exceeds the projected net future undiscounted cash now.s. the authori/cd return could be lowered by the PUCO if the Company and Toledo Edison do not implement the , Itegulatory assets in the llalance Sheet are as follows: ' recommend.ition. In August 1996, various intervenors
$["*",'h appealed the PUCO rate order to the Ohio Supreme tmahons of Court. The Company and Toledo Edison did not appeal d""" )
the order to the Ohio Supreme Court. In connection with Amounts due from customers for luture feder.d meome tases. nei $ 6M $ 651 the PUCO order discussed in Management's Financial Unamortized loss on reacquned debi $s 61 Pre phase.in deferrals' Analysis - Outlook-FirstEnergy itate Plan, certain par. 320 Ul . It.oc Stahdvatmn Program dcferrah 3Hn 313 ties agreed to request a stay of the.ir appeals until compic. oiher
- O tion of the pending merger with Ohio Edison.
1 ot.a o un um
- Itepresent deferrals of operatmg espenses and carrying charges for Perry Umt I and licaser Valley Unit 2 in 19s7 and 19ss which are (c) Assessment l
bemp amortized over the hvcs of the related property. The Company and Toledo Edison agree with the concept I 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 regulatary objective to become more competitive. However, 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 years. Itegulatory liabilities in the and the opportunity for Centerior Energy common stock Italance Sheet at December 31,1996 and 1995 totaled share owners to receive a fair return on their investment. S24 million and $17 million, respectively. Consideration of whether to implement a plan responsive to the PUCO's recommendation to revalue assets by (b) flate Order 51.25 b;! lion is pending the merger with Ohio Edison. On April ll,1996, the PUCO issued an order for the We have evaluated the Company's markets, regulatory Company and Tojedo Edison granting price increases conditions and ability to bill and collect the approved aggregating $119 million in annualized revenues (584 prices, and conclude that the Company continues to million for the Company and $35 million for Toled comply with the provisions of SFAS 71 and its regulatory Edison). The PUCO rate order provided for recovery of assets remain probable of recevery. If there is a change in all costs to provide regulated services, including amortiza-our evaluation of the competitive environment, regulatory l tion of regulatory assets, in the approved prices. The new framework or othr factors, or if the PUCO significantly l prices were implemented in late April 1996. The average reduces the value of the Company's assets or reduces the price increase for the Company's customers was 4.9% approved return on common stock equity of 12.59% and with the actual percentage increase depending upon the overall rate of return of 10.06E or both, for future customer class. The Company and Toledo Edison intend regulatory parposes, the Company may be required to to freeze prices through at least 2002, although they are record material charges to earnings. 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 1 Toledo Edison reduce the value of their assets for regula- before-tax .arge to write off the regulatory assets shown I 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 rnects normallevel in nuclear plant and regulatory assets. Imple- the criteria of SFAS 71, a write-oft would be limited to mentation of the price increases was not contingent upon regulatory assets that are not reDected in the Company's a revaluation of assets. The PUCO invited the Company cost-based prices established for the remaining regulated [ Cleveland Electric] F-50 [ Cleveland Electric]
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 emironment which led to discontinuing the application of amount of federal income tax recorded on the books as SI AS 71 to some or all of the Company's operations follow s: would also result in a write-down of property, plant and mg jp32 mg (""Ihuns of duilars) equipment pursuant to SFAS 121. Hook Income Before Federal Income Tax _ g 5?xo $?il See Management s Financial A nalysis - Outlook- Tax on Book Income at Staiutor3 Rate 5 o5 5 98 $ 93 FirstEnergy Rate Plan for a discussion of a regulatory increase (Decrease) in Tax. D'Pci"ti"" 8 8 6 , plan for the Company and Toledo Edison and its effect on Rate Stabilization Program (18) (18) the.ir comph. mcc with SFAS 71. Other items J) J J (d) Rate Stabilization Program The Company joins in the filing of a consolidated federal The Rate Stabilization Program that the PUCO approved in October 1992 allowed the Company to defer and income tax return with its af!iliated companies. The method of tax allocation reflects the benefits and burdens subsequently amortize and recover certain costs not being realized by each company's participation in the consoli-recovered in rates at that time. Recovery of both the costs dated tax return, approximating a separate return result no longer being deferred and the amortization of the f r each company. 1992-1995 deferrals began in late April 1996 vcith the implementation of the priec 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 Stabilization Pro- in 1994 and resulted in a $204 million loss with a gram were $76 million and $70 million, respectively. The corresponding $71 million reduction in federal income tax amortization of the deferrals began ir December 1995. liability. Because of the alternative minimum tax The total amortization was $12 million and $1 million in ( AMT), $40 million of the $71 million was realized in 1996 and 1995, respectively. 1994. The remaining $31 million will not be realized until 1999. Additionally, a repayment of approximately The regulatory accounting measures under the Rate Sta-
$29 million of previously allowed investment tax credits bilization Program also provided for the accelerated was rec gnized in 1994.
amortization of certain benefits during the 1992-1995 period. The total annual amount of such accelerated Under SFAS 109, temporary differences and carryfor-benefits 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. in the income Statement were as follows: These are summarized as follows: jy96 - j992 j994 December 31. (millions of dollars) 1996 1995 Operating Expenses: (millions of Current 5 55 549 $ 53 dollars) Deferred J 4s 29 Property. plant and :quipment $1.482 $1,468 Total Charged to Operating Expenacs _, _,7,1 ,,,14 M Deferred carrying charges and operating expenses.,_ 134 139 urrent
" " " "8 #*"I
- N (11) (9) (17)
Deferred ,,,_,,,,1 y J Investment tax credits (95) (99)
. Total Expense (Credit) to Nonoperating Sale and leaseback transactions (121) (123)
Income , _g) 1 f Other (6%) (20) Total Federal income Tax Expense $ 69 596 5 R6 Net deferred tax hability __ 51 in6 51 ?9x The deferred federal income tax expense results from the For tax purposes, net operating loss (NOL) carryforwards temporary differences that arise from the different years of approximately $74 million are available to reduce when certain expenses are recognized for tax parposes 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 differences relate principally to depreciation r.nd deferred credits of $174 million that may be carried forward operating expenses and carrying charges. indefinitely are available to reduce future tax. [ Cleveland Electric) F-51 [ Cleveland Electric)
(9) R:lir:m:nt B:nsfits and Other Assets - Other in the llalance Sheet was $15 l I (a) Retirement income Plan "IU I"" ""d b l ' *IIII""' P#II)- l t C.enterior E.nergy sponsors jointly with its subsidianes a Plan awets consist primarily of investments in common i noncontnbuting pension plan (C,enterior Pension Plan) stock, bonds, guaranteed investment contracts. cmh equivalent securities and real estate. which covers all employee groups. The amount of retire-ment benefits generally depends upon the length of ser-(b) Other Postretirement Benefits l vice. Under certain circumstances, benefits can begin as i carly as age 55. The funding poh.ey is to comply w.it h the Centerior Energy sponsors jointly ' w.ith .its subsidiaries a Employee Retirement income Security Act of 1974 postretirement bench.t plan which provides all emplovec - guidelines. proups certa n health care, death and other postretirement benef.ts other than pensions. The plan is contributory, Pension costs (credits) for Centerior Energy and its { with retiree contributions adjusted annually. The plan is j subsidiaries for 1994 through 1996 were comprised of the not funded. Under SFAS 106, the accounting standard for ' following components: l postretirement benefits other than pensions, the expected 1996 1994 j994 4 i l Eilhun' Idunars) ' costs of such benefits are accrued during the employees' i Service cost for benefits carned during the l period vears of service.
$ 13 5 10 $ 13 l l j interest cost on projected hencht obhganon _ 28 26 26 Actual return on plan assets The components of the total postretirement benefit costs l
(50) (53) (2) i Net amortization and deferral _ _] _.,,9 ,,0 4) for 1994 through 1996 were as follows: Nel costs (credits) y) $ fx) 5 1 1996 1995 1994 (millions of dollars) Pension costs (credits) for the Company and its pro rata S'["('[si fw benchis canied dunny the share of the Service Company's costs were $(5) million laterest cost on accumulated postreurement for both 1996 and 1995, and $2 million for 1994. ' ' l N'o'r'tilNi$iY$a"nsinun obhganon at I knuary 1.1993 of $104 milhon over The following table presents a reconciliation of the funded 20 years 5 5 5 status of the Centerior Pension Plan. The Company's ^"'" '""'8"'" g [g share of the Centerior Pension Plan's total projected - ~ ~ l benefit obligation approximates 50%. These amounts included costs for the Company and its 1 December 31. pro rata share of the Service Company's costs. 1996 1995 (millions of The accumulated postretirement benefit obligation and Actuarial present value of bencfit obhgations: accrued postretirement benefit cost for the Company and Vested benefits $326 5304 Nonvested benehts its share of the Service Company's obligation are as _!f _] g , Accumulated benefit obligation 342 306 - Effect of future compensation levels J J December 31 Total projected benefit obligation 395 360 *^ I995 Plan assets at fair market value 4.2)l, 19 4 (n of Funded status 26 34 Unrecognized net gam from vanance between Accumulated postretirement benetit obligation assumptions and experience (56) (6R) attributable to. Unrecognized prior service cost 14 15 Retired participants $tlu8) $(124) Transition asset at January t 1967 being amortized Fully eligible active plan participants (3) over 19 years (2) _,(J2) ,ft) Other active plan parucipants (21) (19) ] Net accrued pension habibty M) M) Accumulated postrctirement benefit obhgation, (132) (145) l Unrecognized net gain from variance between 1 l A September 30 measurement date uas used for 1996 and 1995 reporting. At December 31, 1996, the settlement g,",""['ed b""n
>bt,twn t T l Accrued postrctirement bencht cost $ Ik9) 5 (7k) !
l (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-l tion was 3.5% for 1997 and 4% thereafter. At Decem- pany's accrued postretirement benefit cost of 573 million 1 ber 31,1995, the settlement rate and long-term rate of and $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 l 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- [ Cleveland Electric] F-52 [ Cleveland Electric)
sation increase awumptions were the same as those dis- carnings. At December 31, 1996, the Company had cussed for pension reporting in Note 9(a). At $130 million of appropriated retained earnings for December 31,1996, the assumed annual health care co<t the payment of dividends. See Management's Financial trend rates (applicable to gross eligible charges) were Analysis - Capital Resources and Liquidity-Liquidity. 7.5% for medical and 7% for dental in 1997. Iloth rates reduce gradually to a fixed rate of 4.75% by 2003. Ele- (c) Preferred and Preference Stock ments of the obligation affected 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 r rate than other elements. If the assumed health care cost 1997, $15 million in 1998,$33 million in both 1999 and trend rates were increased by one percentage point in 2000, and $80 million in 2001. each future year, the accumulated postrctirement 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 Sh3'es To Price lic Hegmning Per cost components of the annual postretirement benefit cost Redeema! in Share would increase by $0.3 million. 5 7 35 Scric5 C 10 000 1984 5 800 88.00 Series E 3.000 1981 1.000 9.125 Series N 150.000 1993 100 (10) Guarantees vi.50 Scrics o iO.7 i4 iv93 i.000 kh.00 Scrics R 50.000 200l* 1.000 The Company has guaranteed certain loan and lease 90.00 sc,;e, s i g,73o ,999 %
obligations of a coal supplier under a long-term coal
- Ali ouistanding shares to be redeemed on December i. 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 Preferred Stock, $90.00 Series S, which reduces the 2002 the Company under the contract was $19 million. redemption requirement shown in the above table. The prices under the contract which includes certain minimum payments are sufficient to satisfy the loan and The annualized preferred dividend requirement at December 31,1996 was $38 million, lease obligations and mine closing costs over the life of 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 ery 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 FirstEnergy Rate Plan. shares without par value. No preference shares are cur-(11) Capitalization rently outstanding. (a) Capital Stock Transactions \Vith 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 following table. common stock. Subject to Mandaiory Redemption: (d) Long-Term Debt and Other Borrowing
$ 7.35 Scrics C (10) (10) (10) 88.00 Scncs E Arrangements (3) (3) (3)
^d("y*y[*"c5M
, g Long-term debt which matures or is subject to put 91.50 senes o (ii) (ii) - options during the next five years is as follows: $115 mil-n n on in N, Not Su je t o andatory Redemption: . ,
Adjustable Scrics L W 3) - - $5 million in 2000 and $62 million in 2001. I Total t?on ; <?t y ttn?) The Company's mortgage constitutes a direct first lien on (b) Equity Distribution Restrictions substantially all property owned and franchises held by Federal law prohibits the Company from paying dividends the Company. Excluded from the lien, among other out of capital accounts. The Company has since 1993 things, are cash, securitics, accounts receivable, fuel and declared and paid preferred and common stock dividends SUPPhes. 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 [ Cleveland Electric] F-53 (Cleveland Electric] l
i l mortgage bonds or certain other transactions. The Com- ""#*"* pany was in compliance with all such covenants as of n,% em ! (m.bns of December 31, 1996. The Company and Toledo Edison Type of suunner d""'" 3 , have letters of credit in connection with the sale and U$dN.II"""$rnment
$14 $26 leaseback of Beaver Valley Unit 2 that expire in Muni Pal - I4 oihcr s June 1999. The letters of credit are in an aggregate -
~% To !
amount of approximately $225 million and are secured by 4"i'l S"""'i'" ^^ - first mortgage bonds of the Company and Toledo Edison I" E E m the proportion of 40% and 60E respectively. Maturiiics of Debt Snuritics: l Due within one year $- $i Due in one to live ycan to 12 Duc in nit to 10 > cars (12) Short Term Borrowing Arrangements Due aner 10 yean 4 13 ' J 14 , Total $l9 54n ! Centerior Energy has a 5125 million revolving credit facility through May 1997, Centerior Energy and the The fair value of these trusts is estimated based on the : Service Company may borrow under the facility, with all qu ted market prices for the investment securities and borrow.mgs jomtly and severally guaranteed by the Com- approximates the ccrrying value. The fair value of the i pany and Toledo Edison. Centerior E.nergy plans to trans- Company's preferred stock, with mandatory redemption fer any of its borrowed funds to the Company and Toledo provisions, and long-term debt .is estunated based on the
. . i Edison. The credit agreement is secured with first mort- quoted market prices for the respect.ive or similar issues or gage bonds of the Company and Toledo Edison in the on the basis of the discounted value of future cash flows.
proportion of 40% and 60% iespectively. The credit The discounted value used current dividend or interest , rates (or other appropriate rates) for similar issues and agreement also provides the participating banks with a loans with the same rermining maturities. i subordinate mortgage security interest on the properties of the Company and Toledo Edison. The banks' fee is The estimated fa.ir values of all other. financial instru-0.625% per annum payable quarterly in addition to inter- ments approx.imate their carrying amounts in the Balance . Sheet at December 31,1996 and 1995 because of their i est on any borrowings. There were no borrowings under short-term nature. the facility at December 31, 1996. Also, the Company ! j and Toledo Edison may borrow from each other or, a (14) Quarterly Results of Operations ; short-term basis. At December 31, 1996, the Company (Unaudited) had total short-term borrowings of $112 million from its The following is a tabulation of the unaudited quarterly I afliliates with a weighted average interest rate of 6.18% results of operations for the two years ended December 31,1996. (13) FinancialInstruments Ouarten Ended n,s n ,sune 30, sm 30. me. m : The estimated fair values at December 31,1996 and 1995 (millions of dollars) l 1996 i of financial instruments that do not approximate their Opera:ing Revenues $42H $434 $506 $422 l Operating income 76 carrying amounts in the Balance Sheet are as follows: 86 121 76 Net income 17 25 59 16 December 3f. Earnings Availabic for ino6 ino3 Common Stock
)
7 15 49 6 Carrying Fair Carrying Fair 1995 Amount yptus, u Amount Valuy Operating Revenues $410 $424 $526 $408 (millions of dolien) Operating income 85 91 145 77 Capitalization and Liabilitics: Net income 34 38 90 23 Preferred Stock. uith Mandatory Earnings Availabic for Redemption Provisions $ 216 $ 220 $ 245 5 232 Common Stock 23 27 80 12 Long-Term Debt 2.562 2.630 2.819 2.824 Earnings for the quarter ended September 30,1996 were Noncash investments in the Nuclear Plant Decommis- decreased by 511 million as a result of a 317 million sioning Trusts are summarized in the following table. In charge for the disposition of materials and supplies inven-1996, the Company and Toledo Edison transferred the tory. The sale and disposal of inventory was part of the
- bulk of their mvestment assets in existing trusts into .
reengineering of the supply chain process. Centerior Energy pooled trust funds for the two compa- (15) Pending Merger of Centerior Energy J nies. The December 31,1996 amounts in the table repre- and Ohio Edison sent the Company's pro rata share of the fair value of On September 13, 1996. Centerior Energy and Ohio such noncash investments. Edison entered into an agreement and plan of merger to [ Cleveland Electric] F-54 (Cleveland Electric]
.~ _ _
form a new holding company, firstEnergy. I ollowing the Toledo Edison to be charged against earnings, estimated merger, firstEnerg) will directly hold all of the issued and by Firstlinergy to total apprmimately $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 sharc owners of Centerior Energy and FirstEnergy to the PUCO stafT for approval. The Com-Ohio Edison will own all of the issued and outstanding pany's share of the write-oft 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 FirstEnergy If the merger is not consummated, the plan would be null common stock for each share of Centerior E.nergy com- . .
. and void. S.ee Management's 1..mancial Analys.is - Out-mon stock owned. Ohio Edison share owners will receive kiok-Pending Merger w.it h Ohio Edison and -FirstEnergy cne share of FirstEnergy common stock for each share of Rate Plan for a discussion of the proposed merger and the Ohio Edison common stock owned.
plan. FirstEnergy plans to account for the merger as a purchase in accordance with generally accepted accounting princi- (16) Pending Merger of Toledo Edison ples. If FirstEnergy 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 5401 million; (4) reset retained earnings of the Company necessary regulatory approvals have been obtained, except and Toledo Edison to zero; and (5) reduce the related the NRC's approval. This application was withdrawn at deferred federal income tax liability by $438 million- the NRC's request pending Ohio Edison's decision These amounts reflect FirstEnergy's estimates of the pr whether to complete this merger.
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 different stock approved the merger and share owners of the from these estimates. FirstEnergy has not decided Company's preferred stock approved the authorization of whether to push down the effects of purchase accounting additional shares of preferred stock. If and when the to the financial statements of the Company and Toledo merger becomes efTective, share owners of Toledo Edison 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-two companies if push-down accounting is elected. tially the same terms. Debt holders of the merging com-panies will become debt nolders of the Company. In add..ition 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,52.516 billion and the FERC and other regulatory authorities. A rate reduc- 52.422 billion and the combined pro forma net income tion and economic development plan for the Company was $174 million,5281 million and $268 million for the and Toledo Edison has been approved by the PUCO. years 1996,1995 and 19'94. 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, frozen fuel similar to a pooling of interests. The pro forma data is not cost facters, economic development incentive prices, an necessarily indicative of the results of operations which , energy-efficiency program, an earnings cap and an accel- would have been reported had the merger been in effect crated reduction in nuclear and regulatory assets for during those years or which may be reported in the future. regulatory purposes. The plan will require the Company The pro forma data does not reflect any potential effects and Toledo Edison to write oft certain regulatory assets at related to the consummation of the Centerior Energy and the time the merger becomes probable, which is expected Ohio Edison merger. The pro forma data should be read to be after obtaining the aforementioned approvals of the in conjunction with the audited financial statements of j merger. The write-off amounts for the Company and both the Company and Toledo Edison. [ Cleveland Electric] F-55 (Cleveland Elec:ric] I I l
)
i I i 4 Financial and Statistical Review I 1 1 1
.l
- Operating Heienues (millions of dollars) 1 i
t Total Year - Total ' Total Steam Operating Residensial Commercini Industrial Oiher Retail j Wholesale Liectric fleasing Revenues j 1996 $562 571 524 88 1 745 1 45 1790 -
$1790 l
- 1995 559 563 523 93 1 738 31 1 769 -
1 769
; 1994 531 541 508 98 1678 20 1698 -
I 698 ! 1993 539 536 510 98 I 683 68 1 751 - I 751 ) 4 1991 517 531 530 i 1 101 1 679 64 1 743 - 1743 ! 1986 410 383 461 61 1 315 8 1323 13 1 336 4 l
- Operating Expenses (millions of dollars)
! Other Generaikm Amoriiiathm of i
- Fuc1 & Operation Facibties Depreciation Tases. Dcierred l ederal Total Purchased & Rental & Other Than Operatmp j ncome Ye.ir l'nm er Mainienance Espenw. Nei Operatmg Amortisaten iIT Espenses. Net Tases Lyce-1996 $408 426 56 210 230 26 75 1'. 431
- 1995 413 418 56 196 230 (36) 94 1 371 i 1994 391 394 ,
56 195 218 - (34) 82 1302 l 1993 423 598(a) 56 182 221 1992 27(b) 22 1529 - 3 434 410 55 179 226 135) 89 I 358 }' 1986 372 388 - 103 144 - 97 1104 i f income (Loss) (millions of. dollars)
- Federal income Oiher Deferred income i income & Carrying (Luss)
Operating Tases- itefors AFU DC- Deducimas. Charges. Credit interest Year income Louity Net Net (E spense) Charpes 1996 $359 2 (10) - 6 $ 357 1995 398 2 2 29 (2) 429 1994 396 4 6 25 1993 (4) 427 222 4 (356)(c) (487)(b) 270 (347) 1992 385 1 8 59 (5) 448 i 1986 232 179 : (7) - 65 469 ' Income (Loss) (millions of dollars) Larnings Preferred & (Loss) Net Preference Ava4bic for Debt AFUDC- Income Siock Common Year Inierest Debt (Losa Dividends Sinc 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) 1992 243 - 205 41 164 1986 232 (53) 300 40 260 lo) includes early retirement program expenses and other charges of $165 mdlion. Ibl includes write-op of phase-in deferrals of $636 million, consisting of $1!? million of deferred operating expenses and $319 million of deferred carrying charges. , i [ Cleveland Electric] F-56 (Cleveland Electric]
i ihr Clescland 1.lcs tric illuminating Comimns and Subudwrun Electric Sales (millions of KWil) Electric Customers itesidential Usage (thousands at year end) Average A verage Average Pnec Revenac Indosirial hu 11 Per Per Per Year R esidential Commercial Industrial Wholesale Other l ot.it Reudential & Other Com mercial Tnial Costnmer AWil Couomer i 1996 _ 4 958 5 908 7 977 2 155 522 21 520 663 71 7 741 7 451 11.34c $x45.12 1995.___ 5063 5 946 7 994 1 694 550 21 247 670 72 7 749 7 570 11.04 835.40 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 1 1992 _ 4 725 5 467 7 988 1 989 533 20 702 670 71 8 749 7 071 10.94 773.77 1986 _ 4 586 4 744 7 927 121 460 17 838 651 63 9 723 6 810 8.94 611.34 Load (MW & %) Energy (millions of KWil) Fuel Net LIliciency-Scason.' Peak Capacity Lu.n; C.ompany G.enerated Purchased I uci Cost itTU Per Year Canahditv Lead Marysn I ador I omild! Nuclear Total Pow er "g Per AWil AWil 1996 3 922 3 938 (0.4 )% 60.6% 14 411 6 829 21 240 1 640 22 880 1.35c 10 357 1995 4 273 4 049 5.2 58.8 12 684 8 175 20 859 I673 22 532 1.42 10 504 l 1994 4 500 3 740 16.9 62.4 12 840 6 405 19 245 2 022 21 267 1.35 10 538 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 16 151 12 16 163 2 984 19 147 1.78 10 464 Investment (millions of dollars) Construcuen Work in Total Utility Accumulated Progress Nuclear Property. Utility Plant in Deprecianon & Nct A Perry Iuctand Plani and Plant Total Year Service A mortizanon Plant Umi 2 Other I quipment Additions A ue n 1996 $6 938 2 252 4 686 57 167 $4 910 $11I $6 878
- 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 l 1993 6 734 I889 4 845 141 243 5 229 175 7 159 1992 6 602 1728 4 874 501 261 5 636 156 8 123 1 1986 3 197 952 2 245 3 013 384 5 642 671 6 155 l
Capitalization (millions of dollars & %) Preferred & Preference Preferred Stock. without Stock, mth Mandatory Mandator) Redempoon i car Common Stock Ecuit. Redempoon Provaums Provisions Lone. Term Debi Total 1996 $1 045 27% 186 5% 238 6% 2 441 62% $3 910 l 1995 1 127 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 1986 I 844 40 339 7 1 44 3 2 311 50 4 638 (cl includes wrtte op of Perry bnit 2 of $35I millwn. (di Reduced by net energy used by the Seneca Pumped Storage Plantfor pumping. l f (Cleveland Electric] F-59 [ Cleveland Electric]
4 l l ) i I l I 1 I [Titis PAGE INTENTIONALLY LCli OLANK} l l i i i - ( [ Cleveland Electric] F-58 [ Cleveland Electric)
1 Management's Financial Analysis renewals. 9n of our industrial base rate (nonfuel) reve-Outlook nues under contract was scheduled for renewal before g999, g ollowing the renewals, the comparable percentage Strategic Plan is 19's. At > car-end 1996.61% of our industrial base rate in early 1994, Centerior Energy Corporation (Centerior revenues was under long term contracts. Energy), along with The Toledo Edison Company (Com. Northwest Ohio is recognized as one of the nation's pany) and The Cleveland Electric illuminating Company leading areas in job creation and economic growth. New (Cleveland Electric), created a strategic plan to achieve and expanded operations at businesses such as the twin goals of strengthening their financial conditions ; Delafoil/Phillips and Alcoa, as well as the development and impmving their competitise positions. The Company surrounding a new, major North Star illlP Steel facility, and Cleveland Electric are the two wholly owned electric are adding to our opportunities for revenue growth, in utility subsidiaries of Centerior Energy. The plan's objec-1996, we gained commitments on 23 economic develop-tives relate to the combined operations of all three com- ment projects, representing almost 55 million in new and panies. To meet these goals, we seek to maximize share retained annual base rate revenues and over 3,000 new owner return on Centerior Energy common stock, achieve and retained jobs for Northwest Ohio. profitable revenue growth, become a leader in customer satisfaction, build a winning employee team and attain Under the strategic plan, Centerior Energy and its subsid-increasingly competitive supply costs. During 1996, the iaries are structured in six strategic business groups to third year of the eight-year plan, we made strong gains better focus on competitiveness. During 1996, the Com-toward reaching some plan objectives but need significant pany reduced employment from about 1,800 to I,600. improvement on others. Further reduction in our work force to about 1,400 is A major step taken to reach the twin goals was Centerior planned by year-end 1997. We also plan to reduce Energv's agreement to merge with Ohio Edison Company expenditures for operation and maintenance activities (Ohio Edison) to form a new holding company calleil (exclusive of fuel and purchased power expenses) and FirstEnergy Corp. (FirstEnergy). The proposed merger, capital projects from 5384 million in 1996 to approxi-combined with good operating performance, a successful m tely $360 milhon m, 1997 by continuing to streamhne price increase and the accelerated paydown of debt, perations. We wW continue to reduce our unit cost of resulted in a significant stock price gain, such that the fuel used for generating electricity, while safely improving total return to Centerior Energy common stock share the operating performance of our generation facilities. owners during 1996 was 33%. The merger is expected to Reducing fixed financing costs is another primary objec. j better position the merged companies to meet coming tive in strengthening the Company's financial and com-competitive challenges. { petitive position. In 1996, we reduced our fixed Revenue growth is a key objective of the plan, from obligations for debt, preferred stock and generation facili-pricing actions as well as market expansion. ties leases by 582 million. See Note 2. Interest expense
- in April 1996, The Public Utilities Commission of Ohio and preferred dividends dropped $16 million. In the last (PUCO) approved in full the $119 million price increases three years, fixed obligations were reduced by requested by the Company and Cleveland Electric S277 million.
(535 million and $84 million, respectively). The primary In 1996, we reported earnings available for common stock purpose of the increases was to provide additional reve-of $40 million compared to $79 million in 1995. The nues to recover all the costs of providing electric service, reported decrease masks a $5 million incr;ase in basic including deferred costs, and provide a fair return t earnings from operations and a significant improvement in Centerior Energy common stock share owners. The addi-the quality of reported earnings. The decline in reported i tional revenues also provided cash to accelerate the carnings is primarily attributable to the delay in imple-redemption of debt and preferred stock. menting our price increase until late April, while we Kilowatt-hour sales to the Company's retail customers began at the end of 1995 to charge earnings for operating increased by 1.6% compared to 1995 results as sales to expenses and amortization of deferrals which the price industrial and commercial customers increased by 3% and increase was designed to recover. The price increase 2.4%, respectively. Adjusted for weather, kilowatt-hour contributed approximately $14 million (after tax) more i sales to commercial and residential customers increased cash to our earnings in 1996. The change in regulatory ! by 4.7% and 1%, respectively. accounting measures resulted in a $47 million decrease in ! i Another key element of our revenue strategy is to ofter reported earnings for 1996 versus 1995. In addition,1996 I l long-term contracts to large industrial customers who results included noncash charges against earnings of l ! might otherwise consider changing power suppliers. Dur- $11 mi!! ion after tax for the disposition of inventory and i ing 1996, we renewed and extended for seven to ten years write-down of inactive production facilities. The full ben-contracts with many of our large industrial customers, efit of out $35 million price increase, substantial reduc-including the six largest. While this strategy has resulted tions in operation and maintenance expenses and a in lower prices for these customers, in the long run, it is continuing decline in interest charges are expected to expected to maximize share owner value by retaining our result in improvement in earnings and cash flow from customer base in a ' changing industry. Prior to these operations in 1997 , 1 [ Toledo Ed'ison] F-59 [ Toledo Edison)
Pending Merger with Ohio Edison least $2.5 billion through the year 2000, yielding addi. , On September 16,1996, Centerior Energy announced its tional long-tenn sadnp in the fonn of lower interest f merger with Ohio Edison in a stock for stock transaction. **I'"5' Centerior Energy share owners will receive 0.525 of a The Company's share of the Si billion of savings will share of FirstEnergy common stock for each share of permit the Company to reduce prices to its customers as Centerior Energy common stock owned, while Ohio discussed below under FirstEnergy Rate Plan. Absent the Edison share owners will receive one share of FirstEnergy merger, the Company plans to achieve savings as well, but common stock for each share of Ohio Edison common at a lower lesel, which is expected to allow prices to be stock owned. Following the merger, FirstEnergy will frozen at current levels until at least 2002 despite infla-directly hold all of the issued and outstanding common tionary pressures. stock of the Company, Cleveland Electric and Ohio Various aspects of the merger are subject to the approval Edison. of the Federal Energy itegulatory Commission (l'EllC) FirstEnergy plans to account for the merger as a purchase and other regulatory authorities. Common stock share in accordance with generally accepted accounting princi. owners of Centerior Energy and Ohio Edison are expected ples. If FirstEnergy elects to apply, or " push down", the to vote on approval of the merger agreement on effects of purchase accounting to the financial statements March 27,1997. The merger must be approved by the of the Company and Cleveland Electric, the Company affirmative votes of the share owners of at least two-thirds and Cleveland Electric would record adjustments to: of the outstanding shares of Ohio Edison common stock (1) reduce the carrying value of nuclear generating plant and a majority of the outstanding shares of Centerior by $1.25 billion to fair value; (2) recognize goodwill of Energy common stock. The merger is expected to be
$865 million; (3) reduce common stock equity by 5401 effective in late 1997. ;
million; (4) reset retained earnings of the Company and i Cleveland Electric to zero; and (5) reduce the related FirstEnergy Rate Plan 4 deferred federal income tax liability by $438 million. On January 30,1997, the PUCO approved a Rate Redue-These amounts reflect FirstEnergy's estimates of the pro tion and Economic Development Plan (Plan) for the l forma combined adjustments for the Company and Company and Cleveland Electric to be efTective upon the Cleveland Electric as of September 30,1996. The actual consummation of the Centerior Energy and Ohio Edison adjustments to be recorded could be materially different merger. The Plan would be null and void if the merger is from these estimates. FirstEnergy has not decided not consummated. The rate order granting the April 1996 whether to push down the effects of purchase accounting price increase will remain in full force and effect during to the fmancial statements of the Company and Cleveland the pendency of the merger or if the merger is not Electric if the merger with Ohio Edison is completed, nor consummated.
; has FirstEnergy estimated the allocations between the The Plan calls for a base rate freeze through 2005 (except two companies if push-down accounting is elected.
to comply with any significant changes in environmental, We believe that the merger will create a company that is regulatory or tax laws), followed by an immediate better positioned to compete in the electric utility industry $310 million (which represents a decrease of approxi-than either Centerior Energy or Ohio Edison could on a mately 15% from current levels) base rate reduction in stand-alone basis, enhancing long-term share owner value 2006 (the Company's share is expected to be 593 mil- . and providing customers with reliable service at more lion); interim reductions beginning reven months after stable and competitive prices. consummation of the merger of S3 per unth increasing The combination of Centerior Energy and Ohio Edison is to 55 per month per residential customer by July 1,2001; a natural alliance of two companies with adjoining service $105 million for economic development and energy efli-areas who already share many major generating units. ciency programs (the Company's sharc is expected to be . i FirstEnergy expects to reduce costs, maximize efficiencies $35 million); earnings caps for regulatory purposes for the l and increase management flexibility in order to enhance Company and Cleveland Electric; a commitment by f revenues, cash flows and earnings and be a more effective FirstEnergy for a reduction, for regulatory accounting i competitor in the increasingly competitive electric utility purposes, in nuclear and regulatory assets by the end of l industry. 2005 of at least $2 billion more than it otherwise would j FirstEnergy anticipates the merger will result in net be, through revaluing facilities or accelerating deprecia- ] tion and amortization; and a freeze m fuel cost factors j savings for the combined companies of approximately Sl billion over ten years,in addition to the impact of cost until December 31, 2005, subject to PUCO review at f year-end 2002 and annual inflation adjustments. The Plan f reduction programs underway at both companies. The I additional savings, which probably could not be achieved permits the Company and Cleveland Electric to dispose f encrating S assets subject to notice and possible PUCO without the merger, will result primarily from the reduc-tion of duplicative functions and positions, joint dispatch appr v 1, and to enter mto associated power purchase ; of generating facilities and procurement efficiencies. " I' " E * * * * ' FirstEnergy expects reductions in labor costs to comprise Total price savings for the Company's customers of about slightly over half the estimated savings. In addition, $111 million are anticipated over the term of the Plan, as FirstEnergy expects to reduce system-wide debt by at summarized below, excluding potential economic devel- [ Toledo Edison] F-60 [ Toledo Edison]
l opment benetits and assuming that the merger takes place be deternuned at that time. lirstLnerp) estimatch the on December .11.1991 'Ibc total pnee savmps for cus- unte o!! amounts for the Company and Cleveland Liec-tomers of the Company and Cleseland 1.lectric are tric will total approximately $"'50 million. The Company's expected to be about $391 million share of the write-off is expected to be about one third of i w S n,,,o n, this amount. Under the Plan some or all of this u rite-o!T i minen, u cannot be applied toward the $2 billion regulatory com-doli.us ) mitment discussed above. For fmancial reporting pur-
% 5 6 poses, nuclear generating units are not expected to bc l$ impaired. If events cause either the Company or Cleve-2001 i3 land Electric or both companies to conclude they no 2002- 17 longer meet the criteria for applying SFAS 71 for the
[2003 _ l} n remainder of their business, they would be required to w nte oft their remaining regulatory assets and measure all gi UII other assets for impairment. For a discussion of the entena for complying with SFAS 71, see Note 7(a), i ' Under the Plan's earnings cap, the Company and Cleve. land Electric will be permitted to carn up to an 11.5% April 1996 Rate Order return on common stock equity for regulatory purposes in its April 1996 order, the PUCO granted price increases auring calendar years prior to 2000, 12 % during calendar of $35 million and $84 million in annualized revenues to
., cars 2000 and 2001, and 12.59% during calen6r years the Company and Cleveland Electric, respectively. The !
2001 through 2005. The regulatory return on equity is Company and Cleveland Electric intend to freeze rates at generally expected to be lower than the return on equity existing levels until at least 2002, although they are not calculated for financial reporting purposes due to the precluded from requesting further price increases. In the calculation methodology defined by the Plan and, as order, the PUCO provided for recovery of all regulatory discussed in the next paragraph, anticipated differences in assets in the approved rates, and the Company and accounting for the Plan for financial reporting versus Cleveland Electric continue to comply with the provisions regulatory purposes. If for any calendar year the regula- of SFAS 71. tory return on equity exceeds the specilied level, the excess will be credited to customers, first through a in c nnection with .its order, the PUCO recommended reduction in Percentage of Income Payment Plan (PIPP) that the Company and Cleveland Electric write down arrearages and then as a credit to base rates. PIPP is a cenain assets for regulatory purposes by an aggregate of deferred payment program for low-income residential $1.25 bilhon through 2001, if the merger is consum-customers. mated, the Company and Cleveland Electne believe acceleration of $2 billion of costs under the Plan would The Plan requires, for regulatory purposes, a revaluation fully satisfy this recommendation. The Company and of or an accelerated reduction in the investment in Cleveland Electric agree with the concept of accelerating nuclear plant and certain regulatory assets of the Com- the recognition of costs and the recovery of assets as such . I pany anti Cleveland Electric (excluding amounts due concept is consistent with the strategic objective to i from customers for future federal income taxes) by at become more competitive. However, the Company and least $2 billion by the end of 2005. FirstEnergy has not yet Cleveland Electric believe that such acceleration must determined each company's estimated share of the $2 bil- also be consistent with the reduction of debt and the lion. Only a portion of the $2 billion of accelerated costs is opportunity for Centerior Energy common stock share expected to be charged against the tv o companies' carn- owners to receive a fair return on their investment. Con-ings for financial reporting purposes by 2005. sideration of whether to implement a plan responsise to FirstEnergy believes that the Plan will not provide for the the PUCO's recommendation to revalue assets by
$1.25 bilhon is pending the merger with Ohio Edison, full recovery of costs and a fair return on investment associated with the nuclear operations of th- Company Notwithstanding the pending merger with Ohio Edison and Cleveland Electric. Pursuant to the PUCO's order, and discussions with regulators concerning the effect of FirstE' 3 cgy is required to submit to the PUCO staff the the Plan on the Company's nuclear generating assets, we regulatory accountinF and cost recovery details for imple- believe it is reasonable to expect that rates will be set at menting the Plan. After approval of such details by the levels that will recover all current and anticipated costs PUCO staff, FirstEnergy expects that the Company and associated with the Company's nuclear operations, Cleveland Electric will discontinue the arplication of including all associated regulatory assets, and such rates Statement of Financial Accounting Standards (SFAS) can be charged to and collected from customers. If therc 71 for their nuclear operations if and when consummation is a change in our evaluation of the competitive environ-of the merger becomes probable. The remainder of their ment, reFulatory framework or other factors, or if the ;
business is expected to continue to comply with the PUCO significantly reduces the value of the Company's provisions of SFAS 71 At the time the merger is proba- assets or reduces the approved return on common stock l ble, the Company and Cleveland Electric would be equity of 12.59% and overall rate of return of 10.06%, or l required to write off certain of their regulatory assets for both, for future regulatory purposes. the Company may be financial reporting purposes. The write-oft amounts would required to record material charges to earnings. [ Toledo Edison] F-6l (Toledo Edison]
Merger of the Company into Cleveland Electric that any transition to pure competition will be in phases The i1 RC and the PUt O have acknowledged the need in October 1996, the i I RC authorved the merger of the to pnnik at kan panial recosen of stranded insestment 4 Company into Clesciand I:lectric. The merger agreement as greater compemion pennitted and. therefore, we between Centerior linergy and Ohio Edison requires the beh Wat them uW be a meanhm deMoped for the approval of Ohio Edison prior to consummation of the mc very W at Imt smne suanded investment. Ilowever, proposed merger of the Company into Cleveland llectrie. Ohio Edison has not vei made a decision. See Note 16.
' d"C tion wit k ""f"i"'T I "'"h Cd' 'h i$ " Ti5k I" C"""CC-M'h the miroductmn of retail whccling that some of Competition the Companyi assets may not be fully recovered.
Structural changes in the electric utility industry from Competition from municipal electric suppliers for retail actions by both federal and state regul.itory bodies are business in our service area is producing both favorable continuing to place downward pressure on prices and and unfavorable results in our business. All existing cus-increase competition for customers. The Company's tomers in the City of Clyde now have the right to choose nuclear plant licenses have required open-access trans- between the municipal supplier and the Company, as a mission for its wholesale customers for 20 years. More result of a November 1996 referendum overturning a recently, the Federal Energy Policy Act of 1992 initiated Clyde ordinance limiting such choice. In the City of broader access to utility transmission systems and, in Toledo, City Council funded a consultant's study of 1996, the FERC adopted rules relating to open. access alternatives to our service. A draft of the consultant's transmission services. The open-access rules requiie utili- report states that, if Centerior Energy and Ohio Edison ties to deliver power from other utilities or generation merge, a municipal system in Toledo could not compete sources to their w holesale customers at nondiscriminatory with the Company because of the rate reductions con. prices. tained in the Plan approved by the PUCO. The consuh- i A number of states have enacted transition legislation anti draft report also states that, if the merger does not which .rovide for introduction of competition for retail occur, a municipal system could be competitive with the f electric business and recovery of stranded investment. Company in one portion of the City. Ilowever, errors have Several groups in Ohio are studying the possible introduc- been found in the draft report which may change the tion of retail wheeling and stranded investment recovery. content of the final consultanti report. The final report Retail wheeling occurs when a customer obtains power will be considered by the City's Electric Franchise from a utility company other than its local utility. The Review Committee before making its recommendation to term " stranded investment" generally refers to fixed costs City Council later in 1997. Municipal expansion activity approved for recovery under traditional regulatory meth- continues in areas surrounding several towns serviced by ods that would become unrecoverable, or " stranded", as a municipal systems in our service area. We continue to result of legislative changes which allow for widespread pursue legal remedies to halt illegal municipal expansion competition. The PUCO is sponsoring discussions among in our service area. a group of business, utility and consumer interests t
, The merger with Ohio Edison and the benefits of the Plan explore ways of promotmp competitwe opuuns without to our customers are expected to better position us to deal i unduly harm,ng i the interests of unlity company share w th the structural changes taking place in the industry owners or customers. The PUCO also has introduced t" and to improve our competitive position with respect to pdot projects, both intended as imtial steps to introduce municipalization. !
compeutive elements into the Ohio electric utihty business. Nuclear Operations A bill to restructure the electric utility industrs in Ohio has been introduced in the Ohio llouse of Representa. The Company has interests in three nuclear generating lives. A bipartisan committee from both legislative houses units - Davis-llesse Nuclear Power Station ( Davis-has been formed to study the issue. Centerior Energv Ilcsse), Perry Nuclear Power Plant Unit 1 (Perry Unit 1) presented the Company's model for customer choice ( and 11 caver Valley Power Station Unit 2 (13eaver Valley called Energy Choice, to the PUCO discussion group in Unit 2)- and operates the first one. Cleveland Electric August 1996. Under this model, full retail competition operates Perry Umt 1. should be introduced by 2002, but two essential elements, All three units were out of service temporarily for refuel- . recovery of stranded investment and levelization of tax ing during 1996 thus, plant availability factors for Davis- I burdens among energy suppliers. must be resolved in the Ilesse, Perry Unit I and 13 caver Valley Unit 2 were 85%, interim to assure share owncts' recovery of and a fair 76% and 70'", respectively, for 1996. The 1994-1996 return on their investments. availability factors for the units were 91% 72%. and 85E AlthouFh competitive pressures are increasing, the tradi- for Davis-liesse, Perry Unit I and 13eaver Valley Unit 2, tional regulatory framework remains in place and is respectively. The comparable industry averages for a i expceted to continue for the foreseeable future. We can- three-year period (as of August 31,1996) are 82% for not predict when and to what extent retail ubecling or pressurized water reactors such as Davis-13 esse and Ilea-other forms of competioon will be allowed. We believe ver Valley Unit 2 and 78% for boiling water reactors such that pure competition (unrestricted retail whccling for all as Perry Unit 1. Davis-llesse established a plant record customer classifications) is at least several years away and with its 509-day continuous run at or near full capacity i [7'oledo Edison) F-62 [ Toledo Edison)
tiefere shutting dow n for its scheduled retucting outage in A new Statement of Poution issued by the Auounting Apri; 19h Ntandards liccutist Comminee of the Amenean lasti. A significant part of the strategic plar, inwhes ongo.mp tute of Certified Public Accountant- Inc ef!ectisc J.mu. ; vire rts to merease the asailabihtv and lower the cost of "O ' P" E" " " " " "
' " "f"""" """
production of our nuclear units in 19% we continued our h '"*"'"*"""T" "," .w adon liabihues. Adop-progress toward increasing long term unit availability tmn of the staknwnt m mi n nm expd to have a j while continuing to lower production costs. The goal of rnaterial adverse elrect on our financial condition or i our nuelcar improvement program is for Cleveland Elec- resuhs M opem@nt tric to replicate Davis-Hesse's operational execlience and Common Stock Dividends 4 cost reduction pains at Perry Unit I, while improving E' Ounpany has not pad a common unck hidend to performance ratings. . Centenor Energy since I chruary 1991. I rom 1993 Our nuclear units may be impacted by activities or events through November 1996, the Company was prohibited i beyond our control. Operating nuclear units have exper- from paying a common stock dividend by a provision in its ienced unplanned outages or extensions of scheduled mortgage. See Capital Resources and 1.iquidity-Liquidity outages because of equipment problems or new regulatory below. The declaration and payment of future common requirements. A major accident at a nuelcar facility stock dividends is at the discretion of the Company's ' l anywhere in the world could cause the Nuclear Regula- Board of Directors, subject to applicable legal restrictions. I tory Commission (NRC) to limit or prohibit the opera-tion or licensing of any domestic nuclear unit. If one of Capital Resources and Liquidity i our nuclear units is taken out of service for an extended , period for any reason, including an accident at such unit 1994 1996 Cash Requirements or any other nuclear facility, we cannot predict whether We need cash for normal corporate operations (including reguhitory authoritics uould impose unfavorable rate the payment of disidends), retirement of maturing securi-treatment. Such treatment could include taking our ties, and an ongoing pmgram of constructing and improv- l
, alTected unit out of rate base, thereby not permitting us to ing facilities to meet demand for electric service and to recover our investment in and earn a return on it, or comply with government regulations. Our cash construe- !- disallowing certain construction or maintenance costs. An tion expenditures totaled $41 million in 1994.553 million
! extended outage coupled with unfavorable rate treatment in 1995 and $47 million in 1996. Our debt and preferred could have a material adverse efTect on our financial stock maturities and sinking fund requirements totaled conoition, cash flows and results of operations. Prematurc $57 million in 1994,$83 million in 1995 and 558 million plant closings could also have a material adverse etTect on in 1996. In addition, we optionally redeemed $184 million our f nancial condition, cash ficws and results of opera- of securities in the 1994-1996 period, including 594 mil-tions because the estimated cost to decommission a plant lion of tax-exempt issues refunded in 1995. I exceeds the current funding in the decommissioning trust. As discussed m. Note I(j), m. May 1996, the Company Hazardous Waste Disposal Sites and Cleveland Elcetric began to scl! on a daily basis substantially all of their retail customer accounts receiv-The Company is aware of its potential involvement in the ables and unbilled revenue receivables to Centerior Fund-cleanup of several sites. Although these sites are not on ing Corporation (Centerior Funding), a wholly owned the Superfund National Priorities List. they are generally subsidiarv of Cleseland Electric. In July 1996 Centerior
~
being administered by various governmental entities in Funding issued $150 million in AAh-rated accounts the same manner as they ,,ould be administered if they receivable-backed investor certificates due in 2001 with were on such list. Allegations that the Company disposed an interest rate of 7.N. The Company's share of the net of hazardous waste at these sites, and the amount proceeds from the accounts receivable securitization was involved, are of ten unsubstantiated and subject to dispute. used to redeem higher-cost securities and for general
. Federal law provides that all "potentially responsible corporate purposes.
parties" (PRPs) for a particular site be held liab!c on a joint and several basis. If the Company were held liable As a resuh of these activities. the embedded cost of the 4
, for 100% of the cleanup costs of all the sites referred to Company's debt at the end of lo96 dechned to 9.139 l above, the cost could be as high as $115 million. Ilow- venus 9.239 in W95 and 9AM in 1994 ever, we believe that the actual cleanup costs will be The Company is a party to a $125 million revolving credit substantially lower than 5115 million, that the Company's facility which was renewed in May lo96 for a one-year share of any cleanup costs will be substantially less than term. In 1996, portions of the nuclear fuel lease financing 100% and that most of the other PRPs are financially able vehicles for the Company and Cleveland Electric to contribute their share. The Company has accrued a matured: 584 million of intermediate-term notes in Sep-liability totaling 53 million at December 31,1996 based tember and a $150 million letter of credit supporting on estimates of the costs of cleanup and its proportionate short-term borrowing in October. These facilities were ;
responsibility for such costs. We believe that the ultimate repla'c ed by $100 million ofintermediate-term notes and a ! outcome of these matters will not have a material adverse 5100 million two-year letter of credit.1 he net reduction { cffect on our financial condition, cash flows or results of in the facility size results from lower nuclear fuel hnanc- ) operations. ing requiremer.ts. I [ Toledo Edison) F-63 lToleda Edim)
1997 and Beyond Cash Requirements M ~l he Cornpans is a pary to a 5125 million resolviny eredn rauhn w hich is expected to be renewed when it Our . .wy acd 199 cash requirements for ceuuetion g , are Sol mi!Ln. I cht and preferred sto sk man nues and ' sii. king fum! requirements are $$1 milhon. Of thi, Cunent creda ratinp for the Conipany me as WHoux amount 510 million are for a tax-exempt issue sceured by ['y.7,$ iMls brst mortpape bonds and subject to optional tender by the Nmr.em Smac. Inn ounets on November I,1997, w hich we expect to replace nrst monpre bond, 1H H4 with a similar issue at a substantially lower interest rate. w oreaw debi la Hi We expect to meet remaining requirements with internal p,ererred w n W cash generation and cash reserves. We also expect to be Following the FirstEnergy merger announecment. both able to optionally redeem more debt in 1997 than we did i ies placed the' Company's securities on credit watch with positive implications. We expect to meet all of our 1998-2001 cash require- I ederallaw prohibits the Company from paying dividends ments with mternal cash generation.1:,samated cash om of c im ounts. The Company has since 1993 sequirements for our construction program during this declared and paid preferred stock dividends out of appro- l pcriod total 5213 million. Debt and preferred stock matu- I
, priated current net income included in retained earnings.
inies and sinkiny fund requirements total 5207 milhon for At the times of such declarations and payments, the the same period if ceonomical additional securities inay Conpny had a dehcit in its retained earnings. At be redeemed with funding expected to be provided Dmber 31.1996, the Company had $223 million of through internal cash pencration. appmpriated retained earnings for the payment of dwi-Consummation of the merger with Ohio Edison is dends. The Company also has a provision in its mortgage expected to reduce the Company's cash construction applicable to approximately 594 million of outstanding requirements and improve its ability to redeem fixed first mortgage bonds ($31 million of which mature in obligations. August 1997) that requires common stock disidends to be L.iquidity paid out of its total balance of retained earnings, which , had been a deficit from 1993 through November 1996. Net cash flow from operating activities in 1996 was As part of a routine audit, the FEltC is considering significantly increased from 1995 by implementation of statements which it requested and received from the the price increase eflective m April 1996. A part of the Company and Cleveland Electric supporting the payment net proceeds from our accounts receivable securitization of dividends out of appropriated current net income of 54 million was used to redeem other higher-cost included in retained carnings while total retained carnings sceurities, producing net savings in our overall cost of were a deficit. At December 31, 1996, the Company's borrowing. In 1996, we reduced our fixed obligations for total retained earnings were $5 million. The final disposi-debt, preferred stock and generation facilitics icases by tion of this issue is a factor expected to be considered by S82 million. At year-end 1996, we had $81 milhon in cgish Fi Energy in deciding whether to apply purchase
- and ten.porary cash investments, down from 594 milhon ac ounting to the Company and Cleveland Electric, one at year-end 1995. ~
effect of which would be to reset retained earnings to zero. Additional first mortpape bonds may be issued by the if the merger is not consummaico or if FirstEnergy Company under its mortgage on the basis of property determines not to apply purchase accounting to the two addmans. cash or refundable first mortgage bonds. If the companies. the Company and Cleveland Electric intend applicable interest coverage test is met. the CompanF to continue to support their position and pursue all availa-may issue first mortgage bonds on the basis of propertF ble alternatives to allow them to continue the declaration additions and. under certain circumstances. refundable and payment of dnidends. bonds. At December 31.1996. the Company would have been permitted to issue approximately 5148 million of Results of Operations additional first mortgage bonds. If FirstEnerp) elects to apply purchase accounting to the Compan) if the merger 1996 vs.1995 l with Ohio Edison is completed, the Company's first Factors contributing to the 2.7% increase in 1996 operat-mortgage bond capacity would be adversely alTeeted. ing revenues are as follows: There are no restrictions on the Company's ability to issue preference stock. Under its articles of incorporation. the i o.m %. ;,u , %,,,y. u n.y n m.s [$ Company cannot issue preferred stock unless certain
${g g%
carmngs coverage requirements are met. Based on its wyge gevy,me, a 1996 carnings, the Company could not issue additional s ua con accuyery nevenues t i preferred stock. WeeNncuus Revenues W
'l via' W The Company and Cleveland Electric have 5273 million '
in financing schicles to support their nuclear fuel leases. The increase in 1996 base rates revenues resulted prima-583 million of which mature in 1997. Replacement rily from the April 1996 rate order issued by the PUCO financing for the maturing issuch may not be needed in for the Company as discussed unuer Outlook-April 1996 [Toleda Ediwn} F-64 (Toledo Edison] l
Rate Order and in Note 7(b). T he impact of the conmlidates warehousing and uses jusbin time purchase April 1996 price increase was oilset by a ch.mpe in the implementation of summer prices As a result of this and delisery. l'edet.d income taxes decreased as a result of lower pretas operating income. change. higher summer prices were in clTect for most customers from June through September 1996. Previ- A nonoperating loss resulted in 19% primarih from an~ ously, higher summer prices were in ellect from May Sil million write-down of two inactive production facili-through September, Consequently, base rates revenues ties, as discussed in Note 14, and the Company's share of for the May 1996 bilhng period were lower relative t merger-related espem,es. The deferral of carrying charges the May 1995 amount. Renegotiated contracts for related to the Rate Stabilization Pmgram ended in certain large mdustnal customers also resulted in a November 1995. The federalincome tax credit for nonop-decrease in base revenues which partially ollset the eflect crating income increased in 1996 accordinglv. " of the general price increase. Although total kilowatt hour interest charges and preferred dividend icquirements sales decreased 0.9% in 1996 from the 1995 amount, decreased in 1996 because of the redemption of securities r industrial and commercial kilowatt hour sales increased and re undings at favorable terms in 1996 and 1995, 3% and 2.4% respectively. Residential kilowatt-hour sales decreased 0.9% primarily because of the cooler summer "* weather. The industrial sales growth reflected increased Factors contributing to the 1% increase in 1995 operating sales to petroleum refmcries, large primary metal and revenues are as follows: glass manufacturers, and the broad-based, smaller indus-
' " " ' " ' ' '"'" '" Mhns trial customer group. On a weather-normali7ed basis. "*"'"'"'""'S # """"
commercial and residential sales increased 4.7% and 1% N Lic* W""'c ""d M" 53 respectively. The number of commercial customers mcreased 3.4% m, 1996. Other sales (including wholesale
*]} , - - -
g a ncyo, ac,cn,c, g; sales) decreased 8% Wholesale revenues increased in 1996, ahhough wholesale sales resuhs were adversely wi G
~""
afTected by the lleaver Valley Unit 2 refueling outage in Total kilowatt-hour sales m.ercased 2.2% m. 1995 primarily 1996. See Note 2 for a discussion of the llcaver Valley because of the hot summer weather. Residential and Unit 2 capacity sale to Cleveland Electric. A slight C * *C'd"I *"
'. ur saks nicreased 5.2% and 2.2%
increase in 1996 fuel cost recovery revenues resulted from respectively, which meluded about 1% nonweather-an increase in the fuel cost factors. The weighted average related growth m residential sales. Industrial kilowatt-of these fuel cost factors increased approximately 1% hour sales mcreased 1.8% on the strength of increased For 1996, operating revenues were 27% residential,22% sales to large glass manufacturers and the broad-based. commercial,28% industrial and 23% other, and kilowatt- smaller industrial customer group. Other sales increased hour sales were 19% residential,16% commercial, 39% 0.5% Weather accounted for approximately 513 million industrial and 25% other. The average prices per kilowatt- of the $21 million increase in 1995 base rate revenues. hour for residential, commercial and industrial customers Wholesale revenues decreased because of the lower reve-were 11.47,10.82 and 5.87 cents, respectively. nues associated with the Beaver Valley Unit 2 capacity sale to Cleveland Electric. Lower 1995 fuel cost recovery Operating expenses increased 8% in 1996. The cessation revenues resulted from favorable changes in the fuel cost of the Rate Stabilization Program deferrals and the com- factors. The weighted average of these fuel cost factors mencement of their amortization in December 1995 decreased approximately 6% resulted in the increase in the net amortization of deferred operating expenses. See Note 7(d). Depreciation and For 1995, operating revenues were 27% residential, 21% amortization expenses increased primarily because of a 54 commercial,29% industrial and 23% other, and kilowatt-million net increase in depreciation related to changes in hour sales were 19% residential,16% commercial, 37% depreciation rates, as discussed in Note l(c), and the industrial and 28% other. The average prices per kilowati. hour for residential, commercial and industrial customers cessation of the accelerated amortization of unrestncted investment tax credits under the Rate Stabilization Pro- were 10.99, 10.51 and 6.09 cents, respectively. The gram, which was reported in 1995 as a 55 million reduc. changes from 1994 were not significant. tion of depreciation. Fuel and purchased power expenses Operating expenses increased 0.1% in 1995. Federal increased because of increased purchased power require- inc me taxes mereased as a result of higher pretax operat-ments to meet retail customer sales throughout the year ing income, Fuel and purchased pow er expenses but particularly during the refueling outages of Perry decreased because of lower purchased power require-Unit I and Davis-Besse in 1996. Other operation and ments resuhing from the mercased availability of the maintenance expenses in 1996 included a $6 million one- nuclear generating units in 1995. time charge for the disposition of inventory as part of a Interest charges and preferred dividends decreased in reengineering of the supply chain process. Reengineering 1995 because of the redemption of securities and refund-the supply chain process increases the use of technology, ings at favorable terms in 1995 and 1994. [ Toledo Edison] F-65 [ Toledo Edison]
I 1 Report of Independent in our opinion. the financial statements referred to above Public Accountants present ruirly, in all material respects, the inancial posi- ~1o the Share Owners and tion of The Toledo Edison Company as of December 31, lloard of Directors of 1996 and 1995, and the results of its operations and its i The Toledo Edison Company: cash flows for each of the three years in the period ended I i We have audited the accompanying balance sheet and December 31, 1996, in conformity with generally statement of capitalization of The Toledo Edison Com- accepted accounting principles. pany (a wholly owned subsidiary of Centerior Energy Our audits were made for the purpose of forming an Corporation) as of December 31,1996 and 1995, and the opinion on the basic financial statements taken as a related statements of income, retained earnings and cash whole. The schedule of The Toledo Edison Company flows for each of the three years in the period ended listed in the Index to Schedules is presented for purposes December 31,1996. These financial statements and the of complying with the Securities and Exchange Commis-schedule referred to below are the responsibility of the sion's rules and is not part of the basic financial state-Company's management. Our responsibility is to express ments. This schedule has been subjected to the auditing an opinion on these financial statements based on our procedures applied in the audits of the basic financial audits. statements and,in our opinion, fairly states in all material We conducted our audits in accordance with generally respects the financial data required to be set forth therein accepted auditing standards. Those standards require that in relation to the basic financial statements taken as a we plan and perform the audit to obtain reasonable w hole, assurance about whether the financial stat:ments are frc-of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also ARTilUR ANDERSEN LLP includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Cleveland, Ohio We believe that our audits provide a reasonab!c basis for February 14,1997 our opinion. [ Toledo Edison} F-66 [ Toledo Edison]
income Statement n,, r,.w,. u,,,,,, n,,,,,,,,,,, l'or the tears ended December 31. IW6 1995 1994 (millmns of dollars) Operating Reienues (1) SR97 5874 $$6] Operating Expenses . Fuel and purchased power 169 157 167 Other operation and maintenance 231 225 229 l Generation facilities rental expense, net 104 104 104 ! Total operation and maintenance $04 486 500 Depreciation and amortization 94 84 83 l Taxes, other tha federal income taxes 90 91 90 Amortization of detc ;-d operating expenses, net 17 (17) (21) Federal income taxes 16 42 33 741 6R6 685 Operating income 156 188 180 ( Nonoperating income (Loss) Allowance for equity funds used during construction i I I Other income and deductions. net (10) 6 3 Deferred carrying charges - 14 15 Federal income taxes-credit (expense) 5 (2) __Q ) l (4) 19 17 ! Income Before Intere,.t Charges _jf2 207 197 Interest Charges Debt interest 96 Ill 116 l Allowance for borrowed funds used during construction (1) (I) (1) j 95 110 115 ; Net Income 57 97 82 l Preferred Disidend Requirements 17 18 20 ! Earnings Agailable for Common Stock 8 Q M i i (1) includes revenuesfrom all bulk power sales to Cleveland Electric of $105 million. $102 million and $11I million in 1996,1995 and 1994. respectively. I Retained Earnings l For the years ended December 31. _ I 1996 1995 1994 i ! i (millions of dollars) l ! Retained Earnings (Deficit) at Beginning of Year $LM) S(113) $(175) Additions I Net income 57 97 82 Deductions Preferred stock dividends declared and other (17) (19) (20) ! Net increase 4() 78 62 ! Retained Earnings (Deficit) at End of Year ( 5 5 (16) 5(113)
' The accompanying notes are an integralpart of these statements.
i I i } l \ [ Toledo Edison] F-67 [ Toledo Edison]
Balance Sheat December 31. 1996 1995 (milhons or dolies) ASSETS l'roperty, I'lant and Equipment Utility plant in service 52,929 $2,896 Less: accumulated depreciation and amortization 1.020 942 1,909 1,954 Construction work in progress 22 28 1,931 1,982 Nuclear fuel, net of amortization 76 78 Other property, less accumulated depreciation 8 20 _2 011 2.080 Current Assets Cash and temporary cash investments 81 94 Amounts due from customers and others, net 13 68 Amounts due from affiliates 13 19 Notes receivable from affiliates 82 - Unbilled revenues 4 22 Materials and supplies, at average cost Owned 33 49 Under consignment 10 - Taxes applicable to succeeding years 68 71 Other 4 4 308 327 Regulatory and Other Assets Regulatory assets 928 978 Nuclear plant decommissioning trusts 64 52 Other 42 37 1.034 1.067 Total Assets $ 3.357 $3.474 The accompanying notes are on integral part of this statement. l l [ Toledo Edison} F-68 l Toledo Edison] l
lin Ia,lo do I dower Corunnsros Decemb:r 3L 19 tin 1993 ( nulhons of doll.us) CAPITALIZATION AND LIABILITIES Capitaliiation Common stock equity 5 803 5 763 l* referred stock With mandatory redemption provisions 3 5 Without mandatory redemption provisions 210 210 Long-term debt 1.003 1.06x 2.019 2.046 Current Liabilities i Current portion of long-term debt and preferred stock 51 58 Current portion of nuclear fuel lease obligations 36 40 3 Accounts payable 46 56 Accounts and notes payable to afliliates 30 53 Accrued taxes 73 78 Accrued interest 22 24 Other 20 20 1 278 329 Deferred Credits and Other Liabilities . Unamortized investment tax credits 75 79 Accumulated deferred federal income taxes $66 573 Unamortized gain from Bruce Mansfield Plant sale 179 188 Accumulated deferred rents for Bruce Mansfie!d Plant and Beaver Valley Unit 2 39 54 Nuclear fuel lease obligations 49 52 Retirement benefits 102 103 Other 50 50 .,j l.060 1.099 Total Capitalization and Liabilities $13s7 ST474 l l r 1 1 l l
\
[ Toledo Edison] F-69 [ Toledo Edison)
Cash Flows n,. i . .u. . u, ,, ,,, r .....i,,,,, l'or the years ended December 31, 1996 ]995 1994
- millmns or dollars)
Cash Flows from Operating Actiiiries (1) Net income _ $ 57 3 97 5_J9 Adjustments to Reconcile Net income to Cash from Operating Activities: Depreciation and amortization 94 84 83 Deferred federal income taxes 18 16 46 Unhilled revenues (7) - 3 Deferred fuel 9 (3) 3 Deferred carrying charges - (14) (15) Leased nucicar fuel amortization 33 54 44 Amortization of deferred operating expenses, net 17 (17) (21) Allowance for equity funds used during construction (1) (1) (1) Changes in amounts due from customers and others, net (2) (6) l Net proceeds from accounts receivable securitization 78 - - Changes in materials and supplies 6 8 (2) Changes in accounts payable (10) 8 (15) Changes in working capital alTecting operations (1) 4 (16) Other noncash items (10) 9 10 Total Adjustments _ 224 142 120 Net Cash from Operating Activitiet _ 281 239 202 Cash Flows from Financing Actitities (2) Notes payable to affiliates (21) 21 - First mortgage bond issues - 99 31 Maturities, redemptions and sinking funds (73) (215) (98) Nuclear fuel lease obligations (39) (44) (49) Dividends paid (17) (18) (20) Premiums, discounts and expenses - (6) - Net Cash from Financing Activities (150) (163) (13(i) Cash Flows from imesting Actiiities (2) Cash applied to construction (47) (53) (41) Interest capitalized as allowance for borrowed funds used during construction (1) (1) (1) Loans to affiliates (82) - - Contributions to nuclear plant decommissioning trusts (10) (11) (12) Other cash applied (4) (5) (6) Net Cash from Investing Activities (144) (70) (60) Net Change in Cash and Temporary Cash Imestments (13) 6 6 Cash and Temporary Cash Imestments at Ileginning of Year 94 88 82 Cash and Temporary Cash Insestments at End of Year % RI S 94 5 RR (1) Interest paid inct of amounts capitali:ed) S 4? S 9.1 S 94 Federal income taxes paid S It1 S ?1 5 5 (2) Increases in Nucicar Fuel and Nuclear Fuel Lease Obligations in the Balance Sheet resulting from the noncash capitali:ations under nuclearfuel agreements are c>cludedfrom this statement. The accompanying notes are an integralpart of this statement. [7'oledo Edison] F-70 (Toledo Edison]
Statement of Capitalization n, wet. u,.,,, n,,.wei. December 11. luy6 1446 i nulinins of d, !!.iro ( ON1410N STOCA 1:QL li' L ommon shares,55 par ut ic: 60 nullion authorized, 39.1 million uutstanding in 1996 and 1995 _ .5 196 5 146 Premium on capital stotk _ 4hl 481 Other paid in capital 121 121 Retained earnings (deheit) 5 (35) Total Common Stock Equity ko3 763 1996 Current Shares Call Price Outstandine Per Sharc I PREFERRI:D STOCK: ' 5100 p,ir value, 3,000.000 preferred shares authorized, i
$25 par value,12J100,000 preferred shares authorized Subject to mandatory redemption: I 5100 par 59.375 50,200 $ 100.99 5 7 Less: Current maturities 2 2 lotal Preferred Stock, with Mandator)
Redemption Provisions 3 5 i Not subject to mandatory redemption: 5100 par 54.25 160,000 104.625 16 16 4.56 50,000 101.00 5 5 4.25 100,(KK) 102.00 10 10 l 8.32 100.000 102.46 10 10 7.76 150,000 102.437 15 15 i 7.80 150,000 101.65 15 15 10AK) 190,000 101.00 19 19 25 par 2.21 1,000,000 25.25 25 25 2.365 1,400,000 27,75 35 35 Series A Adjustable 1,200,000 25.00 30 30 Series H Adjustable 1,200.000 25.00 30 30 Total Preferred Stock, without Mandatory Redemption Provisions 210 210 i LONG-TERM DEBT: First mortgage bonds: 6.125% duc 1997 31 31 7.250% duc 1999 85 100 7.500% due 2002 26 26 8.000% duc 2003 36 36 7.875% duc 2004 145 145 3 323 3.4 Tax-esempt issues secured by first mortgage honds: 10.000% due 1998 1 1 3.700% due 201I" 31 31 8.000% due 2019 67 67 7.625% due 2020 45 45 7.750% duc 2020 54 54 7.400% duc 2022 31 31 9.875% duc 2022*" 10 10 7.550% due 2023 37 37 6.875% duc 2023 20 20 8.000% duc 2023 50 50 346 34 6 The accompanying rwies are an untegral part of this statement. [ Toledo Edison] F 11 [ Toledo Edison)
Statement of Capitalization ico i.eoo December 31, pstn, 199s (nuthons of dollare 1.O N F I1:R M Di'.llT: (Continued ) Medium-term notes secured by hrst mortparc bondt 9.05(fL duc 1996 - 10 9.(KXYL duc 1996 - 3 9.3(KYL duc 199R 26 26 8.(KXfL due 1998 7 7 7.94(PL duc 1998 5 5 l h.47(fL duc 1999 4 4 l 7.72(fL duc 1999 15 15 7.5(KfL duc 2(KKI *
- 7.3ku% duc 2(XK) 14 14 1 7.46(fL duc 2(XX) 17 17 l 9.5(KfL duc 2(Kil 21 21 8.50(PL due 2001 8 8 K.62(FL due 2(K)2 7 7 8.650% duc 2002 5 5 8.180% due 2002 17 17 7.820'L duc 2003 37 37 1 7.850% due 2003 15 15 7.760% duc 2003 $ 5 7.910% due 2003 3 3 7.7b(FL duc 2003 l I 10.0(Kr1 duc 2021 15 15 9.22(FL duc 2021 15 15 237 250 l Tauexempt notes:
5.75(rL duc 2003 4 4 10.000% duc 2010 l I 5 5 Bank loans secured b) subordinate mortgape: 9.050% due 1996 - 25 i 7.500% duc 1996 - 2 l 27 Notes secured by subordinate mortgage: i l 10.060% duc 1996 _ 14 1 8.750% duc 1997 g iI 8 25 l l Dchentures: l S.700% duc 2002 135 135 Unamortized premium (discount), net (2) (2) 1,052 1,124 Less: Current maturitics 49 56 Total LonF-Term Debt IB03 1.06R ; TOTAL CAPITALIZATION $2 fil9 52(146 l
- Denotes debt ofless than Si milhon
** Denotes variable rare i.uve with December 31.1996 internt raic shown.
*' Subject to optional tender by the owners on hvember 1.1997.
1 I l l [ Toledo Edison] F-72 [7'oledo Edison] l
_. . ~ _ - Notes to the Financial Statements (c) neuenues (1) Summary of Significant Accounting ( ustomers are bined on a nnetta cule hw tor their Policies encrry wasumroon beed on raic scheduies or comracis (a) General authori/cd by the PL10 or on ordin. mees of mdmdual
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l he Company is an electric utilitt serving Northwest Ohio and a w holly owned subsidiarv of C,enterior E.nergy. month to record the estimated amount of unbilled reve-
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.I.hc C.ompany follows the Uniform S.ystem of Accounts nues for kilowatt-hours sold in the current month but not billed by the end of that month. prescribed by the FERC and adopted by the PUCO. Rate-regulated utilities are subject to SFAS 71 which A fuel factor is added to the base rates for electric service. governs accounting for the elTects of certain types of rate This factor is designed to recover from customers the regulation. Pursuant to SFAS 71, certa.n incurred costs costs of fuel and most purchased power. It is reviewed and are deferred for recovery in future rat . See Note 7(a), adjusted semiannually in a PUCO proceeding. See Man- ! The m paration of financial statements in conformity "E'*'" """ ^"" ~ " '
"' T F
. . . Rate Plan.
. generally accepted accountmg prmciples requires management to make estimates and assumptions that (d) Fuel Expense afTect the reported amounts of assets, liabilities, revenues The cost of fossil fuel is charged to fuel expense based on i and expenses, and the disclosure of contingent assets and inventory usage. The cost of nuclear fuel, including an I liabilities. The estimates are based on an analysis of the interest component, is charged to f uel espense based on best information available. Actual results could differ the rate of consumption. Estimated future nuclear fuel from those estimates.
disposal costs are being recovered through base rates. The Company is a member of the Central Area Power The Ccmpany defers the differences between actual fuel Coordindtion Group (CAPCO). Other members are costs and estimated fuel costs currently being recovered i Cleveland Electric. Duquesne Light Company, Ohio from customers through the fuel factor. This matches fuel ) Edison and its wholly owned subsidiary, Pennsylvania expenses with fuel-related revenues. ! Power Company. The members base constructed and 1 operate pencration and transmission facilities for their Owners of nuc! car generating plants are assessed by the jointuse. federal povernment for the cost of decontamination and i decommissioning of nuclear enrichment facilities oper- l (b) Related Party Transactions ated by the United States Department of Energy. The Operating revenues, operating expenses and interest assessments are based upon the amount of enrichment charges include those amounts for transactions with aflili- services used in prior years and cannot be imposed for ated companies in the ordinary course of business more than 15 years (to 2007). The Company has accrued l operations. a liability for its share of the total assessments. Thesc l costs have been recorded as a regulatory asset since the The C.ompany's transactions with Cleveland Electric are PUCO is allowing the Company to recover the assess-primarily for firm power, interchange power, transmission ments through its fuel cost factors. See Note 7ta). line rentals and j. .omtly owned power plant operations and construction. See Notes 2 and 3. As discussed in (e) Depreciation and Decommissioning Note 1(j). beginning in May 1996. Cleveland Electric's The cost of property, plant and equipment is depreciated wholly owned subsidiary, Centerior Funding began sen- over their estimated useful lives on a straight-line basis. ing as the transferor in connection with the accounts in its April 1996 rate order, the PUCO approved chariges receivable securitization for the Company and Cleveland in depreciation rates for the Company. An increase in the Electric. depreciation rate for nuclear property from 2.5% to 2.95% Centerior Service Company (Senice Company), a increased annual depreciation expense approximately wholly owned subsidiary of Centerior Energy. provides 58 million. A reduction in the composite depreciation rate management, financial, administrative, engineering. legal for nonnuclear property from 3.36% to 3.13% decreased and other services at cost to the Company and other annual depreciation expense by approximately S2 million. aniliated companics. The Service Company billed the The changes in depreciation rates were effective in Company 560 million, 567 million and 559 million in April 1996 and resulted in a 54 million net increase in 1996,1995 and 1994, respcctively, for such services. 1996 depreciation expense. i (Toledo Edison] F 73 l Toledo Ediwn]
l i ~l he ( ompany accrues the estimated emts of decommis- assets and the related component of the decommissioning l siomng its three nuclear gener. ding units. 'l he accruals rescrse (included in Accumulated Depreciation and ) are reqmred to be funded in an external trust.1 he Pl TO A morti/ation b l reqmres that the expense and payments to the external The s'atT of the Securities and Exchange Commission j trusts be determined on a leselized hasis by dividing the has questioacd certain of the current accounting practices unrecovered decommissioning costs in current do4ars by of the electne utility industry, including those of the the remaining year > in the licensing period of each unit. Con: pans, regarding the recognition, measurement and l This methodology requires that the nel carnings on the classification of decommissioninF costs for nuclear gener-trusts he reinvested therein with the intent of having net . . . ating stations m the f.inancial statements. In response to earnings othet innation. The PUCO requires that the . these questions, the h..nancial Accou',aing Standards estimated costs of decommissioning and the funding level Board (FASB) is reviewing the accounting for removal be resiewed at least every five years. . . costs, including decomm.issmmng. If current accounting in April 1996, pursuant to the PUCO rate order, the practices are changed, the annual provision for decom-Company decreased its annual decommissioning expense missioning could increase; the estimated cost for decom-accruals to $10 million from the Sil million levelin 1995. missioning could be recorded as a liability rather than as The accruals are renected in current rates. The accruals accumulated depreciation; and trust fund income from me based on adjustments to updated, site-specific studies the external decommissioning trusts could be reported as for each of the units completed in 1993 and 1994. These investment income rather than as a reduction to decom-estimates renect the DECON method of decommission- missioning expense. The FASB issued an exposure draft ing (prompt decontamination), and the locations and cost on the subject on February 7,1996 and continues to characteristics specific to the units, and include costs review the subject. associated with decontamination and dismantlement for each of the units. The estimate for Davis-Besse also (f) Property, Plant and Equipment includes the cost of site restoration. The adjustments to Property, plant and equipment are stated at original cost the updated studies which reduced the annual accruals less amounts disallowed by the PUCO. Construction costs beginning in April 1996 were attributable to changed include related payroll taxes, retirement benefits, fringe assumptions on radioactive waste burial cost estimates benefits, management and general overheads and allow-and the exclusion of site restoration costs for Perry Unit I ance for funds used during construction ( AFUDC). and Beaver Valley Unit 2. After the decommissioning of AFUDC represents the estimated composite debt and these units in the future, the two plant sites may be usable equity cost of funds used to finance construction. This
- for new power production facilities or other industrial noncash allowance is credited to income. The AFUDC purposes. rate was 10.12% in 1996,12.6% in 1995 and 9.87% in
,The revised estimates for the units in current dollars and in dollars at the time of license expiration, assuming a 4% Maintenance and repairs for plant and equipment are annual innation rate, are as follows: charged to expense as incurred. The cost of replacing
- 1. ice nse plant and equipment is charged to the utility plant cenemm. no 7" wmiu IO accounts. The cost of property retired plus removal costs, (rniuions of dollars) after deducting any salvage value, is charged to the i>avismesse 2m7 5166 S.127 accumulated provision for depreciation.
Perry Unn i 20 6 8.4 309 ucaver une3 Unn: 20 7 44 W (g) Deferred Gain and Loss from Sales of Utility kal iM 2 Plant The classification. Accumulated Depreciation and Amor- The sale and leaseback transactions discussed in Note 2 tization, in the Balance Sheet at December 31, 1996 resulted in a net gain for the sale of the Bruce Mansfield includes 571 million of decommissioning costs previously Generating Plant (Mansfield Plant) and a net loss for the , expensed and the carnings on the external trust funding, sale of Beaver Valley Unit 2. The net gain and net loss This amount exceeds the Balance Sheet amount of the were deferred and are being amortized over the terms of external Nuclear Plant Decommissioning Trusts because the leases. See Note 7(a). These amortizations and the the reserve began prior to the external trust funding. The lease expense amounts are reported in the income State-trust earnings are recorded as an increase to the trust ment as Generation Facilities Rental Expense, Net. [ Toledo Edison] F-74 [ Toledo Edison] , l 1
- - - - - . . -_ ~
(h) Interest Charges all of these insentor:,:s under a consignment arranpement. Debt interest reponed in the income Statement does not in accordan;e with SI AS 49 accoummy for product include interest on ohhgations for nuclear f uel under imancing arrangements. the inventories continue to be construction. That interest is capitalized. See Lie 6. reported as assets in the Halance Sheet esen though the n n Mn e e ompan3 has guan Losses and gams reali/cd upon the reacquisition or anteed to be a buyer of last resort. redemption of long-term debt are deferred, consistent - with the regulatory rite treatment. See Note 7(a) Such losses and gains are either amortized over the remainder (2) Utility Plant Sale and Leaseback of the original life of the debt issue retired or amortized ansa & ns over the life of the new debt issue when the proceeds of a The Company and Cleveland Electric are co-lessecs of new issue are used for the debt redemption. The amorti. 18.26% (150 megawatts) of Beaver Valley Unit 2 and zations are included in debt interest expense. 6.5% (51 megawatts), 45.9% (358 megawatts) and 44.38% (355 megawatts) of Units 1, 2 and 3 of the (i) Federalincome Taxes Manslicid plant, respectively. These leases extend The Company uses the liability method of accounting for through 2017 and are the result of sale and leaschack income taxes in accordance with SFAS 109. See Note 8. transactions completed in 1987. This method requires that deferred taxes be recorded for UnJer these lease.s. the Company and Cleveland Electric all temporary differences between the book and tax bases are responsible for paying all taxes, insurance premiums, of assets and liabilities. The majority of these temporary operation and maintenance expenses, and all other similar difTerences are attributable to property-related basis dif- costs for their interests in the units sold and leased back. ferences. Included in these basis difTerences is the equity The may incur additional costs in connection with capi-component of AFUDC, which will increase future tax M improvements to the units. The Company and Cleve-expense when it is recovered through rates. Since this land Electric have options to buy the interests back at component is not recognized for tax purposes, the Com- certain times at a premium and at the end of the leases for j pany must record a liability for its tax obligation. The the fair market value at that time or to renew the leases. l PUCO permits recovery of such taxes from customers The leases include conditions for mandatory termination when they become payable. Therefore, the net amount (and possible repurchase of the leasehold interests) upon
- due from customers through rates has been recorded as a certain events of default.
, regulatory asset and will be recovered over the lives of the ! As co-lessee with Cleveland Electric, the Company is also related assets. See Note 7(a). i obligated for Cleveland Electric's lease payments.11 Investment tax credits are deferred and amortized over Cleveland Electric is unable to make its payments under l ! the lives of the applicable property as a reduction of the Mansfield Plant leases, the Company would be obli-depreciation expense. gated to make such payments. No such payments have been made on behalf of Cleveland Electric. (j) Accounts Receivable Securitization In May 1996, the Company and Cleveland Electric began Future minimum lease payments under the operating leases at December 31,1996 are summarized as follows: to sell on a daily basis substantially all of their retail customer accounts receivable and unbilled revenue y yy'g receivables to Centerior Funding pursuant to a five-vear Yee Comn.m 1:Iccmc asset-backed securitiration agreement. 3$""*d ""y l* '02 O in July 1996 Centerior Funding completed a public sale to im 108 of 5150 million of receivables-backed investor certificates 2000 tu % 75 in a transaction that qualifies for sale accounting treat- 2001 til
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ment for financial reporting purposes. l Total fuurc Minimum Lease I (k) Materials and Supplies In December 1996, the Company sold substantially all of Rental expense is accrued on a straight-line basis over the its materials and supplies and fossil fuel inventories for terms of the leases. The amount recorded in 1996,1995 1 certain generating units and other storage locations to an and 1994 as annual rental expense for the Mansfield Plant independent entity at book value. The buyer now provides leases was $45 million. The amounts recorded in 1996, [ Toledo Edison] F-75 [7'oledo Edison / 4
IW.* and tw4 as annual rental espense for the Hease: The Cle.m Air .Vt Amendments i f Iwo (Clean Air
\ alie) Unit 2 lease were 563 milhon. 503 milhon and Act i require. amonp other thmps signincant reductions in 504 m @on, respectnel3 . See Note I tp s. Amounts the enuwon of sulf ur dioside and nmoren osides by charged to expense in excess of the lease payments are fowl lueled penerating units. Our strategy provides for classified as Accumulated Deferred Rents in the llalance compliance primarily throuph greater use of low-sulfur Sheet. coal at some of our units and the use of emission allowances. Total capital expenditures from 1994 through The Company is selling 150 megawatts of its llcaver 1996 in connection with Clean Air Act compliance Valley Unit 2 leased capacity entitlement to Cleveland amounted to 54 million. The plan will require additional Electrie. Revenues recorded for this transaction were capital expenditures over the 1997-20(Ki period of approx-199 million,598 million and 5108 million in 1996.1995 imately $16 million for nitrogen oxide control equipment and 1994, respectively. We anticipate that this sale will and other plant process modifications. In addition, higher continue indefinitely. The future minimum lease pay- fuel and other operation and maintenance expenses will ments through 2017 associated with Beaver Yahey Unit 2 be incurred. Recently proposed pa ticulate and ozone aggregate $1.265 billion, ambient standards have the potential e increase future
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(3) Property Owned with Other Utilities and investors (b) Hazardous Waste Disposal Sites The Company owns. as a tenant in common with other The Company is aware of its potential involvement in the utilities and those investors u ho are ou ner-participants in C'eanup of several sites. The Company has accrued a various sale and leaseback transactions (Lessors), certain Habihty totaHng 53 million at December 31,1996 based generating units as listed below. Each owner owns an on estimates of the costs of cleanup and its proportionate undivided share in the entire unit. Each owner has the responsibility for such costs. We believe that the ultimate right to a percentage of the pencrating capability of each oute me of these matters will not have a material adverse effect on our financial condition, cash flows or results of unit equal to its ownership share. Each utility owner is obligated to pay for .only its respective sharc of the operadons. See Management's Financial Analysis-construction costs and operating expenses. Each Lessor OudmWazardous Waste Disposal Sites. has leased its capacity rights to a utility which is obligated (5) Nuclear Operations and to pay for such Lessor's share of the construction costs Contingencies and operating expenses. The Company's share of the (a) Operating Nuclear Units j operating expenses of these generating units is included in ' the income Statement. The Balance Sheet classification The Company's three nuclear units may be impacted by of Property, Plant and E.quipment at December 31,1996 activities or events beyond our control. An extended mcludes the following facih. ues. ouned by the Company as outage of one of our nuclear units for any reason, coupled
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with any unfavorable rate treatment, could have a mate-a tenant in common with other utih. .ues and Lessors: - p, rial adverse effect on our financial condition, cash flows runtand and results of operations. See the discussion of these and Da nenhir IWrment Mep ans musne or acumuLini other risks in Management's Financial Analysis- Out-Gener.mne t inn nymro w acariuco I>cnre" " Inuibons of dalbrs) look-Nuclear O Eerations. llam Heue 129 bis 62% ) $ hu (2 H Pern Uno I as not, uf 'f; (b) Nuclear Insurance heaver vancy Unn 2 and The Pri:c-Anderson Act limits the public liability of the Common fadhaes ( Noic 2 3 oom 2m 2 0"ners of a nuclear power plant to the amount provided Toui um 3 by private insurance and an industry assessment plan. In the event of a nuclear incident at any unit in the United l (4) Construction and Contingencies States resulting in losses in excess of the level of private insurance (currently $200 million), the Company's maxi- i (a) Construction Program mum potential assessment under that plan would be The estimated cost of the Company's construction pro- 570 million per incident. The assessment is limited to gram for the 1997-2001 period is $282 million, including 59 million per year for each nuclear incident. These AFUDC of 58 million and excluding nuclear fuel. assessment limits assume the other CAPCO companies [Tokdo Edison] p.76 l Toledo Edison]
contribute their proportionate share of any assessment for it is consumed in a reactor. The lease rates are based on the generating units that they have an ownership or various intermediate term note rates, bank rates and com. f' leaschold interest in. mercial paper rates. The utility owners and lessees of Davk-Besse. Perry and The amounts financed L.Jude nuclear fuel in the Davis. Beaver Valley also have insurance coverage for damage to Besse, Perry Unit I an! Beaver Valley Unit 2 reactors property at these sites (including leased fuel and cleanup with remaining lease payments for the Company of costs). Coverage amounted to $1.3 billion for Davis Besse
$43 million, $26 million and $14 million, respectively, at ;
and $2.75 billion for each of the Perry and Beaver Valley December 31,1996. The nuclear fuel amounts fmanced - sites as of January 1,1997. Damage to property could and capitalized also included interest charges incurred by : exceed the insurance coverage by a substantial amount. If the lessors amounting to $2 million in both 1996 and it does, the Company's share of such excess amount could , 1995, and $4 million in 1994. The estimated future lease ' have a material adverse effect on its financial condition, ' amortization payments for the Company based on pro-cash flows and results of operations. In addition, the jected consumption are $36 million in 1997,$29 million Company can be assessed a maximum of $10 million i in both 1998 and 1999, $27 million in 2000 and $28 mil-under these policies during a policy year if the reserves lion in 2001. * ' available to the insurer are iriadequate to pay claims arising out of an accident at any nuclear facility covered (7) Regulatory Matters by the insurer. (a) Regulatory Accounting Requirements and ! The Company also has extra expense insurance coverage. Regulatory Assets + It includes the incremental cost of any replacement power The Company is subject to the provisions of SFAS 71 and purchased (over the costs which would have been incurred had the units been operating) and other inciden-has complied with its provisions. 3FAS 71 provides, ; among other things, for the deferral of certain incurred tal expenses after the occurrence of certain types of , costs that are probable of future recovery in rates. We accidents at our nuclear units. The amounts of the cover
- monitor changes in market and regulatory conditions and i age are 100% of the estimated extra expense per week consider the effects of such changes in assessing the during the 52-week period starting 21 weeks after an continuing applicability of SFAS 71. Criteria that could ;
accident and 80% of such estimate per week for the next give rise to discontinuation of the application of SFAS 71 104 weeks. The amount and duration of extra expense include: (1) increasing ecmpetition which significantly could substantially exceed the insurance coverage
- restricts the Company's ability to charge prices which (6) Nuclear Fuel allow it to recover operating costs, earn a fair return on i Nuclear fuelis financed for the Company and Cleveland invested capital and recover the amortization of regula.
Electric through leases with a special-purpose corpora- ton assds ad (2) a signhant dange in h manner in ! tion. The total amount of financing currently available - which rates are set by the PUCO from cost-based regula-under these lease arrangements is $273 million ($173 mil- tion to some ohr form of regdanom Regulatoy assets lion from intermediate-term notes and $100 million from represent probable future revenues to the Company asso-bank credit arrangements). The intermediate-term notes ciated with certain incurred costs, which it will recover mature in the 1997 Trough 2000 period. The bank credit fr m customers through the rate making process. arrangements terminate in October 1998. The special- EITective January 1,1996, the Company adopted SFAS purpose corporation may not need alternate financing in 121 which imposes stricter criteria for carrying regulatory 1997 to replace $83 million of maturing intermediate- assets than SFAS 71 by requiring that such assets be term notes. At December 31,1996, $87 million of nuclear probable of recovery at each balance sheet date. The fuel was financed for the Company. The Company and criteria under SFAS 121 for plant assets require such Cleveland Electric severally lease their respective portions assets to be written down if the book value exceeds the i of th nuclear fuel and are obligated to pay for the fuel as projected net future undiscounted cash flows. ' i (Toledo Edison] F 77 [ Toledo Edison] l
I i Regulatory assets in the Halance Sheet are as follows: return on common stock equity of 12.5% and an overall I)neder R rate of return of 10 06% for both comp.mies. llowever, the p% em t minion, of PUCO also indicated the authori/ed return could be dollar 4 lowered by the PUCO if the Company and Cleveland Amounts due from customer > for future federal income tancs. net 53 , Electric do not implement the recommendation. In Unamortized loss from Beaver Valley Umt 2 sale _ 92 % August 1996, various intervenors appealed the PUCO Unamortiicd loss on reacquired debt 24 > Prc-phase.in deferrah* 215 222 rate order to the Ohio Supreme Court. The Company and , Raic stabiliraiion Program dcferrais Iko 188 Cleveland Electric did not appeal the order to the Ohio Other _M _M rooi so sm Supreme Court. In connection with the PUCO order
- Represent deferrals of opcrating expenses and carrying charges for discussed in Management's Financial Analysis - Out- i Perry Unit I und !! caver Valley Unit 2 in 1987 and 19K8 which are look-FirstEnergy Rate Plan, certain parties agreed to being amortved over the lives of the related property, request a stay of their appeals until completion of the As of December 31, 1996, customer rates provide for pending merger with Ohio Edison.
recovery of all the above regulatory assets. The remaining recovery periods for about $740 million of the regulatory (c) Assessment assets approximate 30 years. The remaining recovery The Company and Cleveland Electric agree with the periods for the rest of the regulatory assets generally range concept of accelerating the recognition of costs and recov-from about two to 20 years. Regulatory liabilities in the cry of assets as such concept is consistent with the llalance Sheet at December 31,1996 and 1995 totaled strategic objective to become more competitive. !!owever, $13 million and $4 million, respectively. the Company and Cleveland Electric believe that such acceleration must also be consistent with the reduction of (b) Rate Order debt and the opportunity for Centerior Energy common On April 11, 1996, the PUCO issued an order for the stock share owners to receive a fair. return on their Company and Cleveland Electric granting price increases investment. Consideration of whether to implement a aggregating $119 million in annualized revenues plan responsive to the PUCO's recommendation to (535 million for the Company and 584 million for Cleve- revalue assets by $1.25 billion is pending the merger with land Electric). The PUCO rate order provided for recov- Ohio Edison. ery of all costs to provide regulated services, including
. . We have evaluated the Company's markets, regulatory amortization of regulatory assets, in the approved prices, conditions and ability to bill and coIIcet the approved The new prices were implemented in late April 1996. The prices, and conclude that the Company continues to average price increase for the Company's customers was .
comply with the provisions of SFAS 71 and its regulatory 4.7% w.it h the actual percentage increase depending upon .
. assets remain probable of recovery. If there is a change .m the customer class. The Company and Cleveland Electne our evaluation of the competitive environment, regulatory intend to freeze prices through at least 2002, although . .
framework or other factors, or if the PUCO s.ignificantly they are not precluded from requesting further price reduces the value of the Company,s assets or reduces the increases. approved return on common stock equity of 12.59% and The PUCO also recommended that the Company and overall rate of return of 10.06%, or both, for future Cleveland Electric reduce the value of their assets for regulatory purposes, the Company may be required to regulatory purposes by an aggregate 51.25 billion through record material charges to earnings. In particular, if we 2001. This represents an incremental reduction beyond determine that the Company no longer meets the criteria the normal level in nuclear plant and regulatory assets. for SFAS 71, the Company would be required to record a implementation of the price increases was not contingent before-tax charge to write oft the regulatory assets shown upon a revaluation of assets. The PUCO invited the above. In the more likely event that only a portion of Company and Cleveland Electric to file a proposal to operations (such as nuclear operations) no longer meets effectuate the PUCO's recommendation and expressed a the criteria of SFAS 71, a write-off would be limited to willingness to consider alternatives to its recommenda- regulatory assets that are not reflected in the Company's tion. The PUCO stated in its order that failure by the cost-based prices established for the remaining regulated Company and Cleveland Electric to follow the recom- operations. In addition, we would be required to evaluate mendation could result in a PUCO-ordered write-down of whether the changes in the competitive and regulatory assets for regulatory purposes. The PUCO approved a environment which led to discontinuing the application of fToledo Edison] F-78 [ Toledo Edison] ,
1 1 n ,,,, . n,. n n,. ,4 SIAS 71to some or all of the Companyi operations m ,3,, , ,, a ,n ,,, , u ould also result in a w rite-dow n of property, p!.mt and n.,ot income scioreicacratinw mc I,n m a ur 1 l equipment pursuant to SI- AS 121 t,s on na inn,,,,e in snouion kan su sa s4 See Managementi I inancial Anal) sis - Outlook. ' "[,'" ('y "'" 3 "' - 11r.stlinergy llate Plan for a discussion of a regulator) Raie Stabilvanon Pn rram -- en en plan for the Company and Cleveland Electric and its ' die ""d Ic"'ch"d "d"*"""' ""d amortuanon s $ $ efl.ect on their compliance with SFAS 71. on,crnems j _ , (d) Rate Stabilization Program The Itaic Stabilization Program that the PUCO approved The Company joins in the filing of a consolidated federal 1 in October 1992 allowed the Company to defer and income tax return with its aflitiated companies. The subsequently amortire and recover certain costs not being method of tax allocation reflects the benefits and burdens I recovered in rates at that time. Itecovery 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 i 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 Nuc! car Power PUCO as discussed above. The cost deferrais recorded in Plant Unit 2 (Perry Unit 2) abandonment was recognized 1995 and 1994 pursuant to the Rate Stabilization Pro-
)
in 1994 and resulted in a $122 million loss with a i l gram were $39 million and 543 million, respectively. The corresponding $43 million reduction in federalincome tax amortization of the deferrals began in December 1995. liability, llecause of the alternative minimum tax The total amortization was $8 million and 51 milhon in ( AMT) $25 million of the $43 million was reali7ed in 1996 and 1995, respectively. 1994. The remaining $18 million will not be realized until l The regulatory accounting measures under the Rate Sta- 1999-l bilization Program also provided for the accelerated Under SFAS 109, temporary difTerences and carryfor-amortization of certain benefits during the 1992-1995 wards resulted in deferred tax assets of $162 million and period. The total annual amount of such accelerated deferred tax liabilities of 5728 million at December 31, benefits was Sl8 million in both 1995 and 1994- 1996 and deferred tax assets of $179 million and deferred tax habilities of 5752 million at December 31, 1995. (8) Federalincome Tax These are summarized as follows: The components of federal income tax expense recorded gm.,3c, 3 g in the income Statement were as follows: t u% ne l pi% iue uma t milhons or (tmthons of dollars 6 dollars ) Operating Espenses- E'"P'"b P'""' ""d N"'P'nent SM2 50 Current 5 23 5 4a 5 ik Dercrred carrynr charges and operaung expenses _ , b4 F5 Deferred J j J Net operanny loss carry foruards (lb) (44) Total Charged to Orcranng Lxpenses _ l g _g in esiment tas credas (441 ( 4(i) Nonoperating income: Nie and leaseback transacuom - (4) Current (to) l12 (29 0:bcr uN #49 UCIC""d " 5 Net di.lerred tas hatuhty Wr. W Tota! Ltrense (Creda) ia Nunoperanny income -) r4 '
^ "
For tax purposes net operatine loss (NOL) carrvforwards i l lotal l'cderal income Ln iTrense ( 11 ( 44 ( H '
- of approximately $51 million are available to reduce The deferred federalincome tax expense results from the future taxable income and will expire in 2009. The 35%
temporary differences that arise from the ditTerent years tax efTect of the NOI.s is $18 million. Additionally, AMT when certain expenses are recognized for tax purposes as credits of $100 million that may be carried forward opposed to hnancial reporting purposes. Such temporary indchnitely are available to reduce future tax. differences relate principally to depreciation and deferred operating expenses and carrying charges. (9) Retirement Benefits Federal income tax computed by multiplying income (a) Retirement income Plan before taxes by the 359 statutory rate,is reconciled to the Centerior Energy sponsors jointly with its subsidiaries a amount of federal income tax recorded on the books as noncontributing pension plan (Centerior Pension Plan) follows: w hich covers all employee groups. The amount of retire-(Toledo Ediwn] F-79 [7'oledo Ediwn)
ment benehts pencrally depends upon the length of ser- Plan assets consist primarily of investments in common me. Under certain circumstances, benchts can begm as stock, bonds, guaranteed in vest ment cont ract s, cash early as aye 55. The fundmg policy is to comply with the equisalent securities and real estate. limployee Retirement income Security Act of 1974 puidelines. (b) Other Postretirement Benefits Pension costs (credits) for Centerior Energy and its Centerior Energy sponsors jointly with its subsidiaries a subsidiaries for 1994 through 1996 were comprised of the postrctirement benefit plan which pmvides all employee following components: groups certain health care, death and other postretirement tw6 iws Uma (nullmns or dollars) benefits other than pensions. The plan is contributory, Scrsics cost for benchts carned during the with retiree contributions adjusted annually. The plan is period 5 13 5 10 5 13 inicrcsi tosi on em)ceted beneni onhranon 28 26 26 not funded. Under SFAS 106, the accounting standard for Actual return on plan asi. cts (50) (53) (2) postretirement benefits other than pensions, the expected Net amortization and deferral _; J JJO Nel costs (credds) Q) M) y costs of such benefits are accrued during the employees' vears of service. Pension costs (credits) for the Company and its pro rata share of the Service Company's costs were S(2) million, The coniponents of the total postretirement benefit costs
$(3) million and $1 million for 1996,1995 and 1994, for 1994 through 1996 were as follows:
respcClively. (millions of dollars) The following table presents a reconciliation of the funded S'{,Leou for twncic carned duonc the 5, 1 s, status of the Centerior Pension Plan. The Company's iniercu cow on accumuiaicd iwrentement bencht obhgation 6 7 7 share of the Centerior Pension Plan's total projected Amonizauon of transshon unkpanon at benefit obligation approximates 30%. 3,""";'l,( t, um3 of 563 nunmn mer , ,
- ) _. __. _i December 3L g g a niai cosn - w -
yn yi I"$r"s')# These amounts included costs for the Company and its Actuarial present value of bencht obhgations: Yested benefits $326 5304 pro rata share of the Service Company's costs. Nonvested benents 16 ,] . Accumulated benefit obligation 3 306 The accumulated postretirement benefit obligation and Effect of future compensation levcis _,.5,.3 14 accrued postretirement benefit cost for the Company and Total projected benefit obligation 395 360 . Plan assets at fair market value a.Ht 33 4 its share of the Service L..ompany's obligation are as Funded status 26 34 follows i Onrecognued nct gam from vanance between assumptions und experienc'c (56) (68) U"C"*C' 3 L Unrecogniicd prior service cost 14 15 I"6 19"5 Transinon asset at January 1,19n being amortued (millions of oser 19 years _f,2;) [,]f() dollars) Net accrued pension liabilit) $IM) $t5s) Accumulated postreurement bencht obhpanon attributable to: A September 30 measurement date was used for 1996 and ['"*dgf,;[ gi,, g,,c,g,,, 1995 reporting. At December 31, 1996, the settlement other acove pian paracipants J.!!g) ,_is ) (discount) rate and long-term rate of return on plan Accumutated postrctirement benchi obhgation _ (80) (sc) Lnrecognized net gam from vanance between assets assumptions were 7.75% and ll%, respectively. The assumptions and expenence (13) e)) long term rate of annual compensation increase assump. Unam nited trando n ohhpahon 46 49 Accrued pourebrement bencht cost 94?) 946) tion was 3.5% for 1997 and 4% thereafter. At Decem-ber 31,1995, the settlement rate and long-term rate of The Balance Sheet classification of Retirement Benefits return on plan assets assumptions were 8% and 11%, at December 31,1996 and 1995 includes only the Com-respectively. The long-term rate of annual compensation pany's accrued postretirement benefit cost of 540 million increase assumption was 3.5'7e for 1990 and 1997 and 4% and $39 million, respectively, and excludes the Service thereafter. At December 31,1996 and 1995, the Com- Company's portion since the Service Company's total pany's net accrued pension liability included in Retire- accrued cost is carried on its books. ment Benefits in the Balance Sheet was 562 million and A September 30 measurement date uas used for 1996 and 564 million, respectively. " 1995 reporting. At December 31,1996 and 1995, the settlement rate and the long-term rate of annual compen-sation increase assumptions were the same as those dis- [To!cdo Edison] F-80 (7'o!cdo Edison)
cussed for pe nsion reporting in Note Wa). At applicable to approximate!) 594 million of outstanding 1)ecember 31,1990 the assumed annual heahh nre cost first mortgage bonds (531 milhon of which mature in trend rates (applicable to pross eligible charges) were August 1997) that requires common stock dividends to be 7.5% for medical and 7% for dental in 1997. Both rates paid out of its total balance of retained earnings, which reduce gradually to a fixed rate of 4.75% by 2003 file- had been a deficit from 1993 through November 1996. At ments of the obligation alrected by contribution caps arc December 31, 1996, the Company's total retained earn-significantly less sensitive to the health care cost trend ings were $$ million. See Management's Financial Analy-rate than other elements. If the assumed health care cost sis - Capital Resources and Liquidity-Liquidity, trend rates were increased by one percentage point in each future year, the accumulated postretirement benefit (c) Preferred and Preference Stock obligation as of December 31, 1996 would increase by Amounts to be paid for preferred stock which must be 53 million and the aggregate of the service and interest redeemed during the next five years are 51.665 million in cost components of the annual postretirement benefit cost each year 1997 through 1999 only, would increase by 50.2 million. The annual preferred stock mandatory redemption provi-(10) Guarantees 'I "5 "'" "5 I II " 5 Shares To Prke The Company has guaranteed certain loan and lease obligations of a coal supph,er under a long term coal M N_5aning H en Pc' siou par 59.375 __ 16.650 1%5 ~ 5100Shme supply contract. At December 31, 1996, the principal amount of the loan and lease obligations guaranteed by
.l he annualized preferred dividend requirement at g j9g gg g the Company under the contract was Sil million.
The prices under the contract w hich includes certain The preferred dividend rates on the Company's Series A and B fluctuate based on prevailing interest rates and minimum payments are sullicient to satisfy the loan and lease obligations and mine closing costs over the life of market conditions. The dividend rates for these issues aseraged 7.11% and 7.75% respectively, in 1996. the contract. If the contract is terminated early for any reason, the Company would attempt to reduce the termi- l' reference stock authorized for the Company is 5,000.000 nation charges and would ask the PUCO to allow recov- shares with a $25 par value. No preference shares are cry of such charges from customers through the fuel currently outstanding. factor. See Management's Financial Analysis - Outlook-With respect to dividend and liquidation rights, the Com-FirstEnergy Rate Plan. pany's preferred stock is prior to its preference stock and (11) Capitalization common stock, and its preference stock is prior to its com,on ,,ogy. (a) Capital Stock Transactions Preferred stock shares retired during the three years (d) Long-Term Debt and Other Borrowing Arrangements ended December 31,1996 are listed in the following table. g g g Long-term debt which matures or is subject to put (thousands of share 3) options during the next five years is as follows: 549 million SuNect to AlanJaiorv Redumrhon 5100 par 59.375 tt?) (17) (17) in 1997. 539 million in 1998, 5104 million in 1999' 25 par 2.k i _- 1E!!!) .M) 531 million in 2000 and 530 million in 2001. rou ~) m ~n ~m ai The Company's mortgage constitutes a direct first lien on (b) Equity Distribution Restrictions substantially all property owned and franchises held by ~ Federallaw prohibits the Company from paying dividends the Company, Excluded from the lien, among othct out of capital accounts. The Company has since 1993 things. are cash, securities, accounts receivable, fuel, declared and paid preferred stock dividends out of appro- supplies and automotive equipment. priated current net income included in retained earnings. Certain credit agreements of the Company contain cove- 1 At the times of such declarations and payments, the nants relating to fixed charge coverage ratios and limita-Company had a deficit in its retained earnings. At tions on secured financing other than through first December 31, 1996, the Company had 5223 million of mortgage bonds or certain other transactions. The Com-appropriated retained earnings for the payment of divi- pany was in compliance with all such covenants as of dends. The Company also has a provision in its mortgage December 31,1996. The Company and Cleveland Elec- [ Toledo Edison] F-Sl [ Toledo Edison]
a_ pu e ,1 o tric hme letters of credit in connection with the sale and i, g;f t leasenad of I emer Valley Unit 2 that expire m imdhem s ! dohar s ) 1 June W99. T he letters of cred;t are in an aggregate . Type.g sc,unnes l amount of approximately $2:5 million and are secured by "'@'[,7c,nmaa sig 33 M u map"3 first mortgage bonds of the Company and Cleveland g, q II l Electric in the proportion of 60% and 40% respectisely. ~$ Ti h" At December 31, 1996, the Company had outstanding [~' g 58 million of notes secured by subordinated mortgage % g ,g g,g collateral. Duc votlan one year $_ $l Duc in one io fse years 7 9 Duc in sh to 103 can 3 11 (12) Short-Term Borrowing Arrangements ""'"""'"'c"" 3
,u Total sn 52 Centerior Energy has a $125 million revolving credit
. The fa.ir value of these trusts is estimated based on the faciht) through May 1997. Centenor Energy and the quoted market prices for the investment securities and Service Company may borrow under the facility, with all approximates the carrying value. .The f. . air value of the borrowings j. .omtly and severally guaranteed by the Com-Company's preferred stock, with mandatory redemption pant and Cleveland Electric. Centerior Energy plans to provisions, and long-teim debt is estimated based on the transfer any of its borrowed funds to the Company and . . .
quoted market prices for the respectne or similar issues or Cleveland Electric. The credit agreement is secured with on the bas.is of the discounted value of future cash flows. first mortgage bonds of the Company and Cleveland
. The discounted value used current dividend or interest Electne in the proportion of 60s and 40% respectively. . .
rates (or other appropriate rates) for similar issues and The cred.it agreement also provides the participating . .. loans with the same remaining matunties. banks with a subordinate mortgage security interest on the properties of the Company and Cleveland Electric. The estimated fair values of all other financial instru. The banks' fee is 0.625% per annum payable quarterly in ments ap;)roximate their carrying amounts in the Balance addition to interest on any borrowings. There were no Sheet at December 31,1996 and 1995 because of their short-term nature, borrowings under the facility at December 31,1996. Also, the Company and Cleveland Electric may borrow from (14) Quarterly Results of Operations each other on a short-term basis. At December 31,1996, (Unaudited) the Company had outstanding 582 million of notes receit-The M;owing is a tabulation of the unaudited quarterly able from Cleveland Electric with a weighted average results of operatiom, for the two years ended interest rate of 6.18% December 31, 1996. Onarters Ended (13) FinancialInstruments msres n sum. m w 30, Dec n (milhons of dollars) The estimated fair values at December 31,1996 and 1995
'9yc,,g,rgy,,,,,,
p 37,j 37,, 33 3:23 of financial instruments that do not approximate their operanng inwmc 33 31 52 42 carrying amounts in the Balance Sheet are as follows: Net income 3 b 3 lb g ,,,,y , tos,, g ,,a,nic Decembe* 11 for Common Stock (1) 3 24 14 19 % Iuu-19M Currying F air CarrymF I " Operannt kc6cnues $206 S:15 A mou r t Value Amount \ aise 1246 120t Operahng income 43 45 $9 41 (milhons of dallars) Net income 20 22 33 9 Capaahuuon and Liabamer Earrdnp Avadabic sur Log Term DcN 51.034 $1.0h0 11.126 51,13? Common Stock l$ 17 29 18 Noncash investments in the Nuclear Plant Decommis- Earnings for the quarter ended March 31,1996 were sioning Trusts are summarized in the following table. In decreased by $7 million as a result of an $11 million 1996, the Company and Cleveland Electric transferred write-down of the net book value of two inactive produc-l the bulk of their imestment assets in existing trusts into tion facilities. The write-down resulted from a decision i Centerior Energy pooled trust funds for the two compa- that the facilitics are no longer expected to provide nies. The December 31,1996 amounts in the table repre- revenues. ! sent the Company's pro rata share of the fair value of Earnings for the quarter ended September 30,1996 were t such noncash investments, decreased by 54 million as a result of a 56 million charge [ Toledo Edison] F-82 [ Toledo Edison]
- 9
-. - . . ~ . . - - . - . . - . - - . - - - - _ - _ - - . - - - - . - . - -
for the disposition of materials and supplies inventory, and Clescland Electric to write off certain regulatory l The sale and disposal of inventory was part of the reen. assets at the time the merger becomes probable, which is ! gineering of the supply chain process. cxpected to be after obtaining the aforementioned approv- } als of the merger. The write-oft amounts for the Company j (15) Pending Merger of Centerior Energy and Cleveland Electric to be charged against earnings,
- and Ohio Edison estimated by FirstEnergy to total approximately $750 mil-
! On September 13, 1996, Centerior Energy and Ohio lion, will be determined based upon the plan's regulatory l Edison entered into an agreement and plan of merger to accounting and cost recovery details to be submitted by i form a new holding company, firstEnergy. Following the FirstEnergy to the PUCO stafT for approval. The Com-merEer, FirstEnergy wel directly hold all of the issued and pany's share of the write-oft is expected to be about ] outstanding commor stcJ cf the Company, Cleveland one-third of this amount. , i Electric and O'no Edison. As a result of the merger, the s . If the merger is not consummated, the plan would be null common stock share owners of Centenor Energy and and void. See Management's Financial A aaiysis - Out-i Ohio Edison will own all of the tssued and outstanding . look-Pending Merger w.it h Ohio Edison and -FirstEnergy
- shares of FirstEnergy common stock. Centenor E.nergy i Rate Plan for a discussion of the proposed merger and the share owners will receive 0.525 of a share of FirstEnergy common stock for each share of Centerior Energy com-mon stock owned. Ohio Edison share owners will receive (16) Pending Merger of the Company into one share of FirstEnergy common stock for each share of Cleveland Electric Ohio Edison common stock owned.
In March 1994, Centerior Energy announced a plan to FirstEnergy plans to account for the merger as a purchase merge the Company into Cleveland Electric. The merger in accordance with generally accepted accounting princi-agreement between Centerior Energy and Ohio Edison ples. If FirstEnergy elects to apply, or " push down", the requires the approval of Ohio Edison prior to consumma-effects of purchase accounting to the fmancial statements tion of the proposed merger of the Company into Cleve-of the Company and Cleveland Electric, the Company land Electric. Ohio Edison has not yet made a decision. and Cleveland Electric would record adjustments to: All necessary regulatory approvals have been obtained, (1) reduce the carrying value of nuclear generating plant except the NRC's approval. This application was with-by $1.25 billion to fair value; (2) recognize goodwill of drawn at the NRC's request pending Ohio Edison's deci-
$865 million; (3) reduce common stock equity by 5401 sion whether to complete this merger. l million; (4) reset retained earnings of the Company and Cleveland Electric to zero; and (5) reduce the related in June 1995, share owners of the Company's preferred deferred federal income tax liability by $438 million. stock approved the merger and share owners of Cleveland ,
These amounts reflect FirstEnergy's estimates of the pro Electric's preferred stock approved the authorization of I forma combined adjustments for the Company and additional shares of preferred stock. If and when the Cleveland Electric as of September 30,1996. The actual merger becomes efTective, share owners of the Company's i adjustments to be recorded could be materially different preferred stock will exchange their shares for preferred j from these estimates. FirstEnergy has not decided stock shares of Cleveland Electric having substantially the whether to push down the effects of purchase accounting same terms. Debt holders of the merging companies will to the financial statements of the Company and Cleveland become debt holders of Cleveland Electric.
^
Electric if the merger with Ohio Edison is completed, nor For the merging companies, the combined pro forma has FirstEnergy estimated the allocations between the operating revenues were $2.554 billion, $2.516 billion and two companies if push-down accounting is elected. 52.422 billion and the combined pro forma net income in addition to the approvals by the share owners of was $174 million, $281 million and $268 million for the Centerior Energy and Ohio Edison common stock, vari- years 1996,1995 and 1994, respectively. The pro forma ous aspects of the. merger are subject to the approval of data is based on accounting for the merger on a method the FERC an/. other rigulatory authorities. A ' rate reduc- simila'r to a poolinp of interests. The pro forma data is not tion and ecot omic development plan for the Company neces:arily indicative of the results of operations which and Cleveland Electric has been approved by the PUCO. would have been reported had the merger been in effect From the date of consummation of the merger through during those years or which may be reported in the future. 2006, the plan provides for rate reductions, frozen fuel The pro forma data does not reflect any potential efTects cost factors, economic development incentive prices, an related to the consummation of the Centerior Energy and energy-efficiency program, an earnings cap and an accel- Ohio Edison merger. The pro forma data should be read crated reduction in nuclear and regulatory assets for in conjunction with the audited financial statements of regulatory purposes. The plan will require the Company both the Company and Cleveland Electric. [ Toledo Edison) F-83 l Toledo Edison)
Financial and Statistical Revicw Operating Retenues (millions of dollars) Total Total Operating Year R esidenia.d Commercial I ndustri.il Ot her Retail Whmieule k evenues 1996 $246 194 253 67 760 137 $897 1995 238 184 254 65 741 133 874 1994 227 181 251 64 723 142 865 1993 229 180 244 71 724 147 871 1992 215 175 236 61 687 158 545 1936 189 134 214 24 561 13 574 Operating Expenses (millions of dollars) Ot her Generalion Amortization of I cderal I uci & Operation I auihiecs 1)eprc6iai.on Tu nes. Deferred income Total Purchancd & Rental & Oiher Than Operaima Taxes Operating Year Powcr Mainicnance l'spene Net Amortaation l'IT Linenws Net (Credn ) E spenwa 1996 $169 231 104 94 90 17 36 $741 1995 157 225 104 84 91 (17) 42 686 1994 167 229 104 83 90 (21) 33 685 1993 173 352(a) .' 04 76 91 (4)(b) (10) 782 1992 169 236 106 77 91 (17) 33 695 1986 160 168 - 38 51 - 41 458 Income (Loss) (millions of do!!ars) I ederal income Oiher Deferred income ( Loss) laceme & Carrymg Tanes- Before Operating Al'UDC- Dcducuons. Charges. Credn laterest Year income Louity Net Net ( La rsense ) Charpes 1996 $156 I (10) - 5 $ 152 1995 188 I 6 14 (2) 207 1994 180 1 3 15 (2) 197 1993 89 I (232)(c) (161)(b) 129 (174) 1992 150 t i 41 (I) I92 1986 116 130 (2) - 52 296 Income (Loss) (millions of dollars) Earnmgs ( Losa) Net Preferred Available for Debt AIUDC- Income Stock Common i car interesi Debt iLcon Dwidends Stock 1996 $ 96 (1) 57 17 $ 40 1995 III (I) 97 18 79 ) 1994 I16 (1) 82 20 62 1993 116 (I) (289) 23 (312) 1992 l22 (l) 71 24 47 1986 174 (55) I77 45 132 (a) Includes early retirement program expenses and other charges of $107 million. Ib) Includes wrne-of ofphase-in deferrah of$241 millsorr. consisting of $53 million ofdeferred operating expenses and $l86 million ofdeferred rarrying charges. [ Toledo Edison] F 84 [ Toledo Edison]
The Todvdo I dnan t ompons I:lectric Sales (millions of KWil) 1:lectric Couomers Residential tiage (thousands at year end) Ascraye A scrape Avcrapc Prwg Rescnue Industrial L% ll Per Per Per i car R eudent ul Commerci.it Indosirul w holcode Ot her Tosat Reudenii.d Commercut & Other Tot al Customer Aw f f Cusinmer j 1996 _ 2 145 1790 4 301 2 330 488 II 054 262 27 4 293 8 284 11.47e $950.10 1995 '164 1748 4 174 2 563 500 11 149 260 27 4 291 8 384 10.99 921.23 1994 2 056 I 7II 4 099 2 548 499 10 913 257 26 4 287 8 044 11.04 888.30 1993 _ 2 034 I 672 3 776 2 146 490 10 123 255 26 4 285 7 997 l 1.23 897.65 1992 _ l 441 I 619 3 563 2 753 478 10 354 255 26 5 2k6 7 632 l 1.08 845.99 1936 _ l 441 1495 3 482 348 449 7 715 247 25 4 276 7 881 9.75 768.43 Load (MW & %) Energy (millions of KWil) Fuel Net I thciency-
.Neasonal Peak Capacn> Load Company Generaird Purclined I uti Cost Ir1U Per Yc.it Capah.his inad Marrin i actor Iom! N uclear Tolal iba ct Tot al Per A w 11 K% ll 1996 I 951 1 758 9.9% 62.1% 5173 5 571 10 748 870 11 618 1.26e 10 295 1995 1 651 1738 ( 5.3 ) 62.4 4 576 6 761 11337 299 II 636 1.32 10 341 199J l726 I b20 6.1 64.7 5160 5 419 10 579 773 II 352 1.35 10 298 1993 1 726 1 568 9.2 64 3 5 548 4 791 10 339 196 10 535 1.42 10 146 1992 1 759 I 514 13.9 63.2 4 65o 6 291 10 949 (82) 10 867 1.41 10 284 1986 1760 1 423 19.1 64.8 6 462 12 6 474 1795 8 269 l.82 9 860 Inscsiment (millions of dollars)
Ceibiructum w'ork in Toial l UDhiv Act umulaicd Prorrca Nuclear Property, Utihty l Plant in Depreciainm A Nel & Perry Fuel and Plant and Plant lotal Year Nervice A mortir ation Plant Unn 2 Ot her Louipment Addnams Aswis 1996 $2 929 1 020 1 909 22 84 $2 015 5 49 $3.i57 1995 2 896 942 1 954 28 98 2 080 56 3 474 1994 2 899 892 2 007 30 125 162 41 3 502 1993 2 837 788 2 049 40 142 2 231 43 3 510 1992 2 847 760 2 087 280 164 2 531 44 3 939 1986 1 443 416 1 027 2 130 269 3 426 463 3 774 Capitaliiation (millions of dollars & 7c) Preferred Stock. Preferred Stock. with Mandalors milhout Manda:ory i car Common hiock i unm Redcmmin Pronuons kedemmion Pronoms Lone. Term fichi inial 1996 5 803 40% 3 -G 210 10% 1003 50% $2 019 1995 763 38 5 - 210 10 1068 52 2 046 1994 685 34 7 - 210 10 1 154 56 2 056 1993 623 30 28 1 210 10 1 225 59 2 086 1992 935 39 50 ,' '10 9 1178 50 2 373 1986 1 075 36 149 5 260 9 I 481 50 2 965 oc) includes wrue.op of Pern D.it 2 ef $232 nullwn [ Toledo Edison] F-85 l Toledo Edison] 3
">M.. a--i J a ad eA4-. -.,--1i 4 & ,1 ,a_ . A,eaa . -. .mnJ< a A. 4 - - 1 4 4 e
I 1 I l l 1 [THIS PAGE LEFT BLANK INTENTIONALLY) e i
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INDEX TO SCHEDULES Ea22 Centerior Enerov Corporation and Subsidiaries: Schedule II Valuation and Qualifying Accounts for the ......... Years Ended December 31, 1996, 1995 and 1994 ... S-2 The Cleveland Electric Illuminatino Comnany and Subsidiaries: Schedule II Valuation and Qualifying Accounts for the ......... S-3 Years Ended December 31, 1996, 1995 and 1994 ... The Toledo Edison Company Schedule II Valuation and Qualifying Accounts for the ............ S-4 Years Ended December 31, 1996, 1995 and 1994 i Schedules are otherorthan not required those are not listed above are omitted forreason applicable. the that they \ l l 1 S-1
. . . - . . ... . - - .. - -. . - _~ - - _ ~ . -~ _ .. - - - .. . . . - ~ - . .
e i I t 4 3 4 CENTER 10R ENERGY CORPORATION AND SUBSIDI ARIES SCHEDULE 11 VALUATION AND QUALIFT!NG ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (f5ousands of Dotters) I 4 Additions Deductions Deductions Balance at Balance at Charged to [ from End of '
' Beginning income Reserves Other Period of Period Statement Other Dsscription ............ ............ ......... .......... .
i ' Reflectsd as a Reduction a to the Related Assets A l Accumulated Provision for Uncottectible Accounts l (Deduction f rom Amounts Due ' from Customers and Others) 524,295 (a)(c) 53,246 (d) 5158 53,372 $21,095 (a) 53,232 1996 22,021 (a)(c) 0 3,372 l 3,519 18,007 (a) 3,867 (b) 1995 19,010 (a)(c) 0 3,519 l 3,703 12,779 (a) 6,047 (b) l 1994 l i (a) Includes a provision and corresponding write of f of uncollectible accounts of $14,203,000, $10,024,000 and
$4,695,000 in 1996,1995 and 1994, respectively, relating to customers which qualify for the PUC0 mandated such uncollectible accounts are recovered through a separate PUCO Percentage of Income Payment Plan (PIPP),
cpproved surcharge tariff. (b) Includes amounts for collection of accounts previously written off and deferral of PIPP uncollectibles in The amounts deferred for future recovery were exesss of the amounts included under the 1988 base rate cases.
$1,716,000 and 52,382,000 in 1995 and 1994, respectively. . . (c) Uncollectible accounts written off.
(d) sets of retait customer accounts receivable net of Accumulated Provision for Uncottectible Accounts. l l
)
l s2
, . _ _ . . . . _ . _ _ - . _ m. . ~ m._.______._. _ _ __ . _. .. _.. _... _.. . . _ . - . _ ~ _ . .
THE CLEVELAND ELECTRIC ILtVMINATING COMPANY AND SUBSIDIARIES SCHEDULE 11 - VALUATION AND OUAllff!NG ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Thousands of Dollars)' Additions Deductions
... ......................... l
............................ 1 Balance at Charged to Deductions Beginning Balance at Income from Description End of of Period Statement Other Reserves Other Period Reflected as a Reduction to the Related Asset; Accisnulated Provision for Uncottectible Accounts (Deduction f rom Amounts Due ;
I from Customers and Others) i l 1996 s2,326 $14,872 (s) 51,353 516,193 (a)(c) 52,300 (d) 1995 558 2,129 12,665 (a) 2,585 (b) 15,053 (a)(c) 0 2,326 1994 2,313 8,354 (a) 4,508 (b) ) 13,046 (a)(c) 0 2,129
'(a) Includes a provision and corresponding write.of f of uncottectible accounts of 59,895,000, $6,584,000 and 52,499,000 in 1996, 1995 and 1994, respectively, relating to customers which qualify for the PUC0 mandated
]
Percentage of Income Payment Plan (PjPP). Such uncollectible accounts are recovered through a separate PUC0 approved surcharge tariff. 1 (b) includes amounts for collection of accounts previously written off and deferrat of PIPP uncot tectibles in excess of the amount included under the 1988 base rate case. The amounts deferred for future recovery were 51,273,000 and $1,971,000 in 1995 and 1994, respectively. (c) Uncollectible accounts written off. ! { (d) Sale of retait customer accounts receivable net of Accumulated Provision for Uncollectible Accoun { 1 l
+
53
d THE TOLEDO EDl50N COMPANY SCHEDULE 11 - VALUATION AND QUALIFYING ACCOUNTS FOR iME YEARS ENDED DECEMBER 31,1996,1995 AND 1994 (thousands of Dot tars) Addi t ions Deductions Balance at Charged to Deductions Balance at Beginning income from End of Dzscription of Period S t a t enent Other Reserves Other Period Reflected as a Reduction to the Related Asset: 4 Acetanulated Provision for Uncot tectible Accounts ~ (Deduetion from Amounts Due from Customers and Others) 1996 S1,046 56,223 (a) 51,879 58,102 (a)(c) 5946 (d) $100 1995 1,390 5,342 (a) 1,282 (b) 6,968 (a)(c) 0 1,046 1994 1,390 4,425 (a) 1,539 (b) 5,964 (a)(c) 0 1,390 (a) Includes a provision and corresponding write-of f of uncollectible accounts of 54,308,000, 53,440,000 and 52,196,000 in 1996, 1995 and 1994, respectively, relating to customers which qualify for the PUC0 mandated Percentage of Income Payment Plan (PIPP). Such uncollectible accounts are recovered through a separate PUCO approved surcharge tariff. (b) Includes amounts for collection of accounts previously written off and deferral of PIPP uncollectnbles in excess of the amount included under the 1988 base rate case. The amounts deferred for future recovery were 5443,000 and 5411,000 in 1995 and 1994, respectively. (c) Uncollectible accounts written off, (d) Sale cf retail custoner accounts receivable net of Accumulated Provision for Uncollectible Accounts. 34
l THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARIES AND THE TOLEDO EDISON COMPANY j COMBINED PRO FORMA CONDENSED FINANCIAL STATEMENTS The following pro forma condensed balance sheets and income statements give . effect to the agreement between Cleveland Electric and Toledo Edison to merge 1 Toledo Edison into Cleveland Electric. These statements are unaudited and l based on accounting for the merger on a method similar to a pooling of ' interests. These statements combine the two companies' historical balance sheets at December 31, 1996 and December 31, 1995 and their historical income statements for each of the three years ended December 31, 1996. ; The following pro forma data is not necessarily indicative of the results of i operations or the financial condition which would have been reported had the i merger been in effect during those periods or which may be reported in the ! future. The pro forma data does not reflect any potential effects related to { the consummation of the pending merger of Centerior Energy and Ohio Edison. ' See "Pending Merger with Ohio Edison" in Item 1 of this Report. The statements should be read in conjunction with the accompanying notes and with f the audited financial statements of both Cleveland Electric and Toledo Edison. l
; COMBINED PRO FORMA CONDENSED BALANCE SHEETS OF CLEVELAND ELECTRIC AND TOLEDO EDISON {
(Unaudited) { (Millions of Dollars) l At December 31, 1996 e _____________________________________________ l Historical Cleveland Toledo Adjust- Pro Forma Electric Edison ments Totals Assets Property, Plant and Equipment $ 7 , 8 0 9 .. 53,504 $ -
$11,313 Less: Accumulated Depreciation and Amortization 2,899 1,489 -
4,388 Not Property, Plant and
~
Equipment 4,910 2,015 - 6,925 Current Assets 498 308 (102)(A,R) 704 Regulatory and Other Assets 1,470 1,034 (18)(A,B,R) 2,486 Total Assets $6,878 S3,357 $(120) 510,115 i Capitalization and Liabilities '! Capitalization (, Common Stock Equity $1,045 5 803 S - S 1,848 Preferred Stock: With Mandatory Redemption Provisions 186 3 - 189 Without Mandatory Redemption Provisions 238 210 - 448 Long-Term Debt 2,441 1,003 - 3,444 Total capitalization 3,910 2,019 - 5,929 Current Liabilities 878 278 (104)(A) 1,052 Deferred Credits and Other Liabilities 2,090 1 060 (16)(B,R) 3.134 Total Capitalization and ) Liabilities $6,878 $3,357 $(120) $10,115
' P-1 I t
I i
l i At December 31, 1995
............................................. \
Historical i Cleveland Toledo Adjust- Pro Forma l Electric Edison ments Totals l Assets a Property, Plant'and Equipment S7,724 S3,485 S - $11,209 1 Less: Accumulated Depreciation and Amortization 2,693 1,405 1 (R) 4,099 Net Property, Plant and Equipment 5,031 2,080 (1) 7,110 I Current Assets. 598 327 (24)(A) 901 l Regulatory and Other Assets 1,523 1,067 .fil)(B) 2,579 I Total Assets $7,152 $3,474 Sf36) $10,590 ! Capitalization and Liabilities l Capitalization: Common Stock Equity S1,127 5 763 $ - S 1,890 l Preferred Stocks i With Handatory Redemption ! Provisions 215 5 - 220 l Without Handatory Redemption I Provisions 241 210 - 451 Long-Term Debt 2.666 1,068 - 3,734 Total Capitalization 4,249 2,046 - 6,295 Current Liabilities 796 329 (27)(A,R) 1,098 i Deferred Credits and Other Liabilities 2,107 1,099 (9)(A,B) 3.197 Total Capitalization and Liabilities S7,152 S3,474 Sf36) S10,590 1 t i t 6 i i ! P-2 1 1 1 I
COMDINED PRO FORMA CONDENSED INCOME STATEMENTS OF CLEVELAND ELECTRIC AND TOLEDO EDISON (Unaudited) (Millions of Dollars) Year Ended December 31, 1996 Historical Cleveland Toledo Adjust- Pro Forma Electric Edison ments Totale Operating Revenues $1,790 $ 897 $(133)(C,R) $2,554 Operetin; Expenses 1.431 741 (134)(C,D,R) 2,038 operating Income 359 156 1 516 Nonoperating (Loss) (2) (4) __12)(D,E) (8) Income Before Interest Charges 357 152 (1) 508 Interest Charges 240 95 (1)(E) 334 Net Income 117 57 - 174 Preferred Dividend Requirements 39 17 - 56 Earnings Available for Common Stock $ 78 $ 40 $ - S 118 Year Ended December 31, 1995 Historical Cleveland Toledo Adjust- Pro Forma Electric Edison ments Totals Operating Revenues $1,769 S 874 $(127) (C,R) S2,516 Operating Expenses 1,371 686 (129) (C,D,R) 1.928 Operating Income 398 188 2 588 Nonoperating Income 31 19 (2) (D) 48 Income Before Interest Charges 429 207 - 636 Interest Charges 245 110 - 355 Net Income 184 97 - 281 Preferred Dividend Requirements 43 18 - 61 _ Earnings Available for Common Stock S 141 5 79 5 - S 220 Yehr Ended December 31, 1994 Historical l Cleveland Toledo Adjust- Pro Forma Electric Edison ments Totale Operating Revenues 51,698 5 865 S(141)(C) $2,422 Operating Expenses 1,302 685 (143)(C,D) 1,844 Operating Income 396 180 2 578 Nonoperating Income 31 17 (2)(D,E,R) 46 Income Before Interest Charges 427 197 - 624 j Interest Charges 242 115 (1)(E) 356 Net Income 185 82 1 268 Preferred Dividend Requirements 45 20 1 (R) 66 Earnings Available for Common Stock $ 140 S 62 S - S 202 P-3
4 NOTES TO COMBINED PRO FOP.MA CONDENSED BALANCE SHEETS AND INCOME STATEMENTS (Unaudited) The Pro For:oc Fi:iancial Statements include the following adjustments: (A) Elimination of intercompany accounts and notes receivable and accounts and notes payable. (B) Reclassification of prepaid pension costs. (C) (D) Elimination of intercompany operating revenues and operating expenses. Elimination of intercompany working capital transactions. (E) Elimination of intercompany interest income and intereat expense. (R) Rounding adjustments. P-4
EIH7 BIT INDEI ! The exhibits designated with an asterisk (*) are filed herewith. The exhibits [ not so designated have previously been filed with the SEC in the file indi- ! cated in parenthesis following the description of such exhibits and are in-corporated herein by reference. An exhibit designated with a pound sign (#) is a management contract or compensatory plan or arrangement. + COMMON EINIBITS (The_following documents are exhibits to the reports of Centerior Energy, Cleveland Electric and Toledo Edison.) Exhibit Number Document 2(a) Agreement and Plan of Merger between Ohio Edison and Centerior Energy dated as of September 13, 1996 (Exhibit (2)-1, Form S-4 File No. 333-21011, filed by FirstEnergy). 2(b) Merger Agreement by and among Centerior Acquisition Corp., FirstEnergy and Centerior (Exhibit (2)-3, Form S-4 File No. 333-21011, filed by FirstEnergy). l 4 Rights Agreement (Exhibit 4, June 25, 1996 Form 8-K, File Nos. 1-9130, 1-2323 and 1-3583). 10b(1)(a) CAPCO Administration Agreement dated November 1, 1971, as of September 14, 1967, among the CAPCO Group members re-garding the organization and procedures for implementing the objectives of the CAPCO Group (Exhibit 5(p), Amendment No. 1, File No. 2-42230, filed by Cleveland Electric). 10b(1)(b). Amendment No. 1, dated January 4, 1974, to CAPCO Adminis-tration Agreement among the CAPCO Group members (Exhibit 5(c)(3), File No. 2-68906, filed by Ohio Edison). 10b(2) CAPCO Transmission Facilities Agreement dated November 1, 1971, as of September 14, 1967, among the CAPCO Group . { members regarding the installation, operation and mainte- ' nance of transmission facilities to carry out the objec- ! tives of the CAPCO Group (Exhibit 5(g), Amendment No. 1, File No. 2-42230, filed by Cleveland Electric). 10b(2)(1) Amendment No. I to CAPCO Transmission Facilities Agree- ; ment, dated December 23, 1993 and' effective as of January 1, 1993, among the-CAPCO Group members regarding requirements for payment of invoices at specified times, for payment of interest on non-timely paid invoices, for restricting adjustment of invoicessafter a four-year period, and for revising the method for computing the Investment Responsibility charge for use of a member's transmission facilities (Exhibit 10b(2)(1), 1993 Form ; 10-K, File Nos. 1-9130, 1-2323 and 1-3583). ' E-1
Exhibit Number Document 10b(3) CAPCO Basic Operating Agreement As Amended January 1, 1993 among the CAPCO Group members regarding coordinated l operation of the members' systems (Exhibit 10b(3), 1993 l Form 10-K, File Nos. 1-9130, 1-2323 and 1-3583). 10b(4) Agreement for the Termination or Construction of Certain Agreements By and Among the CAPCO Group members, dated , December 23, 1993 and effective as of September 1, 1980 (Exhibit 10b(4), 1993 Form 10-K, File Nos. 1-9130, 1-2323 and 1-3583). r 10b(5) Construction Agreement, dated July 22, 1974, among the ' CAPCO Group members and relating to the Perry Nuclear ; Plant (Exhibit 5(yy), File No. 2-52251, filed by Toledo l Ediaon). I 20b(6) Contract, dated as of December 5, 1975, among the CAPCO j Group members for the construction of Deaver Valley Unit No. 2 (Exhibit 5(g), File No. 2-52996, filed by Cleveland
- Electric). >
10b(7) Amendment No. 1, dated May 1, 1977, to Contract, dated as 4 of December 5, 1975, among the CAPCO Group members for the i construction of Beaver Valley Unit No. 2 (Exhibit 5(d)(4), i File No. 2-60109, filed by Ohio Edison). 10d(1)(a) Form of Collateral Trust Indenture among CTC Beaver Valley Funding Corporation, Cleveland: Electric, Toledo Edison and s Irving Trust Company, as Trustee-(Exhibit 4(a), File No. 33-18755, filed.by' Cleveland Electric and Toledo Edison). 10d(1)(b) Form of Supplemental Indenture to Collateral Trust'In- ! i
. , denture-constituting Exhibit /10d(1)(a) above, including j form of
- Secured Lease Obligation : Bond (Exhibit 4(b), File !
No. 33-18755, filed by Cleveland Electric and Toledo Edison). f t 10d(1)(c) _ Form of. Collateral Trust Indenture among Beaver Valley II
- Funding Corporation, The Cleveland Electric Illuminating Company and The Toledo Edison Company and The Bank of New York, as Trustee (Exhibit (4)(a), File No. 33-46665, filed by Cleveland Electric and Toledo Edison).
, t - ,
c s 10d(1)(d) Form -of Supplemental' Indenture to -Collateral Trust ( Indenture. constituting Exhibit 20d(1)(c) above, including form of Secured Lease obligation Bond (Exhibit (4)(b), 3 File N6. 33-46665, filed by Cleveland Electric and Toledo
. Edison). L l
10d ( 2 ) ( a ) .. Form of Collateral Trust Indenture among CTC Hansfield I Funding Corporation, Cleveland Electric, Toledo Edison and ' IBJ Schroder Bank & Trust Company, a's Trustee (Exhibit 4(a), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). E-2
Exhibit Number Document 10d(2)(b) Form of Supplemental Indenture to Collateral Trust In-denture constituting Exhibit 10d(2)(a) above, including forms of Secured Lease Obligation Bonds (Exhibit 4(b), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(3)(a) Form of Facility Lease dated as of September 15, 1987 be-tween The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the limited partnership Owner Participant named therein, Lessor, and Cleveland Electric and Toledo Edison, Lessees (Exhibit 4(c), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(3)(b) Form of Amendment No. I to Facility Lease constituting Exhibit 10d(3)(a) above (Exhibit 4(e), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(4)(a) Form of Facility Lease dated as of September 15, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the corporate owner Participant named therein, Lessor, and Cleveland Electric and Toledo Edison, Lessees (Exhibit 4(d), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(4)(b) Form of Amendment No. 1 to Facility Lease constituting Exhibit 10d(4)(a) above (Exhibit 4(f), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(5)(a) Form of Facility Lease dated asHof September 30, 1987 be-tween Meridian Trust Company, as owner Trustee under a i
~6:
Trust Agreement dated as of September 30, 1987 with the
' ' Owner Participant ' named therein, Lessor, and Cleveland lo' Electric 'and Toledo Edison,' Lessees (Exhibit 4(c), File ~
No. 33-20128, filed by Cleveland Electric and Toledo Edison).
* ~
10d(5)(b) Form of-Amendment No. l' to' the' Facility Lease constituting Exhibit 10d(5)(a) above (Exhibit 4(f), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(6)(a) Form of Participation Agreement dated as of September 15, 1987 among the limited partnership-Owner Participant named therein, the Original Loan Participants listed in Schedule 1 thereto, as Or'ginal i Loan Participants, CTC Beaver i
' ~ ~ Valley Funding Corporation, as Funding Corporation,,The First National Bank of Boston, as Owner Trustee, Irving i
-Trust Company, as Indenture Trustee, and Cleveland l Electric and Toledo Edison, as Lessees (Exhibit 28(a), i File'No. 33-18755, filed by Cleveland Electric and Toledo Edison). ~ '"
)
E-3 l l
1 I l 1 Exhibit Number Document 10d(6)(b) Form of Amendment No. I to Participation Agreement consti- I tuting Exhibit 10d(6)(a) above (Exhibit 28(c), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(7)(a) Form of Participation Agreement dated as of Septembet 15, 1987 among the corporate Owner Participant named therein, the original Loan Participants listed in Schedule 1 thereto, as Original Loan participants, CTC Deaver Valley Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Cleveland Electric and Toledo Edison, as Lessees (Exhibit 28(b), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(7)(b) Form of Amendment No. I to Participation Agreement consti-tuting Exhibit 10d(7)(a) above (Exhib. 28(d), File No. 33-18755, filed by Cleveland Electric nd Toledo Edison). 10d(8)(a) Form of Participation Agreement dated as of September 30, 1987 among the Owner Participant named therein, the origi-nal Loan Participants listed in Schedule II thereto, as Original Loan Participants, CTC Hansfield Funding Corpora-tion, Heridian Trust Company, as Owner Trustee, IBJ Schroder Bank & Trust Company, as Indenture. Trustee, and Cleveland Electric and Toledo Edison, as Lessees (Exhibit 28(a), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(8)(b) Form of Amendment No. 1 to the Participation Agreement constituting Exhibit 10d(8)(a) above (Exhibit 28(b), File No. 33-20128, filed by Cleveland Electric and Toledo, Edison). 10d(9) Form of Ground Lease dated as of September 15, 1987 be-tween Toledo Edison, Ground Lessor, and The First National Bank of Boston, as O'wner Trustee under a Trust Agreement dated as of September 15, 1987 with the Owner Participant named therein, Tenant (Exhibit 28(e), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(10) Form of Site Lease dated as of September 30, 1987 between Toledo Edison, Lessor, and Heridian Trust Company, as Owner Trustee under a.Truut Agreement dated as of September 30, 1987 with the Owner Participant named
. therein, Tenant (Exhibit 28(c), File No. 33-20128, filed by Cleveland Electric and Toledo Edison).
10d(11) Form . of Site Lease dated as . o ', September 30, 1987 between Cleveland Electric, Lessor, i.nd Heridian Trust Company, as owner Trustee under a Troct Agreement dated as of September 30, 1987 with the Owner Participant named therein, Tenant (Exhibit 28(d), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). E-4
Exhibit Number Document 10d(12) Form of Amendment No. 1 to the Site Leases constituting Exhibits 10d(10) and 10d(11) above (Exhibit 4(f), File No. 33-20128, ' filed by Cleveland Electric and Toledo Edison). 10d(13) , Form of Assignment, Assumption and Further Agreement dated as of September 15, 1987 among The First National Bank of I Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the Owner Participant named therein, Cleveland Electric, Duquesne, Ohio Edison, Pennsylvania Power and Toledo Edison (Exhibit 28(f), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(14) Form of Additional Support Agreement dated as of September Boston, 15, 1987 between The First National Bank of ao Owner of September 15, 1987Trustee under a Trust Agreement dated as I with the Owner Participant named therein, 33-18755, and Toledo Edison (Exhibit 28(g), File No. ! filed by Cleveland Electric and Toledo Edison). 10d(15) Form of Support Agreement dated as of September 30, 1987 between Meridian Trust Company, as Owner Trustee under a Trust Agreement dated as of September 30, 1987 with the owner Participant named there, Toledo Edison, Cleveland Electric, Duquesne, Ohio Edison and Pennsylvania Power
.(Exhibit 28(e), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). '
10d(16). t Form of Indenture, Bill of Sale, Instrument of Transfer and Severance Agreement dated as of September 30, 1987 , between Toledo Edison, Seller, and The First National Bank { of Boston, i as Owner Trustee under a Trust Agreement dated ! as of September 15, 1987 with the Owner Participant named therein, Buyer (Exhibit 28(h), File No. 33-18755, filed by l Cleveland Electric a- Toledo Edison). 10d(17) Form of Bill of Sale, Instrument of Transfer and Severance Agreement dated as of September 30, 1987 between Toledo Edison, Seller, and Meridian Trust Company, as owner Trustee under a Trust Agreement dated as of September 30, 1987 with the Owner Participant named therein, Buyer (Exhibit 28(f), File No. 33-20128, filed by cleveland Electric and Toledo Edison). 10d(18) Form of Bill of Sale, Instrument of Transfer and Severance Agreement dated as of September 30, 1987 between Cleveland Electric, ' Seller, and Meridian Trust Company, as owner i Trustee under a Trust Agreement dated as of Septemier 30, 1987 with the Owner Participant named therein, Buyer (Exhibit 28(g), File No. 33-20128, filed by Cleveland j i Electric and Toledo Edison). t E-5
i i Document Exhibit Number Forms of Refinancing Agreement, including exhibits 10d(19) thereto, among the owner Participant named therein, as , Owner Participant, CTC Beaver Valley Funding Corporation, as Funding Corporation, Beaver Valley II Funding Corporation, as New Funding Corporation, The Bank of New York, as Indenture Trustee, The Bank of New York, as Collateral Trust Trustee, The Bank of New York, as New Collateral Trust Trustee, and The Cleveland Electric Illuminating Company and.The Toledo Edison Company, as Lessees (Exhibit (28)(e)(i), File No. 33-46665, filed by Cleveland Electric and Toledo Edison).
#Conterior Energy Corporation Equity Compensation Plan 10e(1)
(Exhibit 99, Form S-8, File No. 33-59635). 99a Financial Statements of the Centerior Energy Corporation Employee Savings Plan for the fiscal year ended December 31, 1996 (to be filed by amendment). CENTERIOR ENERGY EIRIBITS r Exhibit Number Document r 3a Amended Articles of Incorporation of Centerior Energy ef-fective April 29, 1986 (Exhibit 4(a), File No. 33-4790). Regulations of Centerior Energy effective April 28, 1987 3b (Exhibit 3b, 1987 Form 10-K, File No. 1-9130). 10a (CEC)
- Indemnity Agreements between Centerior and certain of its current directors and officers. l 21 (CEC)
- List of subsidiaries.
23a (CEC)
- Consent of Independent Accountants.
23b (CEC)
- Consent of Counsel for Centerior Energy.
- Powers of Attorney of Centerior Energy directors and
]' 24 (CEC) officers required to sign the Report. 27 (CEC)
- Financial Data Schedule for the period ended {
December 31, 1996. CLEVELAND ELECTRIC EIHIBITS i Document Exhibit Number 3a Amended Articles of Incorporation of Cleveland Electric, as amended, effective May 28, 1993 (Exhibit Ja, 1993 Form , 10-K, File No. 1-2323). . 1981, 3b Regulations of Cleveland Electric, dated April 29, as amended effective October 1, 1988 and. April 24, 1990 (Exhibit 3b, 1990 Form 10-K, File No. -2323). l t E-6 1
Exhibit Eumber Document 4b(1) Mortgage and Deed of Trust between Cleveland Electric and Guaranty Trust Company of New York (now Morgan Guaranty Trust Company of New York), as Trustee, dated July 1, 1940 (Exhibit 7(a), File No. 2-4450). Supplemental Indentures between Cleveland Electric and the Trustee, supplemental to Exhibit 4b(1), dated as follows: 4b(2) July 1, 1940 (Exhibit 7(b), File No. 2-4450). 4b(3) August 18, 1944 (Exhibit 4(c), File No. 2-9887). 4b(4) December 1, 1947 (Exhibit 7(d), File No. 2-7306). 4b(5) September 1, 1950 (Exhibit 7(c), File No. 2-8587). 4b(6) June 1, 1951 (Exhibit 7(f), File No. 2-8994). 4b(7) May 1, 1954 (Exhibit 4(d), File No. 2-10830). 4b(8) March 1, 1958 (Exhibit 2(a)(4), File No. 2-13839). 4b(9) April 1, 1959 (Exhibit 2(a)(4), File No. 2-14753). 4b(10) December 20, 1967 (Exhibit 2(a)(4), File No. 2-30759). 4b(11) January 15, 1969 (Exhibit 2(a)(5), File No. 2-30759). 4b(12) November 1, 1969 (Exhibit 2(a)(4), Fi e No. 2-35008). 4b(13) June 1, 1970 (Exhibit 2(a)(4), File ao. 2-37235). 4b(14) November 15, 1970 (Exhibit 2(a)(4), File No. 2-38460). 4b(15) May 1, 1974 (Exhibit 2(a)(4), File No. 2-50537). 4b(16) April 15, 1975 (Exhibit 2(a)(4), File No. 2-52995). 4b(17) April 16, 1975 (Exhibit 2(a)(4), File No. 2-53309). 4b(18) May 28, 1975 (Exhibit 2(c), June 5, 1975 Form 8-A, File No. 1-2323). 4b(19) February 1, 1976 (Exhibit 3(d)(6), 1975 Form 10-K, File No. 1-2323). 4b(20) November 23, 1976 (Exhibit 2(a)(4), File No. 2-57375). 4b(21) July 26, 1977 (Exhibit 2(a)(4), File No. 2-59401). 4b(22) September 27, 1977 (Exhibit 2(a)(5), File No. 2-67221). 4b(23) May 1, 1978 (Exhibit 2(b), June 30, 1978 Form 10-Q, File l No. 1-2323).
- 4b(24) September 1, 1979 (Exhibit 2(a), September 30, 1979 Form 10-Q, File No. 1-2323).
4b(25) April 1, 1980 (Exhibit 4(a)(2), September 30, 1980 Form 10-Q, File No. 1-2323). 4b(26) April 15, 1980 (Exhibit 4(b), Septe.mber 30, 1980 Form 10-Q, File No. 1-2323). 4b(27) May 28, 1980 (Exhibit 2(a)(4), Amendment No. 1, File No. 2-67221). 4b(28) June 9, 1980 (Exhibit 4(d), September 30, 1980 Form 10-Q, File No. 1-2323). 4b(29) December 1, 1980 (Exhibit 4(b)(29), 1980 Form 10-K, File No. 1-2323). l 4b(30) July 28, 1981 (Exhibit 4(a), September 30, 1981, Form 10-Q, File No. 1-2323).
. 4b(31) August 1, 1981 (Exhibit 4(b), September 30, 1981, Form 10-Q, File No. 1-2323).
4b(32) March 1, 1982 (Exhibit 4(b)(3), Amendment No. 1, File No. 2-76029). 4b(33) July 15, 1982 (Exhibit 4(a), September 30, 1982 Form 10-Q, File No. 1-2323). 4b(34) September 1, 1982 (Exhibit 4(a)(1), September 30, 1982 Form 10-Q, File No. 1-2323). E-7 l l
Exhibit Number Document 4b(35) November 1, 1982 (Exhibit 4(a)(2), September 30, 1982 Form 10-Q, File No. 1-2323). 4b(36) November 15, 1982 (Exhibit 4(b)(36), 1982 Form 10-K, File No. 1-2323). 4b(37) May 24, 1983 (Exhibit 4(a), June 30, 1983 Form 10-Q, File No. 1-2323). 4b(38) May 1, 1984 (Exhibit 4, June 30, 1984 Form 10-Q, File No. , 1-2323). ; 4b(39) May 23, 1984 (Exhibit 4, May 22, 1984 Form 8-K, File No. 1-2323). 4b(40) June 27, 1984 (Exhibit 4, June 11, 1964 Form 8-K, File No. 1-2323). 4b(41) September 4, 1984 (Exhibit 4b(41), 1984 Form 10-K, File No. 1-2323). 4b(42) November 14, 1984 (Exhibit 4b(42), 1984 Form 10-K, File ; No. 1-2323). I 4b(43) November 15, 1984 (Exhibit 4b(43), 1984 Form 10-K, File ! No. 1-2323). I 4b(44) April 15, 1985 (Exhibit 4(a), May 8, 1985 Form 8-K, File No. 1-2323). 4b(45) May 28, 1985 (Exhibit 4(b), May 8, 1985 Form 8-K, File No. l 1-2323). l 4b(46) August 1, 1985 (Exhibit 4, September 30, 1985 Form 10-Q, File Mo. 1-2323). 4b(47) September 1, 1985 (Exhibit 4, September 30, 1985 Form 8-K, File No. 1-2323). : 4b(48) Novemoer 1, 1985 (Exhibit 4, January 31, 1986 Form 8-K, File No. 1-2323). 4b(49) April if, 1986 (Exhibit 4, March 31, 1986 Form 10-Q, File No. 1-2323). 4b(50) May 14, 1986 (Exhibit 4(a), June 30, 1986 Form 10-Q, File No. 1-2323). 4b(51) May 15, 1986 (Exhibit 4(b), June 30, 1986 Form 10-Q, File No. 1-2323). 4b(52) February 25, 1987 (Exhibit 4b(52), 1986 Form 10-K, File l No. 1-2323)., . 4b(53) October 15, 1987 (Exhibit 4, September 30, 1987 Form 10-Q, File No. 1-2323). 4b(54) February 24, 1988 (Exhibit 4b(54), 1987 Form 10-K, File No. 1-2323). 4b(55) September 15, 1988 (Exhibit 4b(55), 1988 Form 10-K, File ; No. 1-2323). j
~4b(56) May 15, 1989 (Exhibit 4(a)(2)(i), File No. 33-32724).
4b(57) June 13, 1989 (Exhibit 4(a)(2)(ii), File No. 33-32724). ' 4b(58) October 15, 1989 (Exhibit 4(a)(2)(iii), File No. 33-32724). 4b(59) January 1, 1990 (Exhibit 4b(59), 1989 Form 10-K, File No. 1-2323). 4b(60) June 1, 1990 (Exhibit 4(a), September 30, 1990 Form 10-Q, File No. 1-2323). , 4b(61) August 1, 1990 (Exhibit 4(b), September 30, 1990 Form i 10-Q, File No. 1-2323). E-8
Exhibit Number Document 4b(62) May 1, 1991 (Exhibit 4(a), June 30, 1991 Form 10-Q, File 4b(63) May 1, 1992 (Exhibit 4(a)(3), File No. 33-48845). 4b(64) July 31, 1992 (Exhibit 4(a)(3), File No. 33-57292). No. 1-2323). 4b(65) January 1, 1993 (Exhibit 4b(65), 1992 Form 10-K, File No. 1-2323). 4b(66) February 1, 1993 (Exhibit 4b(66), 1992 Form 10-K, File No. 1-2323). 4b(67) May 20, 1993 (Exhibit 4(a), July 14, 1993 Form 8-K, File No. 1-2323). 4b(68) June 1, 1993 (Exhibit 4(b), July 14, 1993 Form 8-K, File No. 1-2323). 4b(69) September 15, 1994 (Exhibit 4(a), September 30, 1994 Form 10-Q, File No. 1-2323). 4b(70) May 1, 1995 (Exhibit 4(a), September 30, 1995 Form 10-Q, File No. 1-2323). 4b(71) May 2, 1995 (Exhibit 4(b), September 30, 1995 Form 10-Q, File No. 1-2323). 4b(72) June 1, 1995 (Exhibit 4(c), September 30, 1995 Form 10-Q, File No. 1-2323). 4b(73) July 15, 1995 (Exhibit 4b(73), 1995 Form 10-K, File No. 1-2323). 4b(74) August 1, 1995 (Exhibit 4b(74), 1995 Form 10-K, File No. 1-2323). 4c Open-End Subordinate Indenture of Hortgage between The Cleveland Electric Illuminating Company and Bank One, Columbus, N.A., as Trustee, Dated as of June 1, 1994 (Exhibit 4(a), August 26, 1994 Form 8-K, File No. 1-2323). 21 (CEI)
- List of Subsidiaries. l t
23a (CEI)
- Consent of Independent Accountants.
23b (CEI)
- Consent of Counsel for Cleveland Electric.
~
24 (CEI)
- Powers of Attorney of Cleveland Electric directors and officers required to sign the Report.
l 27 (CEI)
- Financial Data Schedule for the period ended i
December 31, 1996. l 1 i l E-9
, . _ _ . - . _ __ _ _. _ . _ . .__ . _ __ _ _ ._ _ .. _ . - . _ ._ _ _ . _ _ ._ _ _ _ .__ _ . . ~ _ . . . _ TOLEDO EDISON EXHIBITS Exhibit Number Document 3a , Amended Articles of Incorporation of Toledo Edison, as ! amended effective October 2, 1992 (Exhibit 3a, 1992 Form ! 10-K, File No. 1-3583). i 3b Code of Regulations of Toledo Edison dated January 28, i 1987, as amended effective July 1 and October 1, 1988 and April.24, 1990 (Exhibit 3b, 1990 Form 10-K, File No. 1-3583). 4b(1) Indenture, dated as of April 1, 1947, between the Company and The chase National Dank of the city of New York (now ! The Chase Manhattan Bank (National Association)) (Exhibit 2(b), File No. 2-26908). i Supplemental Indentures between Toledo Edison and the Trustee,' Supplemental to Exhibit 4b(1), dated as follows: 4b(2) September 1,'1948 (Exhibit 2(d), File No. 2-26908). 4b(3) April 1, 1949 (Exhibit 2(e), File No. 2-26908). 4b(4)' ' December 1, 1950 (Exhibit 2(f), File'No. 2-26908). 4b(5) March 1, 1954 (Exhibit 2(g), File No. 2-26908). 4b(6) - February 1, 1956 (Exhibit 2(h), File No. 2-26908). { 4b(7) Hay 1, 1958 (Exhibit 5(g), File No. 2-59794). l 4b(8) August 1, 1967 (Exhibit 2(c), File No. 2-26908). 4b(9)F November 1, 1970 (Exhibit 2(c), File No. 2-38569). 4b(10)' '- August 1,'1972 (Exhibit 2(c), File No. 2-44873). 4b (11)' ( " November 1,,1973 "(Exhibit 2(c), File No. 2-49428). 4b(12)~ ' July 1, 1974 (Exhibit 2(c), File No. 2-51429). 4b(13) October 1, 1975 (Exhibit 2(c), File No. 2-54627). 4b(14) June 1, 1976 (Exhibit 2(c), File No. 2-56396). ! 4b(15) October 1, 1978 (Exhibit 2(c), File No. 2-62568). 4b(16) September'-1,~1979f(Exhibit 2(c), File No. 2-65350). 4b(17) September 1, 1980 (Exhibit 4(s), File No. 2-69190). 4b(18) ' October l', 1980 (Exhibit 4(c), File No. 2-69190). ' 4b(19) April 1, 1981 (Exhibit 4(c), File No. 2-71580). D Nov' ember 1, 1981 (Exhibit 4(c), File No. 2-74485). 4b(20) I 4b(21) June l', 1982'(Exhibit 4(c),' File No.-2-77763). 4b(22) September 1, 1982 (Exhibit 4(x), File No. 2-87323). 4b(23) April 1, 1983 (Exhibit 4(c), March 31, 1983 Form 10-Q, File No. 1-3583). l 4b(24) December 1, 1983 (Exhibit 4(x), 1983 Form 10-K, File No. 1-3583). 4b(25) April 1, 1984 (Exhibit 4(c), File No. 2-90059). 4b(26) October 15, 1984 (Exhibit 4(z), 1984 Form 10-K, File No. 1-3583). 4b(27) October 15, 1984 (Exhibit 4(aa), 1984 Form 10-K, File No. 1-3583). 4b(28) August 1, 1985 (Exhibit 4(dd), File No. 33-1689). 4b(29) August 1, 1985 (Exhibit 4'(ee), File No. 33-1689).
}
4b(30) December 1, 1985 (Exhibit 4(c), File No. 33-1689).
]
4b(31) March 1, 1986 (Exhibit 4b(31), 1986 Form 10-K, File No. i 1-3583). E-10 I
, __ _ _ . _ _ . .,.__m . _ _ _ . _ . _ _ . _ . . _ . . _ _ _ . _ _ _ . _ . _ _ . .. _ . _ _ . _ . _ . _ .
Enhibit Number Document I 4b(32) October 15, 1987 (Exhibit 4, September 30, 1987 Form 10-0, t File No. 1-3583). i 4b(33) l September 15, 1988 (Exhibit 4b(33), 1988 Form 10-K, File No. 1-3583). j ! 4b(34) 1 June 1-3583), 15, 1989 (Exhibit 4b(34), 1969 Form 10-K, File No. i t 4b(35) October 15, 1989 (Exhibit 4b(35), 1989 Form 10-K, File No. 1-3583). 4b(36) s May 15, 1990 (Exhibit 4, June 30, 1990 Form 10-Q, File No. j 1-3583). 4b(37) March 1, 1991 (Exhibit 4(b), June 30, 1991 Form 10-Q, File No. 1-3583). ; 4b(38) May 1, 4b(39) August 1, 1992 - (Exhibit 4 (a)(3), File No. 33-48844). > 1992 (Exhibit 4b(39), 1992 Form 10-K, File No. 1-3583). I 4b(40) October 1, 1992 (Exhibit 4b(40), 1992 Form 10-K, File No. i 1-3583). { 4b(41) January 1, 1993 (Exhibit 4b(41), 1992 Form 10-K, File No. 1-3583). 4b(42) September 15, 1994 (Exhibit 4(b), September 30, 1994 Form 10-Q, File No. 1-3583). 4b(43) May 1, 1995 (Exhibit 4(d),-September 30, 1995 Form 10-0, File No. 1-3583). 4b(44) June 1, 1995 (Exhibit 4(e), September 30, 1995 Form 10-Q, File No. 1-3583). 4b(45) July 14, 1995 (Exhibit 4(f), September 30, 1995 Form 10-Q, 4b(46) File No. 1-3583). July 15, 1995 (Exhibit 4(g), September 30, 1995 Form 10-Q, File No. 1-3583). 4c Open-End Subordinate Indenture of Mortgage between The Toledo Edison Company and Bank one, Columbus, N.A., as Trustee, Dated as of June 1, 1994 (Exhibit 4(b), August 26, 1994 Form 8-K, File No. 1-3583), 1 i 24 (TE) !
- Powers of Attorney of Toledo Edison directors and officers required to sign the Report.
27 (TE)
- Financial Data Schedule for the period erided December 31, 1996, i
Pursuant to Paragraph (b)(4)(Lii)(A) of Item 601 of Regulation S-K, trants have not filed as an exhibit to this Form 10-K any instrumentthe Regis-with respect to long-term debt if the total amount of securities authorized there-under does not exceed 10% of the total assets of the applicable Registrant and its subsidiaries on a consolidated basis, but each hereby agrees to furnish to the Securities and Exchange Commission on request any such instruments. : Parsuant to Rule 14a-3(b)(10) under the Securities Exchange Act of 1934, cc.oies of exhibits filed by the Registrants with this Form 10-K will be fur-nisned ceipt by the Registrants to share owners upon written request and upon re-in advance of the aggregate fee for preparation of such exhibits at a { rate of incurred S.25 by theper Registrants. page, plus any postage or shipping expenses which would be E-11
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