SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended JuneSeptember 30, 1996
OR
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification No.
1-9130 CENTERIOR ENERGY CORPORATION 34-1479083
(An Ohio Corporation)
6200 Oak Tree Boulevard
Independence, Ohio 44131
Telephone (216) 447-3100
1-2323 THE CLEVELAND ELECTRIC 34-0150020
ILLUMINATING COMPANY
(An Ohio Corporation)
55 Public Square
Cleveland,c/o Centerior Energy Corporation
6200 Oak Tree Boulevard
Independence, Ohio 4411344131
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 X No
On August 8,November 13, 1996, there were 148,025,928 shares of Centerior
Energy Corporation Common Stock outstanding. Centerior Energy Corporation
is the sole holder of the 79,590,689 shares and 39,133,887 shares of common
stock of The Cleveland Electric Illuminating Company and The Toledo Edison
Company, respectively, outstanding on that date.
This combined Form 10-Q is separately filed by Centerior Energy Corporation
("Centerior Energy"), The Cleveland Electric Illuminating Company
("Cleveland Electric") and The Toledo Edison Company ("Toledo Edison").
Centerior Energy, Cleveland Electric and Toledo Edison are sometimes
referred to collectively as the "Companies". Cleveland Electric and Toledo
Edison are sometimes collectively referred to as the "Operating Companies".
Information contained herein relating to any individual registrant is filed
by such registrant on its behalf. No registrant makes any representation
as to information relating to any other registrant, except that information
relating to either or both of the Operating Companies is also attributed to
Centerior Energy.
Centerior Energy has made forward-looking statements in Note 8 to the
financial statements in this Form 10-Q regarding the merger with Ohio
Edison Company ("Ohio Edison") herein referred to and the associated
Regulatory Plan (as defined herein), which statements are subject to risks
and uncertainties, including the impact on the Companies if: (1)
competitive pressure in the electric utility industry increases
significantly;(2) state and federal regulatory initiatives are implemented
that increase competition, threaten costs and investment recovery and
impact rate structures; (3) the provisions of the Regulatory Plan vary
significantly from what has been announced; (4) the effects of the
Regulatory Plan or other events on the carrying value of regulatory assets
and on the Operating Companies' ability to continue to apply SFAS 71 (as
defined herein) cause an impairment of property, plant and equipment or
variances from the amounts disclosed; (5) expected cost savings from the
merger cannot be fully realized; (6) costs or difficulties related to the
integration of the business of Ohio Edison and Centerior Energy are greater
than expected; (7) unanticipated developments occur which change the
Operating Companies' expectations regarding cost recovery over the
Regulatory Plan period; or (8) general economic conditions, either
nationally or in the area in which the combined company will be doing
business are less favorable than expected.
-i-
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Centerior Energy Corporation and Subsidiaries
The Cleveland Electric Illuminating Company and Subsidiary
The Toledo Edison Company
Notes to the Financial Statements (Unaudited) 1
Centerior Energy Corporation and Subsidiaries
Income Statement 5
Balance Sheet 6
Cash Flows 7
Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
The Cleveland Electric Illuminating Company and Subsidiary
Income Statement 12
Balance Sheet 13
Cash Flows 14
Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
The Toledo Edison Company
Income Statement 1819
Balance Sheet 1920
Cash Flows 2021
Management's Discussion and Analysis of Financial 2122
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 5. Other Information 2526
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Exhibit Index 29
-i--ii-
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES,
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND
SUBSIDIARY, AND THE TOLEDO EDISON COMPANY
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
(1) Interim Financial Statements
Centerior Energy Corporation (Centerior Energy) is the parent
company of Centerior Service Company (Service Company); two
electric utilities, The Cleveland Electric Illuminating Company
(Cleveland Electric) and The Toledo Edison Company (Toledo
Edison); and three other wholly owned subsidiaries. The two
utilities are referred to collectively herein as the "Operating
Companies" and individually as an "Operating Company". Centerior
Energy, Cleveland Electric and Toledo Edison are referred to
collectively herein as the "Companies".
The comparative income statement and balance sheet and the related
statement of cash flows of each of the Companies have been
prepared from the records of each of the Companies without audit
by independent public accountants. In the opinion of management,
all adjustments necessary for a fair presentation of financial
position at JuneSeptember 30, 1996 and results of operations and cash
flows for the three months and sixnine months ended JuneSeptember 30,
1996 and 1995 have been included. All such adjustments were
normal recurring adjustments, except for the write-down of
inactive production facilities in the first quarter of 1996
discussed in Note 8.7.
These financial statements and notes should be read in conjunction
with the financial statements and notes included in the Companies'
combined Annual Report on Form 10-K for the year ended December
31, 1995 (1995 Form 10-K) and the Quarterly ReportReports on Form 10-Q
for the quarter ended March 31, 1996 (First Quarter 1996 Form 10-
Q) and the quarter ended June 30, 1996 (Second Quarter 1996 Form
10-Q). These interim period financial results are not necessarily
indicative of results for a 12-month period.
In August 1995, Cleveland Electric formed a wholly owned
subsidiary, Centerior Funding Corporation (Centerior Funding), to
serve as the transferor in connection with asset-backed
securitization transactions completed by the Operating Companies
in May and July 1996 as discussed in Note 5. Centerior Funding was initially funded5 to the financial
statements in May 1996.
As discussed in "Part II, Item 5. Other Information" in this Quarterly
Report onthe Second Quarter 1996 Form 10-Q, Centerior Energy announced in April 1996 that it had
entered into a partnership with an AT&T subsidiary related to wireless
communications. The total investment at June 30, 1996 approximated $17
million.10-Q.
(2) Equity Distribution Restrictions
The Operating Companies can make cash available for the funding of
Centerior Energy's common stock dividends by paying dividends on
their respective common stock, which is held solely by Centerior
Energy. Federal law prohibits the Operating Companies from paying
dividends out of capital accounts. However, the Operating
Companies may pay preferred and common stock dividends out of
appropriated retained earnings and current earnings. At JuneSeptember
30, 1996, Cleveland Electric and Toledo Edison had $168.1$187.6 million
and $185.2$208.9 million, respectively, of appropriated retained
earnings for the payment of dividends. However, Toledo Edison is
prohibited from paying a common stock dividend by a provision in
its mortgage that essentially requires such dividends to be paid
out of the total balance of retained earnings, which currently is
a deficit.
(3) Common Stock Dividends
Cash dividends per common share declared by Centerior Energy
during the sixnine months ended JuneSeptember 30, 1996 and 1995 were as
follows:
1996 1995
Paid February 15 $.20 $.20
Paid May 15 .20 .20
Paid August 15 .20 .20
Paid November 15 .20 .20
Common stock cash dividends declared by Cleveland Electric during
the sixnine months ended JuneSeptember 30, 1996 and 1995 were as follows:
1996 1995
(millions)
Paid in February $29.6 $ --$--
Paid in May 46.6 15.0
Paid in August 29.6 29.6
Toledo Edison did not declare any common stock dividends during
the sixnine months ended JuneSeptember 30, 1996 and 1995.
(4) Financing Activity
During the three months ended JuneSeptember 30, 1996, the Operating Companies
redeemed or retired debt and preferred stock as follows:mandatory
redemptions for Cleveland Electric Mandatory redemptions consisted of $20$80 million
principal amount of secured medium-term notes; $3$1 million of
Serial Preferred Stock, $88.00$7.35 Series E;
$10.7C; and $0.9 million of first
mortgage bonds and pollution control notes. Also, Cleveland
Electric optionally purchased and retired 26,000 shares of Serial
Preferred Stock, $91.50Adjustable Rate Series Q; and $1.1L, for $1.8 million.
(5) Nuclear Fuel Financing
Nuclear fuel is financed for the Operating Companies through
leases with a special-purpose corporation. On August 2, 1996, the
special-purpose corporation completed a transaction in which it
issued $100 million aggregate amount of intermediate-term secured
notes maturing in the 1997 through 2000 period. On October 4,
1996, the special-purpose corporation completed a two-year $100
million bank credit arrangement, replacing $150 million of bank
loans secured by subordinated mortgage collateral and pollution
control notes.
Toledo Edison
Mandatory redemptions consisted of $12.5 million aggregate principal amount
of secured medium-term notes; $1.7credit arrangements which terminated in October 1996. The
special-purpose corporation used the proceeds from these
transactions to pay its outstanding borrowings, including $84
million of 9-3/8% Cumulative Preferred
Stock, $100 par value; and $1 million of bank loansintermediate-term secured by subordinated
mortgage collateral and pollution control notes.
(5) Asset-Backed Securitization Transactions
In May 1996, the Operating Companies began to sellnotes which matured on
a daily basis
substantially all of their retail customer accounts receivable and unbilled
revenue receivables to Centerior Funding, a wholly owned subsidiary of
Cleveland Electric, pursuant to a five-year asset-backed securitization
agreement.
In consideration for the initial sale, the Operating Companies received
$97.4 million ($35.7 million for Cleveland Electric and $61.7 million for
Toledo Edison), $18 million of notes receivable ($7.6 million for Cleveland
Electric and $10.4 million for Toledo Edison) and a Cleveland Electric
equity contribution in Centerior Funding of $142.1 million. The cash
proceeds were used to retire maturing fixed obligations of the Operating
Companies and for general corporate purposes. The transactions between
each Operating Company and Centerior Funding were treated as sales for
financial reporting purposes.
Upon acquiring the Operating Companies' accounts receivable and unbilled
revenue receivables, Centerior Funding transferred the assets to a master
trust and subsequently raised $100 million through the issuance of
receivables-backed investor certificates representing an undivided interest
in the master trust receivables (certificates). The terms of the
transaction required Centerior Funding to record the proceeds received as
debt for financial reporting purposes. At JuneSeptember 30, 1996, the $100 million
obligation is recorded as a current liability in the Cleveland Electric and
Centerior Energy balance sheets.
In July 1996, Centerior Funding completed a public sale of $150 million of
receivables-backed investor certificates in a transaction that qualifies
for sale accounting treatment for financial reporting purposes. Centerior
Funding used the net proceeds of $148.9 million from the sale to retire the
$100 million of its certificates, repay its notes payable ($10 million to
Cleveland Electric and $16 million to Toledo Edison) and pay a $22.9
million dividend to Cleveland Electric.1996.
(6) Capital Stock
In June 1996, Centerior Energy's Board of Directors increased its previous
authorization to purchase Centerior Energy common stock in the open market
from 1.5 million shares to 10% of the shares outstanding (about 14.8
million shares) and extended the buy-back period for one year through June
30, 1997. As of June 30, 1996, an aggregate of 225,500 shares had been
purchased under the July 1991 authorization. Such shares are being held as
treasury stock. No purchases have been made since August 1992.
In June 1996, Centerior Energy's Board of Directors also adopted a share
owner rights plan to protect the long-term value of share owner investment
and to encourage anyone seeking to acquire Centerior Energy to negotiate
with the Board prior to attempting a takeover. Under this plan, Centerior
Energy common stock share owners of record on July 8, 1996 were granted a
right to purchase one five-hundredth of a share of Centerior Energy
preferred stock for each share of common stock owned on that date.
Centerior Energy's Board of Directors will decide if the rights will be
exercisable in the event of an unsolicited takeover attempt that the Board
determines not to be in the best interest of Centerior Energy or its share
owners. For additional information, see "Item 5. Other Events. 1.
Shareholder Rights Plan." in the Companies' combined Current Report on Form
8-K dated June 25, 1996.
(7) Generating Plant Lease Agreement
Cleveland Electric hashad entered into an agreement with Jersey
Central Power & Light Company (Jersey Central) under which Jersey
Central will leaseleased Cleveland Electric's ownership share (351,000
kilowatts) of the Seneca Power Plant (Seneca), a pumped-storage,
hydro-electric generating station. The lease, which is subject to regulatory approvals, has aagreement began June 1,
1996 and was expected to May
31, 2004 term. Totalprovide annual revenues are expected to beof approximately
$18 million initially withmillion. The parties agreed to cancel the rental rate subject to escalation provisions inagreement effective
October 2, 1996 because the agreement. The Federal Energy Regulatory Commission
(FERC) issued an
order in August 1996 ininsisted on terms which it concluded that the transaction should be
accounted for as a wholesale power sale rather than a lease. In its order,
the FERC also accepted the agreement for filing effective June 1, 1996 and
set the matter for hearing on August 15, 1996 to consider the rates to be
paid pursuantwere not economic to the agreement.
(8)parties.
(7) Write-down of Inactive Production Facilities
In the first quarter of 1996, Toledo Edison wrote down the net
book value of two inactive production facilities, $11.3 million,
to "Other Income and Deductions, Net" resulting in nonoperating
losses for Toledo Edison and Centerior Energy for that period.
The net write-down was $7.2 million after taxes or, for Centerior
Energy, $.05 per common share. The write-down resulted from a
decision that the facilities are no longer expected to provide
revenues.
(9) Regulatory Matters
On April 11, 1996, The Public Utilities Commission of Ohio (PUCO) issued a
rate order granting the full price increase aggregating $119 million in
annualized revenues ($84 million for Cleveland Electric and $35 million for
Toledo Edison) requested in April 1995. The new prices were implemented
in late April 1996. The PUCO also approved changes in depreciation rates
for the Operating Companies. For a full discussion, see Note 6 to the
financial statements in the First Quarter 1996 Form 10-Q.
(10)(8) Commitments and Contingencies
Various legal actions, claims and regulatory proceedings covering
several matters are pending against the Companies. See "Item 3.
Legal Proceedings" in the 1995 Form 10-K and10-K; "Part II, Item 5. Other
Information" in this Quarterly Report on Form 10-Q and in the
First and Second Quarter 1996 Form 10-Q.10-Qs; and "Item 5. Other
Events" in the Companies' combined Current Report on Form 8-K
dated August 21, 1996.
On September 13, 1996, Centerior Energy and Ohio Edison Company (Ohio
Edison) entered into an Agreement and Plan of Merger to form a new
holding company, FirstEnergy Corp. (FirstEnergy). See "Item 5. Other
Events" in the Companies' combined Current Report on Form 8-K dated
September 13, 1996. The merger agreement is conditioned upon, among
other matters, approval by The Public Utilities Commission of Ohio
(PUCO) of a FirstEnergy regulatory plan (Regulatory Plan) for the
Operating Companies which is mutually acceptable to Ohio Edison and
Centerior Energy. Implementation of the Regulatory Plan is conditioned
upon consummation of the merger. As announced, the Regulatory Plan is
expected to include (i) a price freeze through 2005 followed by a $300
million price reduction in 2006; and (ii) a $2 billion aggregate
reduction in assets through 2005, resulting from amounts that have been
sold, revalued, recovered and amortized, and/or depreciated on an
accelerated basis. These provisions may be changed, and other
provisions may be added, to the Regulatory Plan prior to its filing.
Until the Regulatory Plan is filed, Centerior Energy cannot predict what
the Plan's effect on the Operating Companies' regulatory assets will be,
or whether the Plan will demonstrate that the Operating Companies will
continue to comply with Statement of Financial Accounting Standards
(SFAS) 71. If it is determined that the Regulatory Plan ultimately
approved by the PUCO does not provide for full recovery of costs and
regulatory assets, or other events cause one or both of the Operating
Companies to conclude that the SFAS 71 criteria are no longer met, one
or both of the Operating Companies would be required to record a
material charge against earnings to write off regulatory assets ($1.328
billion for Cleveland Electric and $0.932 billion for Toledo Edison,
aggregating $2.260 billion for Centerior Energy at September 30, 1996),
and to evaluate whether the effects of the Regulatory Plan would cause
an impairment of property, plant and equipment. It is possible that
only a portion of operations (such as nuclear operations) would no
longer meet the criteria of SFAS 71, and, therefore, the write-off
would be limited to regulatory assets and/or property, plant and
equipment that are not reflected in cost-based prices established for
the remaining regulated operations. Any such effects from the
Regulatory Plan would be recorded at the time consummation of the merger
becomes probable. If the merger is not consummated, the Operating
Companies are not obligated to adopt either of the two provisions
described above. Any asset revaluation must be consistent with the
Operating Companies' objectives to become more competitive, reduce debt
and provide the opportunity for share owners to receive a fair return
on their investment. The Operating Companies continue to examine a
number of accelerated cost recognition and asset recovery plans.
On October 17, 1996, the FERC issued an order authorizing the
merger of Toledo Edison into Cleveland Electric without a hearing
and without significant conditions. The order included the FERC's
conclusion that it was not necessary to require the Operating Companies
to turn over control of their facilities to an independent system operator.
The FERC also approved the Operating Companies' recently filed single-system,
open-access transmission tariff. A request for authorization to transfer
certain Nuclear Regulatory Commission licenses to the merged entity was
recently withdrawn. The merger agreement between Ohio Edison and Centerior
Energy requires the approval of Ohio Edison prior to consummation
of the proposed merger of the Operating Companies. No decision on
the proposed merger of the Operating Companies is expected prior
to February 1997 when Ohio Edison and Centerior Energy common
stock shareholders are expected to vote on approval of the Ohio
Edison-Centerior Energy merger agreement.
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
INCOME STATEMENT
(Unaudited)
(Thousands, Except Per Share Amounts)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
--------------------- ---------------------------
1996 1995 1996 1995
-------- -------- ----------- -----------
OPERATING REVENUES $ 608,966727,119 $ 606,945739,579 $ 1,214,2211,941,340 $ 1,194,5261,934,105
OPERATING EXPENSES
Fuel and Purchased Power 110,248 113,725 225,232 233,094122,920 127,914 348,152 361,008
Other Operation and Maintenance 149,763 150,551 305,668 291,155169,711 167,818 475,379 458,973
Generation Facilities Rental Expense, Net 39,853 39,851 79,706 79,70339,873 119,559 119,576
Depreciation and Amortization 76,722 70,023 149,954 139,47176,835 70,420 226,789 209,891
Taxes, Other Than Federal Income Taxes 83,411 82,424 167,363 164,38080,129 81,961 247,492 246,341
Deferred Operating Expenses, Net 10,868 (14,706) 21,411 (30,770)10,853 (16,772) 32,264 (47,542)
Federal Income Taxes 21,361 28,264 39,354 50,94254,385 63,827 93,739 114,769
-------- -------- ----------- -----------
Total Operating Expenses 492,226 470,132 988,688 927,975554,686 535,041 1,543,374 1,463,016
-------- -------- ----------- -----------
OPERATING INCOME 116,740 136,813 225,533 266,551172,433 204,538 397,966 471,089
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction 788 271 1,699 1,646695 120 2,394 1,766
Other Income and Deductions, Net (539) 968 (6,999) 3,270(3,909) (2,094) (10,908) 1,176
Deferred Carrying Charges -- 11,62311,804 -- 23,19534,999
Federal Income Taxes - Credit (Expense) 880 (997) 2,795 (2,797)939 254 3,734 (2,543)
-------- -------- ----------- -----------
Total Nonoperating Income (Loss) 1,129 11,865 (2,505) 25,314(2,275) 10,084 (4,780) 35,398
-------- -------- ----------- -----------
INCOME BEFORE INTEREST CHARGES 117,869 148,678 223,028 291,865170,158 214,622 393,186 506,487
INTEREST CHARGES
Long-term Debt 83,331 87,657 166,649 174,73581,192 89,204 247,841 263,939
Short-term Debt 2,322 2,589 4,198 5,5712,300 1,744 6,498 7,315
Allowance for Borrowed Funds Used During Construction (774) (1,073) (1,617) (1,763)(640) (197) (2,257) (1,960)
-------- -------- ----------- -----------
Net Interest Charges 84,879 89,173 169,230 178,54382,852 90,751 252,082 269,294
-------- -------- ----------- -----------
INCOME AFTER INTEREST CHARGES 32,990 59,505 53,798 113,32287,306 123,871 141,104 237,193
Preferred Dividend Requirements of Subsidiaries 14,042 15,414 28,277 31,15413,815 14,959 42,092 46,113
-------- -------- ----------- -----------
NET INCOME $ 18,94873,491 $ 44,091108,912 $ 25,52199,012 $ 82,168191,080
======== ======== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 148,027148,026 148,032 148,027 148,032
======== ======== =========== ===========
EARNINGS PER COMMON SHARE $ .13.50 $ .30.74 $ .17.67 $ .561.29
======== ======== =========== ===========
The accompanying notes as they relate to Centerior Energy are an integral part of this statement.
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
BALANCE SHEET
(Thousands)
JuneSeptember 30, December 31,
1996 1995
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant In Service $ 9,837,6529,835,687 $ 9,767,788
Accumulated Depreciation and Amortization (3,168,988)(3,218,650) (3,036,181)
----------- -----------
6,668,6646,617,037 6,731,607
Construction Work In Progress 86,63992,875 101,031
----------- -----------
6,755,3036,709,912 6,832,638
Nuclear Fuel, Net of Amortization 215,874203,992 199,707
Other Property, Less Accumulated Depreciation 91,83892,434 101,745
----------- -----------
7,063,0157,006,338 7,134,090
CURRENT ASSETS
Cash and Temporary Cash Investments 136,439284,993 179,038
Amounts Due from Customers and Others, Net 265,802210,755 223,228
Unbilled Revenues 98,3447,100 100,344
Materials and Supplies, at Average Cost 115,64693,562 119,507
Fossil Fuel Inventory, at Average Cost 25,42122,140 30,663
Taxes Applicable to Succeeding Years 183,288109,810 255,142
Other 17,21619,937 18,562
----------- -----------
842,156748,297 926,484
REGULATORY AND OTHER ASSETS
Amounts Due from Customers for Future Federal Income
Taxes, Net 1,058,5701,058,817 1,067,374
Unamortized Loss from Beaver Valley Unit 2 Sale 93,96092,837 96,206
Unamortized Loss on Reacquired Debt 85,42283,728 88,893
Carrying Charges and Operating Expenses 1,033,7891,024,207 1,053,220
Nuclear Plant Decommissioning Trusts 123,594133,034 113,681
Other 161,964157,610 163,156
----------- -----------
2,557,2992,550,233 2,582,530
----------- -----------
$ 10,462,47010,304,868 $ 10,643,104
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 1,920,1841,964,802 $ 1,983,560
Preferred Stock
With Mandatory Redemption Provisions 190,267189,267 220,440
Without Mandatory Redemption Provisions 450,871448,325 450,871
Long-Term Debt 3,719,3123,612,166 3,733,892
----------- -----------
6,280,6346,214,560 6,388,763
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock 185,023211,423 234,771
Current Portion of Lease Obligations 81,88984,239 94,653
Notes Payable to Banks and Others 100,000 --
Accounts Payable 154,199114,422 152,909
Accrued Taxes 253,224263,725 373,757
Accrued Interest 81,45391,063 83,050
Dividends Declared 43,91043,771 14,666
Other 65,83966,231 73,328
----------- -----------
965,537874,874 1,027,134
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 257,441254,294 263,352
Accumulated Deferred Federal Income Taxes 1,903,3391,899,793 1,875,080
Unamortized Gain from Bruce Mansfield Plant Sale 486,764480,760 498,771
Accumulated Deferred Rents for Bruce Mansfield Plant
and Beaver Valley Unit 2 133,909137,898 145,393
Nuclear Fuel Lease Obligations 149,414142,464 137,260
Retirement Benefits 181,317182,745 178,579
Other 104,115117,480 128,772
----------- -----------
3,216,2993,215,434 3,227,207
COMMITMENTS AND CONTINGENCIES (Note 10)8)
----------- -----------
$ 10,462,47010,304,868 $ 10,643,104
=========== ===========
The accompanying notes as they relate to Centerior Energy are an integral part of this
statement.
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
CASH FLOWS
(Unaudited)
(Thousands)
SixNine Months Ended
JuneSeptember 30,
-----------------------------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $25,521 $82,168$99,012 $191,080
-------- --------
Adjustments to Reconcile Net Income
to Cash from Operating Activities:
Depreciation and Amortization 149,954 139,471226,789 209,891
Deferred Federal Income Tax 35,638 34,34530,967 52,248
Unbilled Revenues 2,000 (7,000)6,344 11,000
Deferred Fuel 1,591 15,68710,777 11,438
Deferred Carrying Charges -- (23,195)(34,999)
Leased Nuclear Fuel Amortization 35,798 60,00558,212 92,682
Deferred Operating Expenses, Net 21,411 (30,770)32,264 (47,542)
Allowance for Equity Funds Used During Construction (1,699) (1,646)(2,394) (1,766)
Changes in Amounts Due from Customers and Others, Net (42,574) 13,270(29,341) (46,428)
Proceeds from Accounts Receivable Securitization 135,223 --
Changes in Inventories 9,103 (12,815)34,468 15,355
Changes in Accounts Payable 1,290 (4,055)(38,487) 19,373
Changes in Working Capital Affecting Operations (56,419) (69,801)34,841 (9,829)
Other Noncash Items (25,643) (7,397)(15,969) 8,362
-------- --------
Total Adjustments 130,450 106,099483,694 279,785
-------- --------
Net Cash from Operating Activities 155,971 188,267582,706 470,865
CASH FLOWS FROM FINANCING ACTIVITIES
Bank Loans, Commercial Paper and Other Short-Term Debt 100,000 --
First Mortgage Bond Issues -- 398,900541,850
Reacquired Common Stock (20) --
Maturities, Redemptions and Sinking Funds (94,479) (371,516)(178,153) (636,413)
Nuclear Fuel Lease Obligations (52,851) (39,893)(67,962) (69,298)
Common Stock Dividends Paid (59,211) (59,213)(88,816) (88,819)
Premiums, Discounts and Expenses (474) (13,456)(561) (13,955)
-------- --------
Net Cash from Financing Activities (107,035) (85,178)(335,512) (266,635)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction (75,305) (82,767)(107,451) (114,686)
Interest Capitalized as Allowance for Borrowed Funds Used
During Construction (1,617) (1,763)(2,257) (1,960)
Contributions to Nuclear Plant Decommissioning Trusts (5,897)(16,994) (11,794)
Investment in Partnership (17,000)(21,164) --
Other Cash Received (Applied) 8,284 (23,533)6,627 (26,776)
-------- --------
Net Cash from Investing Activities (91,535) (119,857)(141,239) (155,216)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (42,599) (16,768)105,955 49,014
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 179,038 186,399
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $136,439 $169,631$284,993 $235,413
======== ========
Other Payment Information:
Interest (net of amounts capitalized) $165,000 $152,000$235,000 $217,000
Federal Income Taxes 5,200 32,80077,900
The accompanying notes as they relate to Centerior Energy are an integral part of this statement.
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1995
Form 10-K and in the First and Second Quarter 1996 Form 10-Q.10-Qs. The
information under "Capital Resources and Liquidity" remains unchanged
with the following exceptions:
During the secondthird quarter of 1996, the Operating CompaniesCleveland Electric redeemed or retired
various securities as discussed in Note 4.
Also,In July 1996, Centerior Funding, a wholly owned subsidiary of Cleveland
Electric, completed a public sale of $150 million of receivables-backed
investor certificates in a transaction that qualifies for sale
accounting treatment for financial reporting purposes. Centerior
Funding used the net proceeds of $148.9 million to retire $100 million
of its receivables-backed investor certificates which were issued in May
1996, repay its notes payable ($10 million to Cleveland Electric and July
1996, the Operating Companies completed certain asset-backed securitization
transactions as$16
million to Toledo Edison) and pay a $22.9 million dividend to Cleveland
Electric.
As discussed in Note 5.
Nuclear fuel is financed for the Operating Companies through leases with5, a
special-purpose corporation. On August 2, 1996, the special-purpose corporation completed
a transaction in which it issued $100 million
aggregate amount of intermediate-term secured notes maturingfinancing transactions in the 1997
through 2000 period. The proceeds will be used to pay all or part of the
outstanding balance of the special-purpose corporation's commercial paper
borrowings and a portion of its previously issued intermediate-term secured
notes as they mature. The special-purpose corporation also plans to
complete new bank credit arrangements in the1996 third quarter ofand October 1996 to
replace $150expiring nuclear fuel financing arrangements.
In October 1996, Cleveland Electric completed the purchase and
retirement of $50 million principal amount of bank credit arrangements terminatingits 7.625% interest rate
first mortgage bonds due in 2002 and $10 million principal amount of its
7.42% interest rate secured medium-term notes due in 2001 for a total of
$59.1 million. Also in October 1996.1996, Toledo Edison completed the
purchase and retirement of $15 million principal amount of its 7.25%
interest rate first mortgage bonds due in 1999 for $14.9 million. The
securities are included in current liabilities in the September 30, 1996
balance sheet.
Additional first mortgage bonds may be issued by the Operating Companies
under their respective mortgages on the basis of property additions,
cash or refundable first mortgage bonds. If the applicable interest
coverage test is met, each Operating Company may issue first mortgage
bonds on the basis of property additions and, under certain
circumstances, refundable bonds. At JuneSeptember 30, 1996, Cleveland
Electric and Toledo Edison would have been permitted to issue
approximately $430$571 million and $171$143 million of additional first mortgage
bonds, respectively.respectively, after giving effect to the corresponding security
retirements in October 1996 discussed above.
Under its articles of incorporation, Toledo Edison cannot issue
preferred stock unless certain earnings coverage requirements are met.
Based on earnings for the 12 months ended JuneSeptember 30, 1996, Toledo
Edison could not issue additional preferred stock.
Toledo Edison will be unable to issue
preferred stock until it can meet the interest and preferred dividend
coverage test in its articles of incorporation.
Results of Operations
Factors contributing to the 0.3%1.7% third quarter decrease and 1.6% increases0.4% nine-
month increase in 1996 operating revenues from 1995 for the second quarter and six months, respectively, are shown as
follows:
Changes for Period Ended
JuneSeptember 30, 1996
Three SixNine
Factors Months Months
(millions)
Base Rates $ 27.7 $ 40.2
Kilowatt-hour Sales Volume and Mix $ 0.5 $15.5
Base Rates 11.6 11.2(36.3) (22.1)
Wholesale Revenues (3.2) 0.3(3.4) (3.1)
Fuel Cost Recovery Revenues (2.8) (8.7)(1.3) (10.0)
Miscellaneous Revenues (4.1) 1.40.8 2.2
Total $ 2.0 $19.7(12.5) $ 7.2
The increases in 1996 base rates revenues resulted primarily from the
April 1996 rate order issued by the PUCO for the Operating Companies.
Renegotiated contracts for certain large industrial customers of the Operating
Companies resulted in a decrease in base rates which partially offset
the effect of the general price increase.
Percentage changes between 1996 and 1995 billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period Ended
JuneSeptember 30, 1996
Three SixNine
Customer Categories Months Months
Residential 2.9% 5.0%(14.9)% (2.5)%
Commercial 4.2 3.6(3.5) 0.9
Industrial 1.0 0.31.4 0.7
Other (29.5) (15.3)(7.6) (12.1)
Total (1.3) 0.4
Second(5.1) (1.6)
Third quarter 1996 residential, commercial and total kilowatt-hour sales
decreased because of 40% less
wholesale sales (included in the "Other" category). Residential and
commercial sales increased because of the cooler springsummer weather in the second quarter of 1996 than in the second quarter of 1995,period which
increased
heating-relatedreduced cooling-related demand. Weather-normalized residential and
commercial sales increased 0.7%0.6% and 3.6%3.8%, respectively, for the 1996
period. Weather-normalized commercial sales growth in the 1996 period
is attributable to an increase in average customer usage of about 4%.
Industrial sales increased primarily because of increased sales to large
automotive manufacturers and the broad-based, smaller industrial
customer group. Other sales decreased because of less sales to
wholesale and public authority customers.
Total kilowatt-hour sales decreased for the nine-month period in 1996
because of decreases from weather-related demand and a 1.4%14% decline in
wholesale sales. Residential sales decreased because of the cooler
summer weather in the 1996 period. However, commercial and industrial
sales increased for the 1996 nine-month period. Colder winter and
spring weather in the first six months of 1996 had boosted residential
and commercial sales for the first half of 1996. Weather-normalized
residential and commercial sales increased 1.1% and 3%, respectively,
for the 1996 nine-month period. Weather-normalized commercial sales
growth in the 1996 period is attributable to a 1% increase in the
average number of commercial customers and an increase in average customer usage of
about 2%. Increased sales to petroleum refineries and the broad-based,
smaller industrial customer group partially offset less sales to large steel industry customers.
Total kilowatt-hour sales increased for the six-month period in 1996 as
increases from weather-related demand were partially offset by a 20%
decline in wholesale sales. Residential and commercial sales increased
because of the colder winter and spring weather in the 1996 period.
Weather-normalized residential and commercial sales increased 1.4% and
2.6%, respectively, for the 1996 period. Weather-normalized commercial
sales growth in the 1996 period is attributable to a 1.8% increase in the
average number of commercial customers and an increase in average customer
usage of about 1%. Increased sales to petroleum refineries and the
broad-based, smaller industrial customer group were partially offset by less sales to
large automotive manufacturers and steel producers.industry customers.
Wholesale sales in 1996 were suppressed by soft market conditions and,
during the first six months of 1996, limited power availability for bulk
power transactions because of nuclear generating plant refueling and
maintenance outages.
The increases in 1996 base rates revenues resulted primarily from the April
1996 PUCO rate order for the Operating Companies. See Note 9.
Renegotiated contracts for certain large industrial customers resulted in a
decrease in base rates which partially offset the effect of the general
price increase.
The decreases in 1996 fuel cost recovery revenues included in customer
bills resulted from changes in the fuel cost recovery factors used by
the Operating Companies to calculate these revenues. The weighted
average of the respective fuel cost recovery factors used for the secondthird
quarter of 1996 decreased about 5%2% for Cleveland Electric and increased
about 3%1.5% for Toledo Edison compared to the weighted average of the
respective fuel cost recovery factors used for the secondthird quarter of
1995. The weighted average of the respective fuel cost recovery factors
used for the 1996 six-monthnine-month period decreased about 7%5% for Cleveland
Electric and increased about 2% for Toledo Edison compared to the
weighted average of the respective fuel cost recovery factors used for
the 1995 six-monthnine-month period.
Second quarter miscellaneous revenues in 1996 decreased from the 1995
amount primarily because of the retroactive effect of a reclassification of
certain revenues as credits to operating expenses.
SecondThird quarter operating expenses in 1996 increased 4.7%3.7% from the 1995
amount. The cessation of the Rate Stabilization Program deferrals and
the commencement of their amortization in December 1995 resulted in the
decrease in deferred operating expenses. Depreciation and amortization
expenses increased because of a net increase in depreciation related to
changes in depreciation rates approved in the April 1996 PUCO rate order
and the cessation of the accelerated amortization of unrestricted
investment tax credits under the Rate Stabilization Program, which was
reported in 1995 as a reduction of depreciation expense. Federal income
taxes decreased as a result of lower pretax operating income. Fuel and
purchased power expenses decreased as lower fuel expense was partially
offset by slightly higher purchased power expense.
SecondOther operation and maintenance expenses for the 1996 third quarter
included a $22.7 million charge for an ongoing inventory reduction
program. The ongoing streamlining of the supply chain process includes
a shift in management philosophy toward increased use of technology,
consolidated warehousing and just-in-time purchase and delivery. Other
operation and maintenance expenses for the 1995 third quarter had
included charges totaling $14.6 million for an inventory reduction and
the recognition of costs associated with preliminary engineering
studies. Other cost-control measures helped to reduce third quarter
1996 other operation and maintenance expenses below the third quarter
1995 level, exclusive of the charges discussed above.
Third quarter 1996 nonoperating income decreased primarily because the
deferral of carrying charges related to the Rate Stabilization Program
ended in November 1995.
The second quarter 1996 federal income tax credit
for nonoperating income increased accordingly.
SecondThird quarter 1996 interest charges and preferred dividend requirements
decreased because of the redemption of securities and refinancing at
favorable terms.
Second quarter net income and earnings per common share in 1996 decreased
$25.1 million and $.17, respectively, from the 1995 amounts primarily
because of the cessation of the Rate Stabilization Program deferrals and
accelerated amortizations, the commencement of the amortization of the
deferrals in December 1995 and the delay in realizing the full financial
benefits of the Companies' strategic plan initiatives. Recovery of both
the costs no longer being deferred and the amortization of the deferrals
began in late April 1996 with the implementation of the price increases.
Six-monthNine-month operating expenses in 1996 increased 6.5%5.5% from the 1995
amount. The cessation of the Rate Stabilization Program deferrals and
the commencement of their amortization in December 1995 resulted in the
decrease in deferred operating expenses. Other operation and
maintenance expenses increased because of increases in nuclear power
production expenses (attributable to refueling and maintenance outages,
and the end of accelerated amortization of certain excess interim spent
nuclear fuel storage costs under the Rate Stabilization Program), the
third quarter 1996 inventory reduction charge, and expenses related to
distribution operations and improvements in customer service and sales
and marketing efforts. Depreciation and amortization expenses increased
for the same reasons cited for the secondthird quarter 1996 increase in these
expenses. Federal income taxes decreased as a result of lower pretax
operating income. Lower fuelFuel and purchased power expenses resulted fromdecreased as lower
fuel expense related to less amortization of previously deferred fuel costs than the amount
amortized in 1995.generation was partially offset by higher
purchased power expense.
A six-monthnine-month 1996 nonoperating loss resulted primarily from the cessation of
carrying charge deferrals related to the Rate Stabilization Program in
November 1995 and Toledo
Edison's write-down of two inactive production facilities as discussed
in Note 8.7. The six-monthdeferral of carrying charges related to the Rate
Stabilization Program ended in November 1995. The nine-month 1996
federal income tax credit for nonoperating income increased accordingly.
Six-monthNine-month 1996 interest charges and preferred dividend requirements
decreased because of the same reasons cited for the secondthird quarter 1996
decrease in these charges.
Six-month net income and earnings per common share in 1996 decreased $56.6
million and $.39, respectively, from the 1995 amounts primarily because of
the cessation of the Rate Stabilization Program deferrals and accelerated
amortizations, the commencement of the amortization of the deferrals in
December 1995 and the delay in realizing the full financial benefits of the
Companies' strategic plan initiatives. Six-month 1996 earnings were also
negatively affected by Toledo Edison's write-down of two inactive
production facilities ($7.2 million after taxes and $.05 per share).
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
INCOME STATEMENT
(Unaudited)
(Thousands)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
--------------------- -------------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
OPERATING REVENUES $ 434,025506,491 $ 424,362525,833 $ 861,5511,368,042 $ 834,7451,360,578
OPERATING EXPENSES
Fuel and Purchased Power (1) 98,216 101,831 201,942 207,893102,941 110,104 304,883 317,997
Other Operation and Maintenance 99,083 100,315 204,215 194,969115,118 113,421 319,333 308,390
Generation Facilities Rental Expense, Net 13,891 13,891 27,783 27,78313,892 13,892 41,675 41,675
Depreciation and Amortization 53,033 48,883 103,849 97,48753,279 49,290 157,128 146,777
Taxes, Other Than Federal Income Taxes 59,750 58,559 119,760 116,24756,537 58,288 176,297 174,535
Deferred Operating Expenses, Net 6,575 (9,564) 12,943 (20,457)6,567 (11,229) 19,510 (31,686)
Federal Income Taxes 17,565 19,377 29,370 34,45237,434 47,140 66,804 81,592
-------- -------- ---------- ----------
Total Operating Expenses 348,113 333,292 699,862 658,374385,768 380,906 1,085,630 1,039,280
-------- -------- ---------- ----------
OPERATING INCOME 85,912 91,070 161,689 176,371120,723 144,927 282,412 321,298
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction 601 (122) 1,099 966366 290 1,465 1,256
Other Income and Deductions, Net (1,016) 845 633 1,137(4,506) 804 (3,873) 1,941
Deferred Carrying Charges -- 7,7157,991 -- 15,36323,354
Federal Income Taxes - Credit (Expense) 1,034 (408) 282 (903)1,449 (538) 1,731 (1,441)
-------- -------- ---------- ----------
Total Nonoperating Income 619 8,030 2,014 16,563(Loss) (2,691) 8,547 (677) 25,110
-------- -------- ---------- ----------
INCOME BEFORE INTEREST CHARGES 86,531 99,100 163,703 192,934118,032 153,474 281,735 346,408
INTEREST CHARGES
Long-Term Debt 60,626 61,337 120,786 121,30558,628 62,889 179,414 184,194
Short-Term Debt 1,372 1,143 2,064 1,7941,063 844 3,127 2,638
Allowance for Borrowed Funds Used During Construction (627) (965) (1,146) (1,378)(380) (236) (1,526) (1,614)
-------- -------- ---------- ----------
Net Interest Charges 61,371 61,515 121,704 121,72159,311 63,497 181,015 185,218
-------- -------- ---------- ----------
NET INCOME 25,160 37,585 41,999 71,21358,721 89,977 100,720 161,190
Preferred Dividend Requirements 9,813 10,718 19,845 21,6759,563 10,452 29,408 32,127
-------- -------- ---------- ----------
EARNINGS AVAILABLE FOR COMMON STOCK $ 15,34749,158 $ 26,86779,525 $ 22,15471,312 $ 49,538129,063
======== ======== ========== ==========
(1) Includes purchased power expense for
purchases from Toledo Edison. $ 25,90824,933 $ 26,16125,939 $ 52,58077,513 $ 49,55775,496
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
BALANCE SHEET
(Thousands)
JuneSeptember 30, December 31,
1996 1995
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant In Service $ 6,917,4106,911,857 $ 6,871,468
Accumulated Depreciation and Amortization (2,184,313)(2,212,724) (2,094,092)
----------- -----------
4,733,0974,699,133 4,777,376
Construction Work In Progress 66,90769,801 73,250
----------- -----------
4,800,0044,768,934 4,850,626
Nuclear Fuel, Net of Amortization 129,021121,678 121,966
Other Property, Less Accumulated Depreciation 56,63256,707 58,299
----------- -----------
4,985,6574,947,319 5,030,891
CURRENT ASSETS
Cash and Temporary Cash Investments 41,16585,234 69,770
Amounts Due from Customers and Others, Net 247,218191,445 152,339
Amounts Due from Affiliates 3,0401,502 4,729
Unbilled Revenues 91,5445,000 78,500
Materials and Supplies, at Average Cost 76,34760,276 79,540
Fossil Fuel Inventory, at Average Cost 17,16911,104 21,391
Taxes Applicable to Succeeding Years 130,67377,935 184,099
Other 7,70710,029 7,197
----------- -----------
614,863442,525 597,565
REGULATORY AND OTHER ASSETS
Amounts Due from Customers for Future Federal Income
Taxes, Net 642,895643,024 651,264
Unamortized Loss on Reacquired Debt 59,53858,681 61,252
Carrying Charges and Operating Expenses 631,782626,007 643,561
Nuclear Plant Decommissioning Trusts 66,90471,986 61,497
Other 99,42585,788 105,696
----------- -----------
1,500,5441,485,486 1,523,270
----------- -----------
$ 7,101,0646,875,330 $ 7,151,726
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 1,081,8931,102,128 $ 1,126,762
Preferred Stock
With Mandatory Redemption Provisions 186,912185,912 215,420
Without Mandatory Redemption Provisions 240,871238,325 240,871
Long-Term Debt 2,659,8502,599,076 2,665,981
----------- -----------
4,169,5264,125,441 4,249,034
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock 160,874140,874 176,474
Current Portion of Lease Obligations 48,24949,468 54,634
Notes Payable to Banks and Others 100,000 --
Accounts Payable 93,92452,486 89,038
Accounts and Notes Payable to Affiliates 99,03959,437 63,961
Accrued Taxes 220,593227,225 296,141
Accrued Interest 58,23665,185 58,608
Dividends Declared 6,092 15,818
Other 36,51940,947 40,766
----------- -----------
823,526641,714 795,440
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 180,059178,088 184,002
Accumulated Deferred Federal Income Taxes 1,312,8491,311,649 1,298,260
Unamortized Gain from Bruce Mansfield Plant Sale 303,204299,467 310,678
Accumulated Deferred Rents for Bruce Mansfield Plant 95,19298,183 91,604
Nuclear Fuel Lease Obligations 89,82685,465 85,569
Retirement Benefits 69,06571,352 65,424
Other 57,81763,971 71,715
----------- -----------
2,108,0122,108,175 2,107,252
COMMITMENTS AND CONTINGENCIES (Note 10)8)
----------- -----------
$ 7,101,0646,875,330 $ 7,151,726
=========== ===========
The accompanying notes as they relate to Cleveland Electric are an integral part of this
statement.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
CASH FLOWS
(Unaudited)
(Thousands)
SixNine Months Ended
JuneSeptember 30,
------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $41,999 $71,213
-------- --------$100,720 $161,190
----------- ---------
Adjustments to Reconcile Net Income
to Cash from Operating Activities:
Depreciation and Amortization 103,849 97,487157,128 146,777
Deferred Federal Income Tax 22,905 24,00421,514 36,106
Unbilled Revenues (6,000) (5,000)5,500 9,000
Deferred Fuel (52) 15,3933,245 13,900
Deferred Carrying Charges -- (15,363)(23,354)
Leased Nuclear Fuel Amortization 20,338 33,98733,537 52,552
Deferred Operating Expenses, Net 12,943 (20,457)19,510 (31,686)
Allowance for Equity Funds Used During Construction (1,099) (966)(1,465) (1,256)
Changes in Amounts Due from Customers and Others, Net (29,708) 10,120(16,219) (35,066)
Proceeds from Accounts Receivable Securitization 57,988 --
Changes in Inventories 7,415 (11,107)29,551 6,824
Changes in Accounts Payable 4,886 1,697(36,552) (3,565)
Changes in Working Capital Affecting Operations (31,895) (64,495)38,596 (16,558)
Other Noncash Items (12,856) (13,165)(7,157) (2,438)
-------- --------
Total Adjustments 90,726 52,135305,176 151,236
-------- --------
Net Cash from Operating Activities 132,725 123,348405,896 312,426
CASH FLOWS FROM FINANCING ACTIVITIES
Bank Loans, Commercial Paper and Other Short-Term Debt 100,000 --
Notes Payable to Affiliates 41,4111,281 (58,100)
First Mortgage Bond Issues -- 353,900442,850
Maturities, Redemptions and Sinking Funds (50,614) (265,063)(134,288) (428,455)
Nuclear Fuel Lease Obligations (29,533) (23,092)(38,532) (39,776)
Dividends Paid (96,388) (36,967)(135,598) (77,078)
Premiums, Discounts and Expenses (249)(307) (8,644)
-------- --------
Net Cash from Financing Activities (35,373) (37,966)(307,444) (169,203)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction (51,455) (65,316)(74,747) (89,534)
Interest Capitalized as Allowance for Borrowed Funds Used
During Construction (1,146) (1,378)(1,526) (1,614)
Contributions to Nuclear Plant Decommissioning Trusts (3,204)(9,194) (6,408)
Purchases of Accounts Receivable from Affiliate (76,326) --
Other Cash Received (Applied) 6,174 (15,988)2,479 (18,389)
-------- --------
Net Cash from Investing Activities (125,957) (89,090)(82,988) (115,945)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (28,605) (3,708)15,464 27,278
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 69,770 65,643
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $41,165 $61,935$85,234 $92,921
======== ========
Other Payment Information:
Interest (net of amounts capitalized) $119,000 $105,000$169,000 $149,000
Federal Income Taxes (Refund) (6,200) 20,90060,300
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1995
Form 10-K and in the First and Second Quarter 1996 Form 10-Q.10-Qs. The
information under "Capital Resources and Liquidity" remains unchanged
with the following exceptions:
During the secondthird quarter of 1996, Cleveland Electric redeemed or retired
various securities as discussed in Note 4.
Also,In July 1996, Centerior Funding, a wholly owned subsidiary of Cleveland
Electric, completed a public sale of $150 million of receivables-backed
investor certificates in a transaction that qualifies for sale
accounting treatment for financial reporting purposes. Centerior
Funding used the net proceeds of $148.9 million to retire $100 million
of its receivables-backed investor certificates which were issued in May
1996, repay its notes payable ($10 million to Cleveland Electric and July 1996, the
Operating Companies completed certain asset-backed securitization
transactions as$16
million to Toledo Edison) and pay a $22.9 million dividend to Cleveland
Electric.
As discussed in Note 5.
Nuclear fuel is financed for the Operating Companies through leases with5, a
special-purpose corporation. On August 2, 1996, the special-purpose corporation completed
a transaction in which it issued $100 million
aggregate amount of intermediate-term secured notes maturingfinancing transactions in the 1997
through 2000 period. The proceeds will be used to pay all or part of the
outstanding balance of the special-purpose corporation's commercial paper
borrowings and a portion of its previously issued intermediate-term secured
notes as they mature. The special-purpose corporation also plans to
complete new bank credit arrangements in the1996 third quarter ofand October 1996 to
replace $150expiring nuclear fuel financing arrangements.
In October 1996, Cleveland Electric completed the purchase and
retirement of $50 million principal amount of bank credit arrangements terminatingits 7.625% interest rate
first mortgage bonds due in October
1996.2002 and $10 million principal amount of its
7.42% interest rate secured medium-term notes due in 2001 for a total of
$59.1 million. The securities are included in current liabilities in
the September 30, 1996 balance sheet.
Additional first mortgage bonds may be issued by Cleveland Electric
under its mortgage on the basis of property additions, cash or
refundable first mortgage bonds. If the applicable interest coverage
test is met, Cleveland Electric may issue first mortgage bonds on the
basis of property additions and, under certain circumstances, refundable
bonds. At JuneSeptember 30, 1996, Cleveland Electric would have been
permitted to issue approximately $430$571 million of additional first
mortgage bonds.bonds after giving effect to the October 1996 security
retirements discussed above.
Results of Operations
Factors contributing to the 2.3%3.7% third quarter decrease and 3.2% increases0.5% nine-
month increase in 1996 operating revenues from 1995 for the second quarter and six months, respectively, are shown as
follows:
Changes for Period Ended
JuneSeptember 30, 1996
Three SixNine
Factors Months Months
(millions)
Base Rates $13.7 $15.3$ 20.2 33.4
Kilowatt-hour Sales Volume and Mix 2.0 13.7(38.2) (22.4)
Wholesale Revenues 1.2 4.8(0.9) 3.9
Fuel Cost Recovery Revenues (3.7) (9.7)(1.8) (11.5)
Miscellaneous Revenues (3.5) 2.71.44 .1
Total $(19.3) $ 9.7 $26.87.5
The increases in 1996 base rates revenues resulted primarily from the
April 1996 PUCO rate order. See Note 9.order issued by the PUCO. Renegotiated contracts for
certain large industrial customers resulted in a decrease in base rates
which partially offset the effect of the general price increase.
Percentage changes between 1996 and 1995 billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period Ended
JuneSeptember 30, 1996
Three SixNine
Customer Categories Months Months
Residential 2.6% 4.8%(15.4)% (2.8)%
Commercial 3.9 3.1(3.7) 0.5
Industrial (0.6) (1.0)(0.8)
Other 9.1 4.45.8 5.2
Total 2.2 2.0
Second(4.4) (0.3)
Third quarter 1996 residential, commercial and total kilowatt-hour sales
increaseddecreased because of increased residential and commercial sales and a 14% increase in wholesale
sales (included in the "Other" category). Residential and commercial sales
increased because of the cooler springsummer weather in the second quarter of
1996 than in the second quarter of 1995,period which
increased heating-relatedreduced cooling-related demand. Weather-normalized residential and
commercial sales increased 0.9%0.8% and 3.4%2.8%, respectively, for the 1996
period. Weather-normalized commercial sales growth in the 1996 period
is attributable to a 1.4% increase in the
number of commercial customers and an increase in average customer usage of about 2%3%.
Industrial sales decreased slightly primarily because ofas less sales to large automotive
manufacturers and the broad-based, smaller industrial customer group
were partially offset by increased sales to large steel industry
customers. Other sales increased as increased wholesale sales were
partially offset by less sales to public authorities.
Total kilowatt-hour sales increaseddecreased for the six-monthnine-month period in 1996 because ofas
decreases from weather-related demand and an 8.2%were partially offset by a 10%
increase in wholesale sales. Residential and commercial sales increaseddecreased because of the
coldercooler summer weather in the 1996 period. Colder winter and spring
weather in the first six months of 1996 period.had boosted residential and
commercial sales for the first half of 1996. Weather-normalized
residential and commercial sales increased 1.4%1.2% and 2.2%2.4%, respectively,
for the 1996 nine-month period. Weather-normalized commercial sales
growth in the 1996 period is attributable to a 1.7%1% increase in the
average number of commercial customers and an increase in average customer usage of
about 0.5%1.5%. Industrial sales decreased primarily because of less sales
to large automotive manufacturers and steel producers.the broad-based, smaller
industrial customer group.
The decreases in 1996 fuel cost recovery revenues included in customer
bills resulted from decreases in the fuel cost recovery factors used in
1996 to calculate these revenues compared to those used in 1995. The
decreases in the weighted averages of the fuel cost recovery factors for
1996 were about 5%2% and 7%5% for the secondthird quarter and sixnine months,
respectively.
Second quarter miscellaneousMiscellaneous revenues in 1996 decreasedincreased from the 1995 amountamounts primarily
because of the retroactive effect of a reclassification of
certainnew revenues as creditsrelated to operating expenses.
Secondthe Seneca lease agreement
discussed in Note 6.
Third quarter operating expenses in 1996 increased 4.4%1.3% from the 1995
amount. The cessation of the Rate Stabilization Program deferrals and
the commencement of their amortization in December 1995 resulted in the
decrease in deferred operating expenses. Depreciation and amortization
expenses increased because of a net increase in depreciation related to
changes in depreciation rates approved in the April 1996 PUCO rate order
and the cessation of the accelerated amortization of unrestricted
investment tax credits under the Rate Stabilization Program, which was
reported in 1995 as a reduction of depreciation expense. Federal income
taxes decreased as a result of lower pretax operating income. Lower
fuel and purchased power expenses resulted from both lower fuel expense
and lower purchased power expense.
SecondOther operation and maintenance expenses for the 1996 third quarter
included a $16.6 million charge for an ongoing inventory reduction
program. The ongoing streamlining of the supply chain process includes
a shift in management philosophy toward increased use of technology,
consolidated warehousing and just-in-time purchase and delivery. Other
operation and maintenance expenses for the 1995 third quarter had
included charges totaling $11.4 million for an inventory reduction and
the recognition of costs associated with preliminary engineering
studies. Other cost-control measures helped to reduce third quarter
1996 other operation and maintenance expenses below the third quarter
1995 level, exclusive of the charges discussed above.
Third quarter 1996 nonoperating income decreased primarily because the
deferral of carrying charges related to the Rate Stabilization Program
ended in November 1995. The secondthird quarter 1996 federal income tax credit
for nonoperating income increased accordingly.
Second quarter earnings available for common stock in 1996 decreased $11.5
million from the 1995 amount primarily because of the cessation of the Rate
Stabilization Program deferrals and accelerated amortizations, the
commencement of the amortization of the deferrals in December 1995 and the
delay in realizing the full financial benefits of the Companies' strategic
plan initiatives. Recovery of both the costs no longer being deferred and
the amortization of the deferrals began in late April 1996 with the
implementation of the price increases.
Six-monthNine-month operating expenses in 1996 increased 6.3%4.5% from the 1995
amount. The cessation of the Rate Stabilization Program deferrals and
the commencement of their amortization in December 1995 resulted in the
decrease in deferred operating expenses. Other operation and
maintenance expenses increased because of increases in nuclear power
production expenses (attributable to refueling and maintenance outages,
and the end of accelerated amortization of certain excess interim spent
nuclear fuel storage costs under the Rate Stabilization Program), the
third quarter 1996 inventory reduction charge, and expenses related to
distribution operations and improvements in customer service and sales
and marketing efforts. Depreciation and amortization expenses increased
for the same reasons cited for the secondthird quarter 1996 increase in these
expenses. Federal income taxes decreased as a result of lower pretax
operating income. Lower fuel and purchased power expenses resulted
primarily from less amortization of previously deferred fuel costs than
the amount amortized in 1995.
Six-monthNine-month 1996 nonoperating income decreased because the deferral of
carrying charges related to the Rate Stabilization Program ended in
November 1995. The six-monthnine-month 1996 federal income tax credit for
nonoperating income increased accordingly.
Six-month earnings available for common stock in 1996 decreased $27.4
million from the 1995 amount primarily because of the cessation of the Rate
Stabilization Program deferrals and accelerated amortizations, the
commencement of the amortization of the deferrals in December 1995 and the
delay in realizing the full financial benefits of the Companies' strategic
plan initiatives.
THE TOLEDO EDISON COMPANY
INCOME STATEMENT
(Unaudited)
(Thousands)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
OPERATING REVENUES (1) $ 210,940252,198 $ 215,043245,830 $ 421,733673,931 $ 421,427667,257
OPERATING EXPENSES
Fuel and Purchased Power 40,652 38,466 79,420 75,95746,928 44,239 126,348 120,196
Other Operation and Maintenance 58,244 56,611 114,763 108,67259,287 60,881 174,050 169,553
Generation Facilities Rental Expense, Net 25,962 25,960 51,923 51,92025,961 25,981 77,884 77,901
Depreciation and Amortization 23,689 21,140 46,105 41,98423,556 21,130 69,661 63,114
Taxes, Other Than Federal Income Taxes 23,572 23,748 47,425 47,89723,503 23,555 70,928 71,452
Deferred Operating Expenses, Net 4,293 (5,142) 8,468 (10,313)4,287 (5,543) 12,755 (15,856)
Federal Income Taxes 3,872 9,019 10,099 16,67417,011 16,730 27,110 33,404
-------- -------- -------- --------
Total Operating Expenses 180,284 169,802 358,203 332,791200,533 186,973 558,736 519,764
-------- -------- -------- --------
OPERATING INCOME 30,656 45,241 63,530 88,63651,665 58,857 115,195 147,493
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction 186 392 599 679330 (169) 929 510
Other Income and Deductions, Net 374 1,110 (8,779) 3,12896 (2,905) (8,683) 223
Deferred Carrying Charges -- 3,9083,813 -- 7,83211,645
Federal Income Taxes - Credit (Expense) 115 (501) 3,310 (1,282)(92) 1,100 3,218 (182)
-------- -------- -------- --------
Total Nonoperating Income (Loss) 675 4,909 (4,870) 10,357334 1,839 (4,536) 12,196
-------- -------- -------- --------
INCOME BEFORE INTEREST CHARGES 31,331 50,150 58,660 98,99351,999 60,696 110,659 159,689
INTEREST CHARGES
Long-Term Debt 22,704 26,321 45,863 53,43122,564 26,315 68,427 79,746
Short-Term Debt 1,145 1,965 2,363 4,4651,712 905 4,075 5,370
Allowance for Borrowed Funds Used During Construction (146) (108) (471) (385)(260) 39 (731) (346)
-------- -------- -------- --------
Net Interest Charges 23,703 28,178 47,755 57,51124,016 27,259 71,771 84,770
-------- -------- -------- --------
NET INCOME 7,628 21,972 10,905 41,48227,983 33,437 38,888 74,919
Preferred Dividend Requirements 4,229 4,696 8,433 9,4794,250 4,507 12,683 13,986
-------- -------- -------- --------
EARNINGS AVAILABLE FOR COMMON STOCK $ 3,39923,733 $ 17,27628,930 $ 2,47226,205 $ 32,00360,933
======== ======== ======== ========
(1) Includes revenues from bulk power sales
to Cleveland Electric. $ 25,90824,933 $ 26,16125,939 $ 52,58077,513 $ 49,55775,496
The accompanying notes as they relate to Toledo Edison are an integral part of this statement.
THE TOLEDO EDISON COMPANY
BALANCE SHEET
(Thousands)
JuneSeptember 30, December 31,
1996 1995
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant In Service $ 2,920,2412,923,830 $ 2,896,320
Accumulated Depreciation and Amortization (984,676)(1,005,926) (942,088)
----------- -----------
1,935,5651,917,904 1,954,232
Construction Work In Progress 19,73223,073 27,781
----------- -----------
1,955,2971,940,977 1,982,013
Nuclear Fuel, Net of Amortization 86,85382,314 77,741
Other Property, Less Accumulated Depreciation 7,5158,283 19,555
----------- -----------
2,049,6652,031,574 2,079,309
CURRENT ASSETS
Cash and Temporary Cash Investments 52,272164,664 93,669
Amounts Due from Customers and Others, Net 15,36715,973 68,077
Amounts Due from Affiliates 63,03622,054 18,905
Unbilled Revenues 6,8002,100 21,844
Materials and Supplies, at Average Cost 39,29933,286 39,967
Fossil Fuel Inventory, at Average Cost 8,25211,036 9,273
Taxes Applicable to Succeeding Years 52,61531,875 71,044
Other 3,2063,346 4,315
----------- -----------
240,847284,334 327,094
REGULATORY AND OTHER ASSETS
Amounts Due from Customers for Future Federal Income
Taxes, Net 415,916416,034 416,351
Unamortized Loss from Beaver Valley Unit 2 Sale 93,96092,837 96,206
Unamortized Loss on Reacquired Debt 25,88325,047 27,640
Carrying Charges and Operating Expenses 402,007398,200 409,659
Nuclear Plant Decommissioning Trusts 56,69161,048 52,185
Other 58,76165,010 65,345
----------- -----------
1,053,2181,058,176 1,067,386
----------- -----------
$ 3,343,7303,374,084 $ 3,473,789
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 765,345789,059 $ 762,877
Preferred Stock
With Mandatory Redemption Provisions 3,355 5,020
Without Mandatory Redemption Provisions 210,000 210,000
Long-Term Debt 1,059,4611,013,090 1,067,603
----------- -----------
2,038,1612,015,504 2,045,500
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock 24,14970,549 58,297
Current Portion of Lease Obligations 33,64034,771 40,019
Accounts Payable 58,78658,971 56,233
Accounts and Notes Payable to Affiliates 26,85126,160 53,245
Accrued Taxes 34,49138,717 78,178
Accrued Interest 23,10525,884 24,250
Other 16,82016,039 18,607
----------- -----------
217,842271,091 328,829
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 77,38276,206 79,350
Accumulated Deferred Federal Income Taxes 585,753582,247 573,035
Unamortized Gain from Bruce Mansfield Plant Sale 183,560181,293 188,093
Accumulated Deferred Rents for Bruce Mansfield Plant
and Beaver Valley Unit 2 38,71739,715 53,789
Nuclear Fuel Lease Obligations 59,32556,758 51,691
Retirement Benefits 102,671102,508 103,060
Other 40,31948,762 50,442
----------- -----------
1,087,7271,087,489 1,099,460
COMMITMENTS AND CONTINGENCIES (Note 10)8)
----------- -----------
$ 3,343,7303,374,084 $ 3,473,789
=========== ===========
The accompanying notes as they relate to Toledo Edison are an integral part of this
statement.
THE TOLEDO EDISON COMPANY
CASH FLOWS
(Unaudited)
(Thousands)
SixNine Months Ended
JuneSeptember 30,
-----------------------------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $10,905 $41,482$38,888 $74,919
-------- --------
Adjustments to Reconcile Net Income
to Cash from Operating Activities:
Depreciation and Amortization 46,105 41,98469,661 63,114
Deferred Federal Income Tax 13,368 10,6039,863 16,244
Unbilled Revenues 8,000 (2,000)844 2,000
Deferred Fuel 1,643 2947,532 (2,463)
Deferred Carrying Charges -- (7,832)(11,645)
Leased Nuclear Fuel Amortization 15,461 26,01924,677 40,131
Deferred Operating Expenses, Net 8,468 (10,313)12,755 (15,856)
Allowance for Equity Funds Used During Construction (599) (679)(929) (510)
Changes in Amounts Due from Customers and Others, Net (12,461) 3,364
Sales of(12,597) (11,398)
Proceeds from Accounts Receivable to Affiliate 76,326Securitization 77,235 --
Changes in Inventories 1,689 (1,707)4,918 8,531
Changes in Accounts Payable 2,553 (370)2,738 27,645
Changes in Working Capital Affecting Operations (30,245) (13,159)(3,260) (2,014)
Other Noncash Items (12,787) 5,768(8,812) 10,800
-------- --------
Total Adjustments 117,521 51,972184,625 124,579
-------- --------
Net Cash from Operating Activities 128,426 93,454223,513 199,498
CASH FLOWS FROM FINANCING ACTIVITIES
Notes Payable to Affiliates (20,950) --
First Mortgage Bond IssueIssues -- 45,00099,000
Maturities, Redemptions and Sinking Funds (43,865) (97,678)(199,183)
Nuclear Fuel Lease Obligations (23,318) (16,801)(29,430) (29,522)
Dividends Paid (8,437) (9,544)(12,702) (14,155)
Premiums, Discounts and Expenses (225) (4,812)(254) (5,311)
-------- --------
Net Cash from Financing Activities (96,795) (83,835)(107,201) (149,171)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction (23,850) (17,451)(32,704) (25,152)
Interest Capitalized as Allowance for Borrowed Funds Used
During Construction (471) (385)(731) (346)
Loans to Affiliates (46,411)(6,281) --
Contributions to Nuclear Plant Decommissioning Trusts (2,693)(7,800) (5,386)
Other Cash Received (Applied) 397 (4,857)2,199 (5,421)
-------- --------
Net Cash from Investing Activities (73,028) (28,079)(45,317) (36,305)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (41,397) (18,460)70,995 14,022
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 93,669 87,800
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $52,272 $69,340$164,664 $101,822
======== ========
Other Payment Information:
Interest (net of amounts capitalized) $46,000 $47,000$66,000 $69,000
Federal Income Taxes 10,400 11,30017,500
The accompanying notes as they relate to Toledo Edison are an integral part of this statement.
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1995
Form 10-K and in the First and Second Quarter 1996 Form 10-Q.10-Qs. The
information under "Capital Resources and Liquidity" remains unchanged
with the following exceptions:
DuringAs discussed in Note 5, a special-purpose corporation completed
financing transactions in the second1996 third quarter ofand October 1996 to
replace expiring nuclear fuel financing arrangements.
In October 1996, Toledo Edison redeemed or retired
various securities as discussed in Note 4. Also, in Maycompleted the purchase and July 1996, the
Operating Companies completed certain asset-backed securitization
transactions as discussed in Note 5.
Nuclear fuel is financed for the Operating Companies through leases with a
special-purpose corporation. On August 2, 1996, the special-purpose
corporation completed a transaction in which it issued $100retirement of
$15 million aggregateprincipal amount of intermediate-term secured notes maturingits 7.25% interest rate first mortgage
bonds due in 1999 for $14.9 million. The securities are included in
current liabilities in the 1997
through 2000 period. The proceeds will be used to pay all or part of the
outstandingSeptember 30, 1996 balance of the special-purpose corporation's commercial paper
borrowings and a portion of its previously issued intermediate-term secured
notes as they mature. The special-purpose corporation also plans to
complete new bank credit arrangements in the third quarter of 1996 to
replace $150 million of bank credit arrangements terminating in October
1996.sheet.
Additional first mortgage bonds may be issued by Toledo Edison under its
mortgage on the basis of property additions, cash or refundable first
mortgage bonds. If the applicable interest coverage test is met, Toledo
Edison may issue first mortgage bonds on the basis of property additions
and, under certain circumstances, refundable bonds. At JuneSeptember 30,
1996, Toledo Edison would have been permitted to issue approximately
$171$143 million of additional first mortgage bonds.bonds after giving effect to
the October 1996 first mortgage bond retirement discussed above.
Under its articles of incorporation, Toledo Edison cannot issue
preferred stock unless certain earnings coverage requirements are met.
Based on earnings for the 12 months ended JuneSeptember 30, 1996, Toledo
Edison could not issue additional preferred stock.
Toledo Edison will be unable to issue
preferred stock until it can meet the interest and preferred dividend
coverage test in its articles of incorporation.
Results of Operations
Factors contributing to the 1.9% second quarter decrease2.6% and 0.1% six-month
increase1% increases in 1996 operating
revenues from 1995 for the third quarter and nine months, respectively,
are shown as follows:
Changes for Period Ended
JuneSeptember 30, 1996
Three SixNine
Factors Months Months
(millions)
Base Rates $(2.1) $(4.1)$ 7.5 $ 6.8
Kilowatt-hour Sales Volume and Mix (1.4) 1.9 0.4
Wholesale Revenues (2.3) 0.8(1.9) (1.1)
Fuel Cost Recovery Revenues 0.9 1.00.5 1.5
Miscellaneous Revenues 0.8 0.7(1.6) (0.9)
Total $(4.1) $ 0.36.4 $ 6.7
The increase in third quarter base rates revenues in 1996 resulted
primarily from the April 1996 rate order issued by the PUCO.
Renegotiated contracts for certain large industrial customers also
resulted in a decrease in base rates which partially offset the effect
of the general price increase.
For the nine-month period in 1996, the impact of the price increase authorized by the PUCO in April 1996 as
discussed in Note 9,price
increase was offset by a change in the implementation of summer prices.
As a result of this change, higher summer prices are nowwere in effect for
most customers from June through September.September 1996. Previously, higher
summer prices were in effect from May through September. Consequently,
base rates revenues for the May 1996 billing period were lower relative
to the May 1995 amount. Renegotiated contracts for certain large
industrial customers also resulted in a decrease in base rates which
partially offset the effect of the general price increase.
Percentage changes between 1996 and 1995 billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period Ended
JuneSeptember 30, 1996
Three SixNine
Customer Categories Months Months
Residential 3.6% 5.4%(13.7)% (1.8)%
Commercial (3.0) 2.1
Industrial 5.0 5.2
Industrial 4.0 2.73.5
Other (11.3) (7.9)(12.0) (9.5)
Total (0.1) 0.7
Second(4.9) (1.3)
Third quarter 1996 total kilowatt-hour sales decreased slightly as less
residential and commercial sales, along with less wholesale sales
(included in the "Other" category), completely offset increased residential, commercial and industrial
sales. Residential and commercial sales increaseddecreased because of the cooler
summer weather in the third quarter of 1996 versus the third quarter of 1995,
which reduced cooling-related demand. Weather-normalized commercial
sales increased 7.6% for the 1996 period. Weather-normalized commercial
sales growth in the 1996 period is attributable to a 1% increase in the
average number of customers and an increase in average customer usage of
about 6%. Industrial sales increased on the strength of increased sales
to large automotive and glass manufacturers.
Total kilowatt-hour sales for the nine-month period in 1996 decreased as
less residential and wholesale sales completely offset increased
commercial and industrial sales. Residential sales decreased because of
the cooler summer weather in the 1996 period. Colder winter and spring
weather in the second quarterfirst six months of 1996 than inhad boosted residential and
commercial sales for the second quarterfirst half of 1995, which increased
heating-related demand.1996. Weather-normalized
residential and commercial sales increased 0.1%0.9% and 4.2%5.1%, respectively,
for the 1996 nine-month period. Weather-normalized commercial sales
growth in the 1996 period is attributable to a 1.6% increase in the
average number of commercial customers and an increase in average customer usage of
about 2.5%3.5%. Industrial sales increased on the strength of increased
sales to petroleum refineries, and
the broad-based, smaller industrial customer group.
Total kilowatt-hour sales for the six-month period in 1996 increased as
increased residential, commercial and industrial sales completely offset
less wholesale sales. Residential and commercial sales increased because
of the colder winter and spring weather in the 1996 period.
Weather-normalized residential and commercial sales increased 1.3% and
3.8%, respectively, for the 1996 period. Weather-normalized commercial
sales growth in the 1996 period is attributable to a 2% increase in the
average number of commercial customers and an increase in average customer
usage of about 2%. Industrial sales increased on the strength of increased
sales to petroleum refinerieslarge automotive manufacturers and the
broad-based, smaller industrial customer group.
Wholesale sales in 1996 were suppressed by soft market conditions and,
during the first six months of 1996, limited power availability for bulk
power transactions because of nuclear generating plant refueling and
maintenance outages.
The increases in 1996 fuel cost recovery revenues included in customer
bills resulted from increases in the fuel cost recovery factors used in
1996 to calculate these revenues compared to those used in 1995. The
increases in the weighted averages of the fuel cost recovery factors for
1996 were about 3%1.5% and 2% for the secondthird quarter and sixnine months,
respectively.
SecondThird quarter operating expenses in 1996 increased 6.2%7.3% from the 1995
amount. The cessation of the Rate Stabilization Program deferrals and
the commencement of their amortization in December 1995 resulted in the
decrease in deferred operating expenses. Fuel and purchased power
expenses increased because of higher purchased power expense. Depreciation
and amortization expenses increased because of a net increase in
depreciation related to changes in depreciation rates approved in the April
1996 PUCO rate order and the cessation of the accelerated amortization of
unrestricted investment tax credits under the Rate Stabilization Program,
which was reported in 1995 as a reduction of depreciation expense.
FuelOther operation and purchased powermaintenance expenses for the 1996 third quarter
included a $6.1 million charge for an ongoing inventory reduction
program. The ongoing streamlining of the supply chain process includes
a shift in management philosophy toward increased as higher purchased power expense was
partially offset by lower fuel expense. Federal income taxes decreased as
a resultuse of lower pretax operating income.
Secondtechnology,
consolidated warehousing and just-in-time purchase and delivery. Other
operation and maintenance expenses for the 1995 third quarter had
included charges totaling $3.2 million for an inventory reduction and
the recognition of costs associated with preliminary engineering
studies. Other cost-control measures helped to reduce third quarter
1996 other operation and maintenance expenses below the third quarter
1995 level, exclusive of the charges discussed above.
Third quarter 1996 nonoperating income decreased primarily because the
deferral of carrying charges related to the Rate Stabilization Program
ended in November 1995.
SecondThird quarter 1996 interest charges and preferred dividend requirements
decreased because of the redemption of securities and refinancing at
favorable terms.
Second quarter earnings available for common stock in 1996 decreased $13.9
million from the 1995 amount primarily because of the cessation of the Rate
Stabilization Program deferrals and accelerated amortizations, the
commencement of the amortization of the deferrals in December 1995 and the
delay in realizing the full financial benefits of the Companies' strategic
plan initiatives. Recovery of both the costs no longer being deferred and
the amortization of the deferrals began in late April 1996 with the
implementation of the price increases.
Six-monthNine-month operating expenses in 1996 increased 7.6%7.5% from the 1995
amount. The cessation of the Rate Stabilization Program deferrals and
the commencement of their amortization in December 1995 resulted in the
decrease in deferred operating expenses. Depreciation and amortization
expenses increased for the same reasons cited for the third quarter 1996
increase in these expenses. Fuel and purchased power expenses increased
as higher purchased power expense was partially offset by lower fuel
expense. Other operation and maintenance expenses increased because of
increases in nuclear power production expenses (attributable to
refueling and maintenance outages, and the end of accelerated
amortization of certain excess interim spent nuclear fuel storage costs
under the Rate Stabilization Program), the third quarter 1996 inventory
reduction charge, and expenses related to
distribution operations and improvements in customer
service and sales and marketing efforts. Fuel and purchased power expenses and depreciation and
amortization expenses increased for the same reasons cited for the second
quarter 1996 increases in these expenses. Federal income taxes decreased
as a result of lower pretax operating income.
A six-monthnine-month 1996 nonoperating loss resulted primarily from the cessation of
carrying charge deferrals related to the Rate Stabilization Program in
November 1995 and the write-downwrite-
down of two inactive production facilities as discussed in Note 8.7. The
six-monthdeferral of carrying charges related to the Rate Stabilization Program
ended in November 1995. The nine-month 1996 federal income tax credit
for nonoperating income increased accordingly.
Six-monthNine-month 1996 interest charges and preferred dividend requirements
decreased because of the same reasons cited for the secondthird quarter 1996
decrease in these charges.
Six-month earnings available for common stock in 1996 decreased $29.5
million from the 1995 amount primarily because of the cessation of the Rate
Stabilization Program deferrals and accelerated amortizations, the
commencement of the amortization of the deferrals in December 1995, the
delay in realizing the full financial benefits of the Companies' strategic
plan initiatives and the write-down of two inactive production facilities.
PART II. OTHER INFORMATION
Item 5. Other Information
1. Retail Wheeling Bill
For background relating to this topic, see "Item 7. Management's
Financial Analysis--Outlook--Competition" in the 1995 Form 10-K and
"Item 5. Other Information. 1. Retail Wheeling Bill" in the First
Quarter 1996 Form 10-Q.
On March 21, 1996, House Bill 653 was introduced in the Ohio House of
Representatives by Representative Ronald Amstutz (R-Wooster) which,
if enacted, would provide for the deregulation of the electric
utility industry in Ohio. Hearings were held on H.B. 653 in the
House Public Utilities Committee in April and May 1996, but the
Companies do not expect the bill to pass during the legislative
session which runs through the end of the year.
2. FERC Open-Access Transmission
For background relating to this topic, see "Item 7. Management's
Financial Analysis--Outlook--Competition" in the 1995 Form 10-K.
On April 24, 1996, the Federal Energy Regulatory Commission ("FERC")
issued final order No. 888 which required that all public utilities
which own, control or operate transmission facilities file open-
access transmission tariffs on or before July 9, 1996. The Operating
Companies filed their open-access transmission tariff with the FERC
on July 9, 1996, and such tariff is in effect as of that date.
3. Transmission Alliance
The Operating Companies joined Ohio Edison Company of Akron, Ohio,
Virginia Electric and Power Company of Richmond, Virginia, and
Allegheny Power Service Corporation of Hagerstown, Maryland in an
alliance to understand better the available transmission capacities
of the participating utilities and to compensate the participating
utilities for the wholesale use of their facilities to transmit
power. The information obtained from this alliance will increase
transmission reliability for the utilities by improved scheduling and
coordination of bulk power transactions. The Operating Companies
intend to compare information obtained from this arrangement to
information obtained from the Midwest Independent System Operation,
which may be created after further negotiations among the Operating
Companies and other public utilities in the Midwestern United States.
The comparison will assist the Operating Companies in determining
which of the two arrangements will be most beneficial for a
successful transition to a more competitive marketplace.
4. AT&T Telecommunications Partnership
On April 17, 1996, a wholly owned subsidiary of Centerior Energy and
an AT&T Wireless Services subsidiary entered into a joint venture
aimed at bringing state-of-the-art wireless communications technology
to Northeast Ohio. The new venture, AT&T PCS Cleveland, LLC, is
structured as a limited liability company and is part of AT&T
Wireless Services, which successfully bid last year for personal
communications services ("PCS") licenses that, in conjunction with
its present cellular markets, will afford AT&T Wireless Services
coverage of 80% of the United States. One of the licenses awarded
was for Northeast Ohio. The limited liability company will operate a
PCS network which will provide wireless communications services to
Greater Cleveland and surrounding areas in Northeast Ohio, as well as
areas in Western Pennsylvania. The subsidiary of Centerior Energy
has a 25% interest in AT&T PCS Cleveland, LLC, and would be obligated
to invest no more than $60 million in the venture through April 2001.
Centerior Energy believes that the AT&T/Centerior Energy partnership
will allow the Operating Companies to provide enhancements in
electric service to their customers, improve data communications with
their power plants and better control the flow of electricity through
their power lines.
5. PUCO Rate Order
For background relating to this topic, see "Note 6 to the
Financial Statements (Unaudited)--(6) Regulatory Matters" in the
First Quarter 1996 Form 10-Q and "Item 5. Other Information. 5.
PUCO Rate Order" in the Second Quarter 1996 Form 10-Q.
The City of Cleveland, the Office of the Ohio Consumers' Council,Counsel,
the Ohio Council of Retail Merchants, the Empowerment Center of
Greater Cleveland, the City of Toledo, the Lucas County Board of
Commissioners and Congresswoman Marcy Kaptur have filed appeals
with the Ohio Supreme Court of the PUCO's April 11, 1996 rate
order.order for the Operating Companies. The Operating Companies will oppose such appeals.
6.have
filed motions to dismiss the appeals filed by Congresswoman Kaptur
and the Lucas County Board of Commissioners because neither was a
party to the PUCO proceeding. The appellants filed their merit
briefs with the Ohio Supreme Court on November 4, 1996, and the
Operating Companies expect to file their reply briefs with the
Supreme Court by December 4, 1996.
2. PUCO Order on Request by City of Clyde
For background relating to this topic, see "Item 5. Other Events.
2. PUCO Order on Request by City of Clyde" in the Companies'
combined Current Report on Form 8-K dated April 11, 1996.1996; "Item 5.
Other Information. 6. PUCO Order on Request by City of Clyde"
in the Second Quarter 1996 Form 10-Q; and "Item 5. Other Events.
2. City of Clyde" in the Companies' combined Current Report on
Form 8-K dated August 21, 1996 ("8/21/96 Form 8-K").
On August 12, 1996, the City of Clyde filed with the Ohio Supreme
Court an appeal of the PUCO's April 11, 1996 order.
7. Garfield Heights Appeal
For background relating to this topic, see "Item 1. Business--
Operations--Competitive Conditions--Cleveland Electric" in the 1995
Form 10-K.
On July 31,28, 1996, the Ohio Supreme Court issuedgranted a Writ of
Mandamus against the City of Clyde, Ohio, requiring the City to
allow buildings which existed in the City prior to its decisionFebruary
1995 Ordinance to receive electric service from Toledo Edison or
from the City's electric company, at the option of the customer.
On November 5, 1996, voters in the City of Garfield Heights rate ordinance appeal. The Court determined
thatClyde passed a
referendum rescinding the PUCO in its June 29, 1995 order did not abuse its discretion
by refusing to express an opinion on the non-rate aspects of the
City's ordinances and by refusing to assess the hearing expenses and
costs against the City.
8.Ordinance.
3. Medical Center Co. -- FERC Petition
For background relating to this topic, see "Item 1. Business--
Operations--Competitive Conditions--Cleveland Electric" in the
1995 Form 10-K.10-K; "Item 5. Other Information. 8. Medical Center
Co.--FERC Petition" in the Second Quarter 1996 Form 10-Q; and
"Item 5. Other Events. 3. Medical Center" in the 8/21/96 Form
8-K.
On July 31, 1996, the FERC ruled that Cleveland Electric is
obligated to provide transmission service to Cleveland Public
Power ("CPP"). This will enableruling enabled CPP to provide electric
service to Medical Center Co. beginning in August 1996. The FERC
concluded that such transmission service by Cleveland Electric to
CPP does not violate the Federal Power Act. The FERC also
dismissed Cleveland Electric's request for stranded cost recovery,
without prejudice to its refiling and demonstrating that such
request meets the criteria for seeking stranded cost recovery
under FERC Order 888. Cleveland Electric has sought rehearing of
the FERC ruling and has agreed to provide the requested
transmission service to CPP. On September 18, 1996, the FERC
granted rehearing for further consideration of the issues.
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4. City of Cleveland Lawsuit
For background relating to this topic, see "Item 5. Other
Information. 9. City of Cleveland LawsuitLawsuit" in the Second Quarter
1996 Form 10-Q.
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
certain lamp posts, street lights and/or utility poles and
assessing penalties for failure to take such action. Cleveland
Electric planshas filed a motion to opposedismiss the complaint.complaint for lack of
jurisdiction, which motion is decisional.
5. Cost Reduction Efforts
For background relating to this topic, see "Item 5. Other
Information. Cost Reduction Efforts" in the First Quarter 1996
Form 10-Q.
On May 13, 1996, the Companies announced their intention to reduce
the number of employees from 6,800 at January 1, 1996 to 6,300 by
December 31, 1996. At September 30, 1996, the Operating Companies
and Centerior Service Company had 6,279 employees, with further
reductions expected prior to year end. The Companies also are
decommissioning two older fossil-fueled generating units at the
Acme Station in Toledo and the C-Plant in Ashtabula and reducing
generating activities at three other plants. These steps are part
of an ongoing effort to reduce annual operating costs and are
expected to result in annualized savings of at least $30 million.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
See Exhibit Index following.
b. Reports on Form 8-K
During the quarter ended JuneSeptember 30, 1996, Centerior Energy,
Cleveland Electric and Toledo Edison each filed two Current
Reports on Form 8-K with the Securities and Exchange Commission.
A Form 8-K dated April 11,August 21, 1996 and filed on April 29, 1996 included
two items under "Item 5. Other Events". The first, "1. 1995 Rate
Requests", reported on the rate order issued by the PUCO in connection
with the Operating Companies' pending rate cases. The second, "2.
PUCO Order on Request by the City of Clyde", reported on the PUCO's
denial of a request by the City of Clyde, Ohio, to require Toledo
Edison to abandon service within Clyde.
A Form 8-K dated June 25, 1996 and filed on August 1,September 13, 1996
included three items under "Item 5. Other Events". The first,
"1. Shareholder
Rights Plan""Management Changes", reported on the declaration by Centerior Energy's Boardelection of Directors ("Board") of a Rights dividend distribution and the
corresponding Shareholder Rights Agreement.Lew W. Myers as
Vice President - Nuclear--Perry. The second, "2. Common
Stock Buy-back Program"City of Clyde",
reported on the Board's one-year extensionstatus of Centerior Energy's existing common stock buy-back program.Toledo Edison's litigation with the City
of Clyde. The third, "3. Management Changes"Medical Center", reported two vice presidential changes inon the Servicestatus
of proceedings against Ohio Power Company.
ThisA Form 8-K alsodated September 13, 1996 and filed on September 17,
1996 included one item under "Item 7.
Financial Statements5. Other Events". That item,
"Merger with Ohio Edison", reported on the merger agreement
between Centerior Energy and Exhibits", Exhibit 4 Rights Agreement, dated
June 25, 1996.Ohio Edison.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The person signing this report on
behalf of each such registrant is also signing in his capacity as each
registrant's Chief Accounting Officer.
CENTERIOR ENERGY CORPORATION
(Registrant)
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY
(Registrant)
THE TOLEDO EDISON COMPANY
(Registrant)
By: E. LYLE PEPIN
E. Lyle Pepin, Controller and Chief
Accounting Officer of each Registrant
Date: AugustNovember 14, 1996
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EXHIBIT INDEX
The following exhibits are submitted herewith:
CENTERIOR ENERGY EXHIBIT
Exhibit Number Description
27(a) Financial Data Schedule for the period ended
JuneSeptember 30, 1996.
CLEVELAND ELECTRIC EXHIBITS
Exhibit Number Description
27(b) Financial Data Schedule for the period ended
JuneSeptember 30, 1996.
TOLEDO EDISON EXHIBITS
Exhibit Number Description
27(c) Financial Data Schedule for the period ended
JuneSeptember 30, 1996.
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