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 March 31,June 30, 1997
OR
[ ] Transition report pursuant to Section 13 or 15 (d)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)
c/o Centerior Energy Corporation
6200 Oak Tree Boulevard
Independence, Ohio 44131
Telephone (216) 622-9800
1-3583 THE TOLEDO EDISON COMPANY 34-4375005
(An Ohio Corporation)
300 Madison Avenue
Toledo, Ohio 43652
Telephone (419) 249-5000
Indicate by check mark whether each of the registrants (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrants were required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
On May 9,August 8, 1997, there were 148,025,928148,024,178 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 this Form 10-Q
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 dividends or rate
structures; or (3) general economic conditions, either nationally or in
the area in which the combined company will be doing business are less
favorable than expected.
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TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Centerior Energy Corporation and Subsidiaries
The Cleveland Electric Illuminating Company and Subsidiary
The Toledo Edison Company and Subsidiary
Notes to the Financial Statements (Unaudited) 1
Centerior Energy Corporation and Subsidiaries
Income Statement 45
Balance Sheet 56
Cash Flows 67
Management's Discussion and Analysis of Financial 78
Condition and Results of Operations
The Cleveland Electric Illuminating Company and Subsidiary
Income Statement 912
Balance Sheet 1013
Cash Flows 1114
Management's Discussion and Analysis of Financial 1215
Condition and Results of Operations
The Toledo Edison Company and Subsidiary
Income Statement 1419
Balance Sheet 1520
Cash Flows 1621
Management's Discussion and Analysis of Financial 1722
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security-Holders 19
Item 5. Other Information 2025
Item 6. Exhibits and Reports on Form 8-K 2226
Signatures 2327
Exhibit Index 2428
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CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES,
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY,
AND THE TOLEDO EDISON COMPANY (UNAUDITED)AND SUBSIDIARY
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 March 31,June 30, 1997 and
results of operations and cash flows for the three months and six months
ended March
31,June 30, 1997 and 1996 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 6.
A new Statement of Position issued byIn June 1997, Toledo Edison formed a subsidiary, Toledo Edison Capital
Corporation (TECC), to serve as an equity partner in a trust in
connection with the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants,
Inc. effective January 1, 1997 provides guidance on the recognitionfinancing transaction discussed in Note 4. The
subsidiary was capitalized with Toledo Edison having a 90% interest and
disclosure of environmental remediation liabilities. The Companies'
adoption of this statement in 1997 did not materially affect their
results of operations or financial positions.Cleveland Electric having a 10% interest.
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, 1996 (1996
Form 10-K) and the Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997 (First Quarter 1997 Form 10-Q). These interim period
financial results are not necessarily indicative of results for a 12-month12-
month period.
(2) Equity Distribution Restrictions
The Operating Companies can make cash available to fund 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. Cleveland Electric has since 1993 declared and paid preferred
and common stock dividends out of appropriated current net income
included in retained earnings. At the times of such declarations and
payments, Cleveland Electric had a deficit in its retained earnings.
From 1993 through 1996,June 1997, Toledo Edison declared and paid preferred
stock dividends out of appropriated current net income included in
retained earnings. At the times of such declarations and payments,
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Toledo Edison had a deficit in its retained earnings from 1993 through
November 1996. Toledo Edison also has a provision in its mortgage
applicable to approximately $94 million of outstanding first mortgage
bonds ($31 million of which mature inmatured August 1, 1997) that requires common
stock dividends to be paid out of its total balance of retained
earnings. At March 31,June 30, 1997, Toledo Edison's total retained earnings
were $10$19 million. At March 31,June 30, 1997, Cleveland Electric and Toledo
Edison had $120.4$95.6 million and $227.7$236.6 million, respectively, of
appropriated retained earnings for the payment of dividends. See
"Management's Financial Analysis -- Capital Resources and Liquidity-Liquidity"Liquidity-
Liquidity" contained in Item 7 of the 1996 Form 10-K for a discussion of
a Federal Energy Regulatory Commission (FERC) audit issue regarding the
declaration and payment of dividends.
(3) Common Stock Dividends
Cash dividends per common share declared by Centerior Energy during the
threesix months ended March 31,June 30, 1997 and 1996 were as follows:
1997 1996
Paid February 15 $.20 $.20
Paid May 15 .20 .20
Paid August 15 .20 .20
Common stock cash dividends declared by Cleveland Electric during the
threesix months ended March 31,June 30, 1997 and 1996 were as follows:
1997 1996
(millions)
Paid in February $29.6 $29.6
Paid in May 29.6 46.6
Toledo Edison did not declare any common stock dividends during the threesix
months ended March 31,June 30, 1997 and 1996.
(4) New Financings
In a June 1997 offering (Offering), the Operating Companies pledged $720
million aggregate principal amount of first mortgage bonds due in 2000,
2004 and 2007 to a trust as security for the issuance of a like
principal amount of secured notes due in 2000, 2004 and 2007 (Secured
Notes). Cleveland Electric pledged $175 million principal amount of
7.19% First Mortgage Bonds due 2000, $280 million principal amount of
7.67% First Mortgage Bonds due 2004 and $120 million principal amount of
7.13% First Mortgage Bonds due 2007, and Toledo Edison pledged $45
million principal amount of 7.19% First Mortgage Bonds due 2000, $70
million principal amount of 7.67% First Mortgage Bonds due 2004 and $30
million principal amount of 7.13% First Mortgage Bonds due 2007. The
obligations of the Operating Companies under the Secured Notes are joint
and several.
- 2 -
Also in June 1997 in connection with the Offering, the Companies
arranged for $155 million of short-term borrowings with variable
interest rates (at that time, with a weighted average interest rate of
6.8%). Centerior Energy borrowed $30 million under a $125 million
revolving credit facility which was renewed in May 1997. See Note 5 to
the financial statements in the First Quarter 1997 Form 10-Q. The
Operating Companies also had unsecured borrowings totaling $100 million
guaranteed by Centerior Energy, and Centerior Energy had $25 million of
unsecured borrowings jointly and severally guaranteed by the Operating
Companies. While the $25 million amount is outstanding, Centerior
Energy has agreed not to use $25 million of the revolving credit
facility.
Using available cash, the short-term borrowings and the net proceeds
from the Offering, the Operating Companies invested $906.5 million in
the Mansfield Capital Trust (MCT), an unaffiliated business trust, in
June 1997. The MCT used these funds to purchase lease notes and redeem
all $873.2 million aggregate principal amount of 10-1/4% and 11-1/8%
secured lease obligation bonds (SLOBs) due 2003 and 2016 in July 1997.
The SLOBs were issued by a special purpose funding corporation in 1988
on behalf of lessors in the Operating Companies' 1987 sale and leaseback
transaction for the Bruce Mansfield Generating Plant.
The transaction allows the Operating Companies to capture the benefit of
lower interest rates through the spread between (1) the interest rates
on the Operating Companies' investments in the MCT and the return on
TECC's investment and (2) the cost of funds for the Operating Companies
and TECC, resulting in lower annual lease expense for the Operating
Companies.
For supplemental information on this transaction, see "1. Refinancing
of Mansfield SLOBs" under "Item 5. Other Events" in the Companies'
combined Current Report on Form 8-K dated July 8, 1997 (July 8, 1997
Form 8-K).
(5) Other Financing Activity
During the three months ended March 31,June 30, 1997, the Operating Companies
also redeemed preferred stock and debt securities as follows:
Cleveland Electric
Mandatory redemptions consisted of $15$3 million of Serial Preferred Stock,
$9.125$88.00 Series N.E; $10.7 million of Serial Preferred Stock, $91.50 Series
Q; and $0.3 million of tax-exempt notes.
Toledo Edison
Mandatory redemptions consisted of $8$1.7 million of notes secured by
subordinated mortgage collateral.
(5) Short-Term Borrowing Arrangements
In May 1997, Centerior Energy renewed a $1259-3/8% Cumulative
Preferred Stock, $100 par value, and $0.2 million revolving credit
facility until May 7, 1998 on the same terms as the existing agreement.
Centerior Energy and the Service Company may borrow under the facility,
with all borrowings jointly and severally guaranteed by the Operating
Companies. Centerior Energy plans to transfer any of its borrowed funds
to the Operating Companies. There have not been any borrowings under
the facility.tax-exempt notes.
- 3 -
(6) 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 were
no longer expected to provide revenues.
(7) 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 1996 Form 10-K and10-K; "Part II, Item 5. Other
Information" in this Quarterly Report on Form 10-Q.10-Q and in the First
Quarter 1997 Form 10-Q; and "Item 5. Other Events" in the Companies'
combined Current Report on Form 8-K dated June 11, 1997.
In September 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). On March 27, 1997,
Centerior Energy and Ohio Edison common stock share owners approved the
merger. Various aspects of theThe merger areremains
subject to the approval of the FERC and other regulatory authorities.
FirstEnergy plans to account for the merger asSecurities and Exchange
Commission. For a purchase in accordance
with generally accepted accounting principles. If FirstEnergy elects to
apply, or "push down", the effects of purchase accounting to the
financial statementsdiscussion of the Operating Companies, Cleveland Electric
would record adjustments to: (1) reduce the carrying value of its
nuclear generating plant by $880 million to fair value; (2) recognize
goodwill of $675 million; (3) reduce its common stock equity by $258
million; (4) reset its retained earnings to zero; and (5) reduce its
related deferred federal income tax liability by $308 million; and
Toledo Edison would record adjustments to: (1) reduce the carrying value
of its nuclear generating plant by $370 million to fair value; (2)
recognize goodwill of $307 million; (3) reduce its common stock equity
by $124 million; (4) reset its retained earnings to zero; and (5) reduce
its related deferred federal income tax liability by $130 million.
These amounts reflect FirstEnergy's estimatesstatus of the pro forma
adjustments forFERC approval
process, see "2. Pending Merger with Ohio Edison" under "Item 5. Other
Events" in the Operating Companies as of December 31, 1996. The
actual adjustments to be recorded could be materially different from the
estimates. FirstEnergy has not decided whether to push down the effects
of purchase accounting to the financial statements of the Operating
Companies if theJuly 8, 1997 Form 8-K and "1. Pending Merger with Ohio
Edison-Centerior Energy merger is completed.Edison" under "Part II, Item 5. Other Information" in this Quarterly
Report on Form 10-Q.
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CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
INCOME STATEMENT
(Unaudited)
(Thousands, Except Per Share Amounts)
Three Months Ended March 31,Six Months Ended
June 30, June 30,
--------------------- ---------------------------
1997 1996 1997 1996
-------- -------- ----------- -----------
OPERATING REVENUES $ 611,608612,575 $ 605,255608,966 $ 1,224,183 $ 1,214,221
OPERATING EXPENSES
Fuel and Purchased Power 121,831 114,984113,720 110,248 235,551 225,232
Other Operation and Maintenance 142,584 155,905151,820 149,763 294,404 305,668
Generation Facilities Rental Expense, Net 39,814 39,853 39,85379,667 79,706
Depreciation and Amortization 77,111 73,23276,740 76,722 153,851 149,954
Taxes, Other Than Federal Income Taxes 79,614 83,95280,008 83,411 159,622 167,363
Amortization of Deferred Operating Expenses, Net 10,858 10,54310,868 21,716 21,411
Federal Income Taxes 27,366 17,99326,062 21,361 53,428 39,354
-------- -------- ----------- -----------
Total Operating Expenses 499,217 496,462499,022 492,226 998,239 988,688
-------- -------- ----------- -----------
OPERATING INCOME 112,391 108,793113,553 116,740 225,944 225,533
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction 658 911453 788 1,111 1,699
Other Income and Deductions, Net (5,827) (6,460)(6,969) (539) (12,796) (6,999)
Federal Income Taxes - Credit (Expense) (30) 1,915446 880 416 2,795
-------- -------- ----------- -----------
Total Nonoperating Income (Loss) (5,199) (3,634)(6,070) 1,129 (11,269) (2,505)
-------- -------- ----------- -----------
INCOME BEFORE INTEREST CHARGES 107,192 105,159107,483 117,869 214,675 223,028
INTEREST CHARGES
Long-TermLong-term Debt 76,503 83,318
Short-Term78,168 83,331 154,671 166,649
Short-term Debt 1,648 1,8762,031 2,322 3,679 4,198
Allowance for Borrowed Funds Used During Construction (563) (843)(263) (774) (826) (1,617)
-------- -------- ----------- -----------
Net Interest Charges 77,588 84,35179,936 84,879 157,524 169,230
-------- -------- ----------- -----------
INCOME AFTER INTEREST CHARGES 29,604 20,80827,547 32,990 57,151 53,798
Preferred Dividend Requirements of Subsidiaries 13,507 14,23513,308 14,042 26,815 28,277
-------- -------- ----------- -----------
NET INCOME $ 16,09714,239 $ 6,57318,948 $ 30,336 $ 25,521
======== ======== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 148,026 148,028148,027 148,026 148,027
======== ======== =========== ===========
EARNINGS PER COMMON SHARE $ .11.10 $ .04.13 $ .20 $ .17
======== ======== =========== ===========
The accompanying notes as they relate to Centerior Energy are an integral part of this statement.
-5 -
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
BALANCE SHEET
(Thousands)
March 31,June 30, December 31,
1997 1996
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant In Service $ 9,893,1449,999,234 $ 9,867,193
Accumulated Depreciation and Amortization (3,352,310)(3,467,146) (3,272,158)
----------- -----------
6,540,8346,532,088 6,595,035
Construction Work In Progress 90,50596,773 78,669
----------- -----------
6,631,3396,628,861 6,673,704
Nuclear Fuel, Net of Amortization 168,125162,770 189,148
Other Property, Less Accumulated Depreciation 87,14248,943 89,291
----------- -----------
6,886,6066,840,574 6,952,143
CURRENT ASSETS
Cash and Temporary Cash Investments 144,907108,550 138,068
Amounts Due from Customers and Others, Net 165,367193,561 212,680
Materials and Supplies, at Average Cost
Owned 82,90684,054 84,846
Under Consignment 34,49237,198 34,039
Taxes Applicable to Succeeding Years 215,913182,489 249,961
Other 21,33957,021 24,283
----------- -----------
664,924662,873 743,877
REGULATORY AND OTHER ASSETS
Regulatory Assets 2,262,7192,248,339 2,277,083
Mansfield Capital Trust 906,488 --
Nuclear Plant Decommissioning Trusts 152,885158,273 139,667
Investment in Partnership 25,32735,327 23,245
Other 82,33687,555 74,187
----------- -----------
2,523,2673,435,982 2,514,182
----------- -----------
$ 10,074,79710,939,429 $ 10,210,202
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 1,943,5361,928,170 $ 1,986,855
Preferred Stock
With Mandatory Redemption Provisions 189,473174,094 189,473
Without Mandatory Redemption Provisions 448,325 448,325
Long-Term Debt 3,444,3524,132,863 3,444,241
----------- -----------
6,025,6866,683,452 6,068,894
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock 173,239204,339 196,033
Current Portion of Lease Obligations 84,37179,696 87,836
Notes Payable to Banks and Others 155,000 --
Accounts Payable 100,518129,672 138,005
Accrued Taxes 321,153306,711 389,014
Accrued Interest 85,24576,405 74,826
Dividends Declared 43,33644,042 13,977
Other 64,93466,447 72,653
----------- -----------
872,7961,062,312 972,344
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 248,592245,637 251,547
Accumulated Deferred Federal Income Taxes 1,887,5761,896,246 1,876,924
Unamortized Gain from Bruce Mansfield Plant Sale 468,753462,710 474,757
Accumulated Deferred Rents for Bruce Mansfield Plant
and Beaver Valley Unit 2 138,026141,711 137,956
Nuclear Fuel Lease Obligations 106,860104,733 122,655
Retirement Benefits 184,704185,700 183,571
Other 141,804156,928 121,554
----------- -----------
3,176,3153,193,665 3,168,964
COMMITMENTS AND CONTINGENCIES (Note 7)
----------- -----------
$ 10,074,79710,939,429 $ 10,210,202
=========== ===========
The accompanying notes as they relate to Centerior Energy are an integral part of this
statement.
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CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
CASH FLOWS
(Unaudited)
(Thousands)
ThreeSix Months Ended
March 31,
--------------------June 30,
-----------------------
1997 1996
------------------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $16,097 $6,573$30,336 $25,521
-------- --------
Adjustments to Reconcile Net Income
to Cash from Operating Activities:
Depreciation and Amortization 77,111 73,232153,851 149,954
Deferred Federal Income Taxes 10,467 18,60119,071 35,638
Deferred Fuel 10,264 (2,016)18,891 1,591
Leased Nuclear Fuel Amortization 22,853 20,68842,820 35,798
Amortization of Deferred Operating Expenses, Net 10,858 10,54321,716 21,411
Allowance for Equity Funds Used During Construction (658) (911)(1,111) (1,699)
Changes in Amounts Due from Customers and Others, Net 47,313 4,36012,243 (40,574)
Changes in Materials and Supplies 1,487 7,524(2,367) 9,103
Changes in Accounts Payable (37,487) 53,223(8,333) 1,290
Changes in Working Capital Affecting Operations (28,169) (37,707)(52,196) (56,419)
Other Noncash Items 6,876 (12,463)15,522 (25,643)
-------- --------
Total Adjustments 120,915 135,074220,107 130,450
-------- --------
Net Cash from Operating Activities 137,012 141,647250,443 155,971
CASH FLOWS FROM FINANCING ACTIVITIES
Bank Loans, Commercial Paper and Other Short-Term Debt 155,000 100,000
Secured Note Issues 720,000 --
Reacquired Common Stock -- (7)(20)
Maturities, Redemptions and Sinking Funds (23,000) (44,550)(38,879) (94,479)
Nuclear Fuel Lease Obligations (21,067) (32,163)(43,921) (52,851)
Common Stock Dividends Paid (29,605) (29,606)(59,210) (59,211)
Premiums, Discounts and Expenses -- (50)(81) (474)
-------- --------
Net Cash from Financing Activities (73,672) (106,376)732,909 (107,035)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction (42,961) (39,700)(79,265) (75,305)
Interest Capitalized as Allowance for Borrowed Funds Used
During Construction (563) (843)(826) (1,617)
Contributions to Nuclear Plant Decommissioning Trusts (5,387)(10,775) (5,897)
Investment in Mansfield Capital Trust (906,488) --
Investment in Partnership (2,082) --(12,082) (17,000)
Other Cash Received (Applied) (5,508) 5,348(3,434) 8,284
-------- --------
Net Cash from Investing Activities (56,501) (35,195)(1,012,870) (91,535)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 6,839 76(29,518) (42,599)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 138,068 179,038
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $144,907 $179,114$108,550 $136,439
======== ========
Other Payment Information:
Interest (net of amounts capitalized) $64,000 $68,000$150,000 $165,000
Federal Income Taxes 14,000 --5,200
The accompanying notes as they relate to Centerior Energy are an integral part of this
statement.
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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 1996
Form 10-K.10-K and in the First Quarter 1997 Form 10-Q. The information
under "Capital Resources and Liquidity" remains unchanged with the
following exceptions:
As discussed in Note 4, the Operating Companies refinanced high-cost
fixed obligations through a lower cost transaction.
During the firstsecond quarter of 1997, the Operating Companies redeemed
various securities as discussed in Note 4.5.
Standard & Poor's Ratings Group (S&P) and Moody's Investors Service,
Inc. (Moody's) raised the credit ratings for the Operating Companies'
securities in July and August 1997, respectively, in anticipation of
Centerior Energy's pending merger with Ohio Edison. S&P indicated that,
should the merger not be consummated, its prior ratings would be
restored. Current credit ratings for the Operating Companies are as
follows:
Securities S&P Moody's
First Mortgage Bonds BB+ Ba1
Subordinate Debt BB- Ba3
Preferred Stock BB- b1
In Maythe third quarter of 1997, Cleveland Electric and Toledo Edison plan
to refinance with lower-cost securities $180.6 million principal amount
and $10.1 million principal amount, respectively, of first mortgage
bonds issued as security for certain tax-exempt bonds issued by public
authorities.
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 June 30, 1997, neither Operating
Company would have been permitted to issue a material amount of
additional first mortgage bonds, except in connection with refinancings.
If FirstEnergy elects to apply purchase accounting to the Operating
Companies upon completion of Centerior Energy renewed a $125 million revolvingEnergy's pending merger with Ohio
Edison, each Operating Company's available bondable property would be
reduced to below zero.
The Operating Companies expect their foreseeable future cash needs to be
satisfied with internally generated cash and available credit facility until May 7, 1998 as discussedfacilities
and, therefore, that they will not need to issue first mortgage bonds,
except in Note 5.connection with planned refinancings.
- 8 -
Results of Operations
Factors contributing to the 1% increase0.6% and 0.8% increases in 1997 firstoperating
revenues from 1996 for the second quarter operating
revenuesand six months, respectively,
are shown as follows:
Changes from
First Quarter 1996for Period
Ended June 30, 1997
Three Six
Factors Operating RevenuesMonths Months
(millions)
Base Rates $ 22.1
Kilowatt-hour Sales Volume and Mix (12.6)$ 0.7 $ 7.6
Unbilled Revenues 13.0 (2.0)
Wholesale Revenues 5.91.8 7.7
Base Rates (12.7) 4.9
Fuel Cost Recovery Revenues 0.8(2.8) (2.0)
Miscellaneous Revenues (9.8)3.6 (6.2)
Total $ 6.4
The increase in first quarter 1997 base rates revenues resulted
primarily from the April 1996 rate order issued by The Public Utilities
Commission of Ohio (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.3.6 $10.0
Percentage changes between 1997 and 1996 first quarter billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period
Ended June 30, 1997
Three Six
Customer Categories Months Months
Residential (4.5)% Change
Residential (0.6)(2.3)%
Commercial 1.6(3.5) (0.9)
Industrial 1.75.5 3.6
Other 41.512.6 30.2
Total 5.5
First1.5 3.6
Second quarter 1997 total kilowatt-hour sales increased because ofas increases in
industrial and commercial sales along with a 56% increase
in wholesale sales (included in the "Other" category).were partially offset by fewer
residential and commercial sales. Industrial sales increased as more
sales to large primary metals industry customers (including the new
North Star BHP Steel facility) and the broad-based, smaller industrial
customer group were partially offset by fewer sales to large automotive
manufacturers. CommercialWholesale sales increased despite
milder weather because of a 1.9% increase(included in the number of"Other" category)
increased 26%. Residential and commercial customers and greater economic activity. Residential sales declined
slightly because of the
milder weather.weather in the 1997 period. Weather-normalized residential and
commercial sales decreased 1.9% and 2.3%, respectively, for the 1997
period. Kilowatt-hour sales data does not reflect a significant portion
of the effect of hot weather in the second half of June 1997 because
those sales were not billed by the end of the month. However, the
estimated revenues from those sales have been recorded.
- 9 -
Total kilowatt-hour sales increased for the six-month period in 1997 as
increases in industrial and wholesale sales were partially offset by
fewer residential and commercial sales. Industrial sales increased
primarily for the same reasons cited for the second quarter 1997
increase. Wholesale sales increased 46%. Residential and commercial
sales declined because of the milder weather in the 1997 period.
However, weather-normalized residential and commercial sales increased
3.8%1.4% and 2.5%0.1%, respectively, for the 1997 period.
Wholesale sales in 1996 were suppressed by soft market conditions and
limited power availability for bulk power transactions because of
nuclear generating plant refueling and maintenance outages.
The increasenet changes in first quarter1997 base rates revenues resulted from the April 1996
rate order issued by The Public Utilities Commission of Ohio (PUCO) for
the Operating Companies and renegotiated contracts for certain large
industrial customers of the Operating Companies which resulted in a
decrease in base rates for those customers.
The decreases in 1997 fuel cost recovery revenues included in customer
bills resulted from changes in the weighted average of the
fuel cost recovery factors used by
the Operating Companies to calculate these revenues. FirstThe weighted
average of the respective fuel cost recovery factors used for the second
quarter of 1997 decreased about 10% for Toledo Edison and increased
about 0.3% for Cleveland Electric compared to the weighted average of
the respective fuel cost recovery factors used for the second quarter of
1996. The weighted average of the respective fuel cost recovery factors
used for the 1997 six-month period decreased about 7% for Toledo Edison
and increased about 2% for Cleveland Electric compared to the weighted
average of the respective fuel cost recovery factors used for the 1996
six-month period.
Second quarter miscellaneous revenues in 1997 decreasedincreased from the 1996
amount primarily because of the retroactive effect of a reclassification
of certain revenues as credits to operating expenses commencingexpenses. The
reclassification was recorded in the 1996 second quarterquarter. A significant
portion of 1996
and a first quarterthe six-month decrease in miscellaneous revenues in 1997 refund payment
related to a canceled generating plant lease agreement.
Firstagreement for which a
refund payment was made in the 1997 first quarter.
Second quarter operating expenses in 1997 increased 0.6%1.4% from the 1996
amount. Higher fuelFuel and purchased power expenses resulted from increased as higher purchased
power requirementsexpense was partially offset by lower fuel expense. A change in
the system generating mix (more nuclear generation and less coal-fired
generation in the 1997 period than in the 1996 period) accounted for a
large part of the lower fuel expense for the 1997 period. Federal
income taxes increased as a result of higher pretax operating income.
Taxes, other than federal income taxes, decreased primarily because of
lower property and payroll tax accruals.
The second quarter 1997 nonoperating loss resulted primarily from
expenses related to the pending merger with Ohio Edison and certain
costs associated with an accounts receivable securitization.
Second quarter 1997 interest charges and preferred dividend requirements
decreased primarily because of the redemption of securities in 1996 and
1997.
- 10 -
Six-month operating expenses in 1997 increased 1% from the 1996 amount.
Fuel and purchased power expenses increased for the same reasons cited
for the second quarter 1997 increase in these expenses. Federal income
taxes increased as a result of higher pretax operating income.
Depreciation and amortization expenses increased primarily because of
changes in depreciation rates approved in the April 1996 PUCO rate
order. Federal
income taxes increased as a result of higher pretax operating income.
Other operation and maintenance expenses decreased as a result
of ongoing cost cutting and work force reductions; a shift of certain
payroll expenses to the nonoperating classification for work related to
the Ohio Edison-Centerior Energy merger; and the aforementioned
reclassification of certain expense reimbursements as credits to
operating expenses.reductions. Taxes, other than
federal income taxes, decreased primarily because of lower property and payroll tax accruals.
The firstfor the same reason cited for the second
quarter 1997 total nonoperating loss was larger than the first
quarter 1996 total nonoperating loss.decrease in these expenses.
The first quartersix-month 1997 nonoperating loss resulted primarily from both
merger-related expenses and certain costs associated with an accounts
receivable securitization. The first quartersix-month 1996 nonoperating loss
resulted primarily from Toledo Edison's write-down of two inactive
production facilities as discussed in Note 6.
First quarterSix-month 1997 interest charges and preferred dividend requirements
decreased primarily because of the redemption of securitiessame reason cited for the second
quarter 1997 decrease in 1996.these charges.
New Accounting Standards
In FebruaryJune 1997, the Financial Accounting Standards Board (FASB) issued two
new statements of financial accounting standards, one for the computation and presentationreporting
of earnings per sharecomprehensive income and one for the disclosuredisclosures about segments of information about capital structure.an
enterprise and related information. Both statements are effective for
year-end December 31, 19971998 reporting. Centerior
Energy's adoptionThe Companies have not completed analyses to determine
the effects of adopting the statement for reporting earnings per share in
1997 is not expected to have a material effect on its reporting of
earnings per common share. Centerior Energy's adoption of the statement
for reporting about capital structure in 1997 will not affect its
financial condition.new standards.
- 11 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
INCOME STATEMENT
(Unaudited)
(Thousands)
Three Months Ended March 31,Six Months Ended
June 30, June 30,
--------------------- -------------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
OPERATING REVENUES $ 431,627428,246 $ 427,526434,025 $ 859,873 $ 861,551
OPERATING EXPENSES
Fuel and Purchased Power (1) 110,530 103,726102,090 98,216 212,620 201,942
Other Operation and Maintenance 91,447 105,132101,409 99,083 192,856 204,215
Generation Facilities Rental Expense, Net 13,892 13,89213,891 13,891 27,783 27,783
Depreciation and Amortization 53,297 50,81653,224 53,033 106,521 103,849
Taxes, Other Than Federal Income Taxes 56,686 60,01057,274 59,750 113,960 119,760
Amortization of Deferred Operating Expenses, Net 6,567 6,3686,575 13,134 12,943
Federal Income Taxes 19,203 11,80516,353 17,565 35,556 29,370
-------- -------- ---------- ----------
Total Operating Expenses 351,622 351,749350,808 348,113 702,430 699,862
-------- -------- ---------- ----------
OPERATING INCOME 80,005 75,77777,438 85,912 157,443 161,689
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction 327 498398 601 725 1,099
Other Income and Deductions, Net (4,649) 1,649(7,031) (1,016) (11,680) 633
Federal Income Taxes - Credit (Expense) 658 (752)1,412 1,034 2,070 282
-------- -------- ---------- ----------
Total Nonoperating Income (Loss) (3,664) 1,395(5,221) 619 (8,885) 2,014
-------- -------- ---------- ----------
INCOME BEFORE INTEREST CHARGES 76,341 77,17272,217 86,531 148,558 163,703
INTEREST CHARGES
Long-Term Debt 54,393 60,16056,211 60,626 110,604 120,786
Short-Term Debt 2,177 6922,288 1,372 4,465 2,064
Allowance for Borrowed Funds Used During Construction (459) (519)(252) (627) (711) (1,146)
-------- -------- ---------- ----------
Net Interest Charges 56,111 60,33358,247 61,371 114,358 121,704
-------- -------- ---------- ----------
NET INCOME 20,230 16,83913,970 25,160 34,200 41,999
Preferred Dividend Requirements 9,315 10,0329,096 9,813 18,411 19,845
-------- -------- ---------- ----------
EARNINGS AVAILABLE FOR COMMON STOCK $ 10,9154,874 $ 6,80715,347 $ 15,789 $ 22,154
======== ======== ========== ==========
(1) Includes purchased power expense for
purchases from Toledo Edison. $ 28,92029,454 $ 26,67225,908 $ 58,374 $ 52,580
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement.
- 12 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
BALANCE SHEET
(Thousands)
March 31,June 30, December 31,
1997 1996
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant In Service $ 6,960,9417,053,571 $ 6,938,535
Accumulated Depreciation and Amortization (2,306,322)(2,400,777) (2,252,321)
----------- -----------
4,654,6194,652,794 4,686,214
Construction Work In Progress 62,17367,121 56,853
----------- -----------
4,716,7924,719,915 4,743,067
Nuclear Fuel, Net of Amortization 100,76497,922 113,030
Other Property, Less Accumulated Depreciation 51,55314,999 53,547
----------- -----------
4,869,1094,832,836 4,909,644
CURRENT ASSETS
Cash and Temporary Cash Investments 26,69822,126 30,273
Amounts Due from Customers and Others, Net 146,187160,110 189,547
Amounts Due from Affiliates 3473,160 5,634
Materials and Supplies, at Average Cost
Owned 50,77752,453 51,686
Under Consignment 23,49727,028 23,655
Taxes Applicable to Succeeding Years 156,147130,591 181,609
Other 11,41647,530 15,237
----------- -----------
415,069442,998 497,641
REGULATORY AND OTHER ASSETS
Regulatory Assets 1,341,7851,333,979 1,349,693
Mansfield Capital Trust 569,389 --
Nuclear Plant Decommissioning Trusts 83,06785,995 75,573
Other 60,72572,259 44,980
----------- -----------
1,485,5772,061,622 1,470,246
----------- -----------
$ 6,769,7557,337,456 $ 6,877,531
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 1,034,7011,009,866 $ 1,044,283
Preferred Stock
With Mandatory Redemption Provisions 186,118172,404 186,118
Without Mandatory Redemption Provisions 238,325 238,325
Long-Term Debt 2,441,2973,011,080 2,441,215
----------- -----------
3,900,4414,431,675 3,909,941
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock 129,874134,874 144,668
Current Portion of Lease Obligations 49,26646,329 51,592
Notes Payable to Banks and Others 70,000 --
Accounts Payable 57,09271,373 82,694
Accounts and Notes Payable to Affiliates 170,966129,282 171,433
Accrued Taxes 253,143242,541 315,998
Accrued Interest 60,24753,932 52,487
Dividends Declared 5,6925,686 15,228
Other 40,15639,689 43,672
----------- -----------
766,436793,706 877,772
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 174,158172,186 176,130
Accumulated Deferred Federal Income Taxes 1,316,5291,328,181 1,305,601
Unamortized Gain from Bruce Mansfield Plant Sale 291,993288,256 295,730
Accumulated Deferred Rents for Bruce Mansfield Plant 99,351101,750 98,767
Nuclear Fuel Lease Obligations 64,96863,429 73,947
Retirement Benefits 74,51275,750 72,843
Other 81,36782,523 66,800
----------- -----------
2,102,8782,112,075 2,089,818
COMMITMENTS AND CONTINGENCIES (Note 7)
----------- -----------
$ 6,769,7557,337,456 $ 6,877,531
=========== ===========
The accompanying notes as they relate to Cleveland Electric are an integral part of this
statement.
- 13 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
CASH FLOWS
(Unaudited)
(Thousands)
ThreeSix Months Ended
March 31,
----------------------June 30,
---------------------
1997 1996
------------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $20,230 $16,839$34,200 $41,999
-------- --------
Adjustments to Reconcile Net Income
to Cash from Operating Activities:
Depreciation and Amortization 53,297 50,816106,521 103,849
Deferred Federal Income Taxes 10,736 14,38822,197 22,905
Deferred Fuel 7,696 (2,639)12,775 (52)
Leased Nuclear Fuel Amortization 13,411 11,33925,186 20,338
Amortization of Deferred Operating Expenses, Net 6,567 6,36813,134 12,943
Allowance for Equity Funds Used During Construction (327) (498)(725) (1,099)
Changes in Amounts Due from Customers and Others, Net 43,360 1,67814,965 (35,708)
Changes in Materials and Supplies 1,067 6,643(4,140) 7,415
Changes in Accounts Payable (25,602) 27,758(11,321) 4,886
Changes in Working Capital Affecting Operations (27,289) (31,665)(55,980) (31,895)
Other Noncash Items 2,336 (9,791)5,636 (12,856)
-------- --------
Total Adjustments 85,252 74,397128,248 90,726
-------- --------
Net Cash from Operating Activities 105,482 91,236162,448 132,725
CASH FLOWS FROM FINANCING ACTIVITIES
Bank Loans, Commercial Paper and Other Short-Term Debt 70,000 100,000
Notes Payable to Affiliates 2,781 (5,000)(40,967) 41,411
Secured Note Issues 575,000 --
Maturities, Redemptions and Sinking Funds (15,000) (15,800)(29,014) (50,614)
Nuclear Fuel Lease Obligations (12,450) (18,194)(25,861) (29,533)
Dividends Paid (39,141) (39,865)(77,952) (96,388)
Premiums, Discounts and Expenses (53) (249)
-------- --------
Net Cash from Financing Activities (63,810) (78,859)471,153 (35,373)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction (32,812) (25,105)(54,261) (51,455)
Interest Capitalized as Allowance for Borrowed Funds Used
During Construction (459) (519)(711) (1,146)
Contributions to Nuclear Plant Decommissioning Trusts (2,928)(5,856) (3,204)
Investment in Mansfield Capital Trust (569,389) --
Purchases of Accounts Receivable from Affiliate -- (76,326)
Other Cash Received (Applied) (9,048) 3,486(11,531) 6,174
-------- --------
Net Cash from Investing Activities (45,247) (22,138)(641,748) (125,957)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (3,575) (9,761)(8,147) (28,605)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 30,273 69,770
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $26,698 $60,009$22,126 $41,165
======== ========
Other Payment Information:
Interest (net of amounts capitalized) $47,000 $47,000$110,000 $119,000
Federal Income Taxes (Refund) 8,300 --(6,200)
The accompanying notes as they relate to Cleveland Electric are an integral part of
this statement.
- 14 -
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 1996
Form 10-K.10-K and in the First Quarter 1997 Form 10-Q. The information
under "Capital Resources and Liquidity" remains unchanged with the
following exceptions:
As discussed in Note 4, the Operating Companies refinanced high-cost
fixed obligations through a lower cost transaction.
During the firstsecond quarter of 1997, Cleveland Electric redeemed preferred
stock as discussed in Note 4.
Cleveland Electric is a party to a $125 million revolving credit
facility which Centerior Energy renewed in May 1997 until May 7, 1998various
securities as discussed in Note 5.
S&P and Moody's raised the credit ratings for Cleveland Electric's
securities in July and August 1997, respectively, in anticipation of
Centerior EnergyEnergy's pending merger with Ohio Edison. S&P indicated that,
should the merger not be consummated, its prior ratings would be
restored. Current credit ratings for Cleveland Electric are as follows:
Securities S&P Moody's
First Mortgage Bonds BB+ Ba1
Subordinate Debt BB- Ba3
Preferred Stock BB- b1
In the third quarter of 1997, Cleveland Electric plans to transfer anyrefinance with
lower-cost securities $180.6 million principal amount of first mortgage
bonds issued as security for certain tax-exempt bonds issued by public
authorities.
Additional first mortgage bonds may be issued by Cleveland Electric
under its borrowed fundsmortgage 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 the facilitycertain circumstances, refundable
bonds. At June 30, 1997, Cleveland Electric would not have been
permitted to the Operating Companies.issue a material amount of additional first mortgage bonds,
except in connection with refinancings. If FirstEnergy elects to apply
purchase accounting to Cleveland Electric upon completion of Centerior
Energy's pending merger with Ohio Edison, Cleveland Electric's available
bondable property would be reduced to below zero.
Cleveland Electric expects its foreseeable future cash needs to be
satisfied with internally generated cash and available credit facilities
and, therefore, that it will not need to issue first mortgage bonds,
except in connection with planned refinancings.
Results of Operations
Factors contributing to the 1% increase1.3% and 0.2% decreases in 1997 firstoperating
revenues from 1996 for the second quarter operating
revenuesand six months, respectively,
are shown as follows:
- 15 -
Changes from
First Quarter 1996for Period
Ended June 30, 1997
Three Six
Factors Operating RevenuesMonths Months
(millions)
Base Rates $ 18.7
Kilowatt-hour Sales Volume and Mix (15.0)$(9.5) $(8.8)
Unbilled Revenues 6.0 (6.0)
Wholesale Revenues 7.51.9 9.4
Base Rates (6.7) 8.3
Fuel Cost Recovery Revenues 2.30.2 2.5
Miscellaneous Revenues (9.4)2.3 (7.1)
Total $ 4.1
The$(5.8) $(1.7)
Percentage changes between 1997 and 1996 billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period
Ended June 30, 1997
Three Six
Customer Categories Months Months
Residential (5.3)% (2.0)%
Commercial (4.1) (1.4)
Industrial 2.0 0.1
Other 20.3 52.7
Total 0.4 4.4
Second quarter 1997 total kilowatt-hour sales increased slightly as
increases in industrial and other sales were partially offset by fewer
residential and commercial sales. Industrial sales increased on the
strength of increased sales to the broad-based, smaller industrial
customer group and large primary metals industry customers, which were
partially offset by fewer sales to large automotive manufacturers.
Other sales increased as a 39% increase in first quarterwholesale sales was partially
offset by fewer sales to public authorities. Residential and commercial
sales declined because of a change in the meter reading schedule in June
1997, which reduced the number of days in the billing cycles, and the
milder weather in the 1997 period. Weather-normalized residential and
commercial sales decreased 3.1% and 3%, respectively, for the 1997
period. Kilowatt-hour sales data does not reflect a significant portion
of the effect of hot weather in the second half of June 1997 because
those sales were not billed by the end of the month. However, the
estimated revenues from those sales have been recorded.
Total kilowatt-hour sales increased for the six-month period in 1997 as
increased wholesale sales were partially offset by fewer residential and
commercial sales. Industrial sales increased slightly primarily because
of increased sales to the broad-based, smaller industrial customer
group. Wholesale sales increased 73%. Residential and commercial sales
declined because of the milder weather in the 1997 period. On a
weather-normalized basis, residential sales increased 1.7% for the 1997
period, while commercial sales decreased 0.4%.
- 16 -
Wholesale sales in 1996 were suppressed by soft market conditions and
limited power availability for bulk power transactions because of
nuclear generating plant refueling and maintenance outages.
The net changes in 1997 base rates revenues resulted
primarily from the April 1996
rate order issued by the PUCO.
RenegotiatedPUCO and renegotiated contracts for certain
large industrial customers which resulted in a decrease in base rates
which partially offset the effect of the
general price increase.
Percentage changes between 1997 and 1996 first quarter billed electric
kilowatt-hour sales are summarized as follows:
Customer Categories % Change
Residential 0.5%
Commercial 1.2
Industrial (1.7)
Other 78.5
Total 8.0
Despite milder weather, first quarter 1997 total kilowatt-hour sales
rose asfor those customers.
The increases in residential and commercial sales along with a 99%
increase in wholesale sales (included in the "Other" category) were
partially offset by a decline in industrial sales. Weather-normalized
residential and commercial sales increased 5.4% and 2.2%, respectively,
for the 1997 period. The number of commercial customers at March 31,
1997 was 1.3% above the March 31, 1996 number. Industrial sales
decreased primarily because of fewer sales to large automotive
manufacturers and steel industry customers.
The increase in fuel cost recovery revenues included in customer
bills resulted from a 3% increaseincreases in the weighted average of the fuel cost recovery factors used in
the first quarter of 1997 to calculate these revenues compared to those used in 1996. The
increases in the 1996 firstweighted averages of the fuel cost recovery factors for
1997 were about 0.3% and 2% for the second quarter average.
Firstand six months,
respectively.
Second quarter miscellaneous revenues in 1997 decreasedincreased from the 1996
amount primarily because of the retroactive effect of a reclassification
of certain revenues as credits to operating expenses commencingexpenses. The
reclassification was recorded in the 1996 second quarterquarter. A significant
portion of 1996
and a first quarterthe six-month decrease in miscellaneous revenues in 1997 refund payment
related to a canceled generating plant lease agreement.
Firstagreement for which a
refund payment was made in the 1997 first quarter.
Second quarter operating expenses in 1997 were virtuallyincreased 0.8% from the same as in
1996. Higher fuel1996
amount. Fuel and purchased power expenses resulted from increased as higher purchased
power requirementsexpense was partially offset by lower fuel expense. A change in
the system generating mix (more nuclear generation and less coal-fired
generation in the 1997 period than in the 1996 period) accounted for a
large part of the lower fuel expense for the 1997 period. Taxes, other
than federal income taxes, decreased primarily because of lower property
and payroll tax accruals. Federal income taxes decreased as a result of
lower pretax operating income.
The second quarter 1997 nonoperating loss resulted primarily from both
Cleveland Electric's share of expenses related to Centerior Energy's
pending merger with Ohio Edison and certain costs associated with an
accounts receivable securitization.
Second quarter 1997 interest charges and preferred dividend requirements
decreased primarily because of the redemption of securities in 1996 and
1997.
Six-month operating expenses in 1997 increased 0.4% from the 1996
amount. Fuel and purchased power expenses increased for the same
reasons cited for the second quarter 1997 increase in these expenses.
Federal income taxes increased as a result of higher pretax operating
income. Depreciation and amortization expenses increased primarily
because of changes in depreciation rates approved in the April 1996 PUCO
rate order. Federal
income taxes increased as a result of higher pretax operating income.
Other operation and maintenance expenses decreased as a
result of ongoing cost cutting and work force reductions; a shift of certain
payroll expenses to the nonoperating classification for work related to
the Ohio Edison-Centerior Energy merger; and the aforementioned
reclassification of certain expense reimbursements as credits to
operating expenses.reductions. Taxes, other
than federal income taxes, decreased primarily because of lower property and payroll tax accruals.
A firstfor the same reason cited for the
second quarter 1997 decrease in these expenses.
The six-month 1997 nonoperating loss resulted primarily from both
Cleveland Electric's share of merger-related expenses and certain costs
associated with an accounts receivable securitization.
First quarter- 17 -
Six-month 1997 interest charges and preferred dividend requirements
decreased primarily because of the redemption of securitiessame reason cited for the second
quarter 1997 decrease in 1996.these charges.
New Accounting StandardStandards
In FebruaryJune 1997, the FASB issued atwo new statementstatements of financial accounting
standards, one for the disclosurereporting of informationcomprehensive income and one for the
disclosures about capital
structuresegments of an enterprise and related information.
Both statements are effective for year-end December 31, 19971998 reporting. Cleveland Electric's adoptionElectric
has not completed analyses to determine the effects of adopting the statement in 1997 will not affect its
financial condition.new
standards.
- 18 -
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
INCOME STATEMENT
(Unaudited)
(Thousands)
Three Months Ended March 31,Six Months Ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
OPERATING REVENUES (1) $ 217,060222,144 $ 210,793210,940 $ 439,204 $ 421,733
OPERATING EXPENSES
Fuel and Purchased Power 43,314 38,76844,501 40,652 87,815 79,420
Other Operation and Maintenance 56,317 56,51955,455 58,244 111,772 114,763
Generation Facilities Rental Expense, Net 25,961 25,96125,923 25,962 51,884 51,923
Depreciation and Amortization 23,814 22,41623,516 23,689 47,330 46,105
Taxes, Other Than Federal Income Taxes 22,794 23,85322,601 23,572 45,395 47,425
Amortization of Deferred Operating Expenses, Net 4,291 4,1754,293 8,582 8,468
Federal Income Taxes 8,212 6,2279,780 3,872 17,992 10,099
-------- -------- -------- --------
Total Operating Expenses 184,703 177,919186,067 180,284 370,770 358,203
-------- -------- -------- --------
OPERATING INCOME 32,357 32,87436,077 30,656 68,434 63,530
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction 332 41354 186 386 599
Other Income and Deductions, Net (427) (9,153)900 374 473 (8,779)
Federal Income Taxes - Credit (Expense) (225) 3,195(601) 115 (826) 3,310
-------- -------- -------- --------
Total Nonoperating Income (Loss) (320) (5,545)353 675 33 (4,870)
-------- -------- -------- --------
INCOME BEFORE INTEREST CHARGES 32,037 27,32936,430 31,331 68,467 58,660
INTEREST CHARGES
Long-Term Debt 22,111 23,15921,956 22,704 44,067 45,863
Short-Term Debt 1,190 1,2181,369 1,145 2,559 2,363
Allowance for Borrowed Funds Used During Construction (104) (325)(11) (146) (115) (471)
-------- -------- -------- --------
Net Interest Charges 23,197 24,05223,314 23,703 46,511 47,755
-------- -------- -------- --------
NET INCOME 8,840 3,27713,116 7,628 21,956 10,905
Preferred Dividend Requirements 4,194 4,2044,211 4,229 8,405 8,433
-------- -------- -------- --------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK $ 4,6468,905 $ (927)3,399 $ 13,551 $ 2,472
======== ======== ======== ========
(1) Includes revenues from bulk power sales
to Cleveland Electric. $ 28,92029,454 $ 26,67225,908 $ 58,374 $ 52,580
The accompanying notes as they relate to Toledo Edison are an integral part of this statement.
- 19 -
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
BALANCE SHEET
(Thousands)
March 31,June 30, December 31,
1997 1996
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant In Service $ 2,932,2032,945,663 $ 2,928,657
Accumulated Depreciation and Amortization (1,045,988)(1,066,369) (1,019,836)
----------- -----------
1,886,2151,879,294 1,908,821
Construction Work In Progress 26,44323,883 21,479
----------- -----------
1,912,6581,903,177 1,930,300
Nuclear Fuel, Net of Amortization 67,36164,848 76,118
Other Property, Less Accumulated Depreciation 8,4567,003 8,460
----------- -----------
1,988,4751,975,028 2,014,878
CURRENT ASSETS
Cash and Temporary Cash Investments 63,41622,502 81,454
Amounts Due from Customers and Others, Net 15,94829,007 16,308
Amounts Due from Affiliates 130,57492,949 95,336
Materials and Supplies, at Average Cost
Owned 32,12731,601 33,160
Under Consignment 10,99410,170 10,383
Taxes Applicable to Succeeding Years 59,76651,898 68,352
Other 3,6282,498 3,479
----------- -----------
316,453240,625 308,472
REGULATORY AND OTHER ASSETS
Regulatory Assets 921,175914,600 927,629
Mansfield Capital Trust 337,099 --
Nuclear Plant Decommissioning Trusts 69,81872,277 64,093
Other 39,48332,669 42,408
----------- -----------
1,030,4761,356,645 1,034,130
----------- -----------
$ 3,335,4043,572,298 $ 3,357,480
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 807,883816,795 $ 803,237
Preferred Stock
With Mandatory Redemption Provisions 3,3551,690 3,355
Without Mandatory Redemption Provisions 210,000 210,000
Long-Term Debt 1,003,0551,121,783 1,003,026
----------- -----------
2,024,2932,150,268 2,019,618
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock 43,36569,465 51,365
Current Portion of Lease Obligations 35,10533,367 36,244
Notes Payable to Banks and Others 30,000 --
Accounts Payable 52,98744,574 46,496
Accounts and Notes Payable to Affiliates 25,45481,964 30,016
Accrued Taxes 56,20364,849 72,829
Accrued Interest 24,99822,337 22,348
Other 16,43717,162 18,722
----------- -----------
254,549363,718 278,020
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 74,43473,451 75,417
Accumulated Deferred Federal Income Taxes 565,331562,474 565,600
Unamortized Gain from Bruce Mansfield Plant Sale 176,760174,454 179,027
Accumulated Deferred Rents for Bruce Mansfield Plant
and Beaver Valley Unit 2 38,67539,960 39,188
Nuclear Fuel Lease Obligations 41,69941,303 48,491
Retirement Benefits 104,210104,332 102,214
Other 55,45362,338 49,905
----------- -----------
1,056,5621,058,312 1,059,842
COMMITMENTS AND CONTINGENCIES (Note 7)
----------- -----------
$ 3,335,4043,572,298 $ 3,357,480
=========== ===========
The accompanying notes as they relate to Toledo Edison are an integral part of this
statement.
- 20 -
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
CASH FLOWS
(Unaudited)
(Thousands)
ThreeSix Months Ended
March 31,
----------------------June 30,
-------------------
1997 1996
---------- ------------------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $8,840 $3,277$21,956 $10,905
-------- --------
Adjustments to Reconcile Net Income
to Cash from Operating Activities:
Depreciation and Amortization 23,814 22,41647,330 46,105
Deferred Federal Income Taxes (269) 4,403(3,126) 13,368
Deferred Fuel 2,567 6236,116 1,643
Leased Nuclear Fuel Amortization 9,442 9,34917,634 15,461
Amortization of Deferred Operating Expenses, Net 4,291 4,1758,582 8,468
Allowance for Equity Funds Used During Construction (332) (413)(386) (599)
Changes in Amounts Due from Customers and Others, Net 360 3,784(5,103) (4,461)
Sales of Accounts Receivable to Affiliate -- 76,326
Changes in Materials and Supplies 422 8811,772 1,689
Changes in Accounts Payable 6,491 32,445(1,922) 2,553
Changes in Working Capital Affecting Operations (15,042) (12,698)(3,947) (30,245)
Other Noncash Items 4,540 (2,672)9,886 (12,787)
-------- --------
Total Adjustments 36,284 62,29376,836 117,521
-------- --------
Net Cash from Operating Activities 45,124 65,57098,792 128,426
CASH FLOWS FROM FINANCING ACTIVITIES
Bank Loans, Commercial Paper and Other Short-Term Debt 30,000 --
Notes Payable to Affiliates 55,000 (20,950)
Secured Note Issues 145,000 -- (20,950)
Maturities, Redemptions and Sinking Funds (8,000) (28,750)(9,865) (43,865)
Nuclear Fuel Lease Obligations (8,617) (13,969)(18,060) (23,318)
Dividends Paid (4,193) (4,226)(8,397) (8,437)
Premiums, Discounts and Expenses -- (50)(28) (225)
-------- --------
Net Cash from Financing Activities (20,810) (67,945)193,650 (96,795)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction (10,149) (14,595)(25,004) (23,850)
Interest Capitalized as Allowance for Borrowed Funds Used
During Construction (104) (325)(115) (471)
Loans to Affiliates (32,582) --11,166 (46,411)
Contributions to Nuclear Plant Decommissioning Trusts (2,459)(4,919) (2,693)
Investment in Mansfield Capital Trust (337,099) --
Other Cash Received 2,942 3,4514,577 397
-------- --------
Net Cash from Investing Activities (42,352) (11,469)(351,394) (73,028)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (18,038) (13,844)(58,952) (41,397)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 81,454 93,669
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $63,416 $79,825$22,502 $52,272
======== ========
Other Payment Information:
Interest (net of amounts capitalized) $19,000 $21,000$44,000 $46,000
Federal Income Taxes 4,300 --10,400
The accompanying notes as they relate to Toledo Edison are an integral part of this
statement.
-21 -
THE TOLEDO EDISON 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 1996
Form 10-K.10-K and in the First Quarter 1997 Form 10-Q. The information
under "Capital Resources and Liquidity" remains unchanged with the
following exceptions:
As discussed in Note 4, the Operating Companies refinanced high-cost
fixed obligations through a lower cost transaction.
During the firstsecond quarter of 1997, Toledo Edison redeemed notes as
discussed in Note 4.
Toledo Edison is a party to a $125 million revolving credit facility
which Centerior Energy renewed in May 1997 until May 7, 1998various
securities as discussed in Note 5.
S&P and Moody's raised the credit ratings for Toledo Edison's securities
in July and August 1997, respectively, in anticipation of Centerior
EnergyEnergy's pending merger with Ohio Edison. S&P indicated that, should
the merger not be consummated, its prior ratings would be restored.
Current credit ratings for Toledo Edison are as follows:
Securities S&P Moody's
First Mortgage Bonds BB+ Ba1
Subordinate Debt BB- Ba3
Preferred Stock BB- b1
In the third quarter of 1997, Toledo Edison plans to transfer anyrefinance with
lower-cost securities $10.1 million principal amount of first mortgage
bonds issued as security for certain tax-exempt bonds issued by public
authorities.
Additional first mortgage bonds may be issued by Toledo Edison under its
borrowed fundsmortgage 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 the facilitycertain circumstances, refundable bonds. At June 30, 1997,
Toledo Edison would not have been permitted to the Operating Companies.issue a material amount
of additional first mortgage bonds, except in connection with
refinancings. If FirstEnergy elects to apply purchase accounting to
Toledo Edison upon completion of Centerior Energy's pending merger with
Ohio Edison, Toledo Edison's available bondable property would be
reduced to below zero.
Toledo Edison expects its foreseeable future cash needs to be satisfied
with internally generated cash and available credit facilities and,
therefore, that it will not need to issue first mortgage bonds, except
in connection with planned refinancings.
- 22 -
Results of Operations
Factors contributing to the 3% increase5.3% and 4.1% increases in 1997 firstoperating
revenues from 1996 for the second quarter operating
revenuesand six months, respectively,
are shown as follows:
Changes from
First Quarter 1996for Period
Ended June 30, 1997
Three Six
Factors Operating RevenuesMonths Months
(millions)
Base Rates $ 3.4
Kilowatt-hour Sales Volume and Mix 2.4$10.2 $16.4
Unbilled Revenues 7.0 4.0
Wholesale Revenues 2.94.2 7.1
Base Rates (6.0) (3.4)
Fuel Cost Recovery Revenues (1.5)(3.0) (4.5)
Miscellaneous Revenues (0.9)(1.2) (2.1)
Total $ 6.3
The increase in first quarter 1997 base rates revenues 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.$11.2 $17.5
Percentage changes between 1997 and 1996 first quarter billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period
Ended June 30, 1997
Three Six
Customer Categories Months Months
Residential (2.4)% Change
Residential (3.1)(2.8)%
Commercial 2.9(1.5) 0.7
Industrial 8.211.9 10.0
Other 21.1 21.0
Total 8.1
First9.4 8.7
Second quarter 1997 total kilowatt-hour sales increased primarily
because of increases inincreased industrial and commercialwholesale sales. Industrial sales
along with a 26% increase
in wholesaleincreased on the strength of increased sales to large primary metals
industry customers (including the new North Star BHP Steel facility) and
the broad-based, smaller industrial customer group. Wholesale sales
(included in the "Other" category) increased 22%. Residential and
commercial sales declined because of the milder weather in the 1997
period. On a weather-normalized basis, residential sales increased 0.9%
for the 1997 period. Kilowatt-hour sales data does not reflect a
significant portion of the effect of hot weather in the second half of
June 1997 because those sales were not billed by the end of the month.
However, the estimated revenues from those sales have been recorded.
Total kilowatt-hour sales increased for the six-month period in 1997
primarily because of increased industrial and wholesale sales.
Industrial sales growth reflected increased sales to large primary
metals, automotive and glass manufacturers and the broad-based, smaller
industrial customer group. Industrial sales for the 1997 period included sales to the new
North Star BHP Steel facility. CommercialWholesale sales increased despite milder
weather because of a 3.3% increase in the number of commercial customers
and greater economic activity. Residential24%. While
residential sales declined because of the milder weather. However, weather-normalizedweather in the 1997
period, commercial and
residential sales increased 3.6%slightly. Weather-normalized
residential and 0.3%commercial sales increased 0.5% and 1.9%, respectively,
for the 1997 period.
The- 23 -
Wholesale sales in 1996 were suppressed by soft market conditions and
limited power availability for bulk power transactions because of
nuclear generating plant refueling and maintenance outages.
Renegotiated contracts for certain large industrial customers resulted
in a decrease in base rates which entirely offset the effect of the
general price increase under the April 1996 rate order issued by the
PUCO, resulting in decreases in 1997 base rates revenues.
The decreases in 1997 fuel cost recovery revenues included in customer
bills resulted from a 5% decreasedecreases in the weighted average of the fuel cost recovery factors used in
the first quarter of 1997 to calculate these revenues compared to those used in 1996. The
decreases in the 1996 firstweighted averages of the fuel cost recovery factors for
1997 were about 10% and 7% for the second quarter average.
Firstand six months,
respectively.
Second quarter operating expenses in 1997 increased 3.8%3.2% from the 1996
amount. Higher fuelFuel and purchased power expenses resulted from
increased as higher purchased
power requirementsexpense was partially offset by lower fuel expense. A change in
the system generating mix (more nuclear generation and less coal-fired
generation in the 1997 period than in the 1996 period) accounted for a
large part of the lower fuel expense for the 1997 period. Federal
income taxes increased as a result of higher pretax operating income.
Other operation and maintenance expenses decreased as a result of
ongoing cost cutting and work force reductions. Taxes, other than
federal income taxes, decreased primarily because of lower property and
payroll tax accruals.
Second quarter 1997 interest charges and preferred dividend requirements
decreased slightly primarily because of the redemption of securities in
1996 and 1997.
Six-month operating expenses in 1997 increased 3.5% from the 1996
amount. Fuel and purchased power expenses increased for the same
reasons cited for the second quarter 1997 increase in these expenses.
Federal income taxes increased as a result of higher pretax operating
income. Depreciation and amortization expenses increased primarily
because of changes in depreciation rates approved in the April 1996 PUCO
rate order. Federal
incomeOther operation and maintenance expenses and taxes, increased as a result of higher pretax operating income.
Taxes, other
than federal income taxes, decreased primarily because of
lower property and payroll tax accruals.
The firstfor the same reasons cited for the
second quarter 1997 total nonoperating loss was smaller than the
first quarter 1996 total nonoperating loss.decreases in these expenses.
The first quarter 1997
nonoperating loss resulted primarily from both Toledo Edison's share of
expenses related to the Ohio Edison-Centerior Energy merger and certain
costs associated with an accounts receivable securitization. The first
quartersix-month 1996 nonoperating loss resulted primarily from the write-downwrite-
down of two inactive production facilities as discussed in Note 6.
First quarterSix-month 1997 interest charges and preferred dividend requirements
decreased slightlyprimarily because of the redemption of securitiessame reason cited for the second
quarter 1997 decrease in 1996.these charges.
New Accounting StandardStandards
In FebruaryJune 1997, the FASB issued atwo new statementstatements of financial accounting
standards, one for the disclosurereporting of informationcomprehensive income and one for the
disclosures about capital
structuresegments of an enterprise and related information.
Both statements are effective for year-end December 31, 19971998 reporting. Toledo Edison's adoptionEdison has not
completed analyses to determine the effects of adopting the statement in 1997 will not affect its financial
condition.new
standards.
- 24 -
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
1. Centerior Energy
a. A Special Meeting of Centerior Energy's common stock share
owners was held on March 27, 1997.
b. The only matter submitted to share owners at the Special
Meeting was for the approval and adoption of an Agreement
and Plan of Merger between Ohio Edison and Centerior Energy.
The vote on this issue was as follows:
Broker
For Against Abstain Non-Vote
112,633,407 2,219,786 935,047 Not Applicable
2. Centerior Energy
a. Centerior Energy's Annual Meeting of share owners was held on
May 8, 1997.
b. Proxies for the Annual Meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934. There
was no solicitation in opposition to management's nominees for
directors as listed in the proxy statement dated April 3, 1997,
and all such nominees were elected.
c. Three matters were submitted to share owners for a vote at the
Annual Meeting.
Issue 1 was the election of 11 directors of Centerior Energy.
The vote on this issue was as follows:
Broker
Nominee For Withheld Non-Vote
R. P. Anderson 116,211,692 4,643,968 7,108,921
A. C. Bersticker 116,326,706 4,528,954 7,108,921
T. A. Commes 116,397,916 4,457,744 7,108,921
W. F. Conway 116,246,440 4,609,220 7,108,921
W. R. Embry 116,141,102 4,714,558 7,108,921
R. J. Farling 116,097,124 4,758,536 7,108,921
R. A. Miller 113,866,343 6,989,317 7,108,921
F. E. Mosier 116,226,823 4,628,837 7,108,921
Sr. M. M. Reinhard 116,098,360 4,757,301 7,108,921
R. C. Savage 116,274,966 4,580,694 7,108,921
W. J. Williams 116,236,011 4,619,649 7,108,921
Issue 2 was the ratification of the appointment by the Board of
Directors of Arthur Andersen LLP as the independent accountants
of Centerior Energy, Cleveland Electric and Toledo Edison for
1997.
The vote on this issue was as follows:
Broker
For Against Abstain Non-Vote
118,514,019 1,254,749 1,086,892 7,108,921
- 19 -
Issue 3 was a share owner proposal to eliminate all
discretionary voting when the individual share owner has not
actually voted by marking the proxy card. The vote on this
issue was as follows:
Broker
For Against Abstain Non-Vote
15,700,936 79,222,813 4,893,382 28,147,450
3. Cleveland Electric
a. In lieu of an Annual Meeting, Cleveland Electric's sole share
owner, Centerior Energy (the sole share owner of all 79,590,689
outstanding shares of Cleveland Electric common stock), elected
directors of Cleveland Electric through a Written Action of
Sole Share Owner on May 8, 1997.
b. The directors elected pursuant to the Written Action were:
Robert J. Farling
Murray R. Edelman
Fred J. Lange, Jr.
c. No other matters were addressed in the Written Action in lieu
of an Annual Meeting.
4. Toledo Edison
a. In lieu of an Annual Meeting, Toledo Edison's sole share owner,
Centerior Energy (the sole share owner of all 39,133,887
outstanding shares of Toledo Edison common stock), elected
directors of Toledo Edison through a Written Action of Sole
Share Owner on May 8, 1997.
b. The directors elected pursuant to the Written Action were:
Robert J. Farling
Murray R. Edelman
Fred J. Lange, Jr.
c. No other matters were addressed in the Written Action in lieu
of an Annual Meeting.
Item 5. Other Information
1. 1996 Rate OrderPending Merger with Ohio Edison
For backgroundadditional information relating to this topic, see "Outlook-
Pending Merger with Ohio Edison" under "Item 1. Business-
Electric Rates-1996 Rate Order"7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the CompaniesCompanies' Annual Report on Form 10-K for the
year ended December 31, 1996 ("1996 Form 10-K"). and "Pending Merger
with Ohio Edison" under "Item 5. Other Events" in the Companies'
Form 8-K Current Reports dated June 11, 1997 and July 8, 1997.
On August 8, 1997, Ohio Edison Company and the Companies filed a
revised analysis, additional testimony and proposed mitigation
measures fully responsive to the FERC's July 16, 1997 Order. While
the revised analysis suggests potential anticompetitive effects in
certain markets under certain limited circumstances, the Companies
believe that the mitigation measures more than adequately address
these concerns through a variety of transmission solutions which
are intended to ensure that the proposed merger's effects are
procompetitive. As a result of the mitigation measures, municipal
electric systems in Ohio Edison's and the Companies' service areas
will be able to take full advantage of additional third party
generation sources made available to them as a result of
FirstEnergy's open access transmission tariff. Accordingly,
whether or not the FERC grants their separate request to shorten
the comment period from 60 to 30 days, the Companies continue to
believe the FERC will approve the proposed merger prior to year
end.
2. Conjunctive Electric Service ("CES")
In December 1996, The Public Utilities Commission of Ohio ("PUCO")
ruled that all Ohio electric utilities were required to file
tariffs which would provide for a new type of electric service in
which various customers could aggregate together and negotiate
their electric rates with the utilities. The Operating Companies
filed their version of a CES tariff on March 31, 1997. On April
28, 1997, Cleveland Electric and Toledo Edison, as well as three
other Ohio utilities, appealed the PUCO's order to the Ohio Supreme
Court. The City of Cleveland, the Office of the Ohio Consumer's Counsel
("OCC"), 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 filed appeals
with the Ohio Supreme Court from the PUCO's April 11, 1996 rate
order for the Operating Companies. The Ohio Supreme Court granted
the Operating Companies' motionsEnron Capital and Trade Resources
have moved to dismiss the appeals of the
Lucas County Board of Commissioners and Congresswoman Marcy Kaptur
on November 20, 1996. On April 4, 1997, the OCC filed a motion to
- 20 -
stay the appeal because of the Rate Stipulation agreed to by the
OCC regarding the FirstEnergy merger, and the Operating Companies
filed a memorandum in support of the stay on April 14, 1997. The
Ohio Supreme Court granted OCC's motion to stay on April 21, 1997.
2. Joint Select Committee Hearings
Ohio's General Assembly has commissioned a Joint Committee to study
electric utility deregulation. The Joint Committee is conducting
hearings concerning various issues regarding electric utility
deregulation and plans to have a report completed by October 1997
to present to the full General Assembly for its consideration.intervene. The Operating Companies and other interested parties will be providing
testimony on the issues as the hearings continue throughout the
summer.
3. Rachel Transmission Line
On March 24, 1997, the Ohio Power Siting Board ("OPSB") granted
Cleveland Electric a Certificate of Environmental Compatibility and
Public Need ("Certificate") to construct its nine-mile "Rachel"
138,000-volt transmission line in Geauga County, Ohio. The
transmission line is necessary to provide high-quality and reliable
electric service to the general area, which has experienced above
average load growth over the last several decades. On April 24,
1997, Citizens for a Better Wayhave filed an Application for Rehearing
of the OPSB's decision; however, because the Application for
Rehearing was filed late, it is anticipatedmerit
briefs asserting that the OPSBPUCO is without statutory authority to
require utilities to file tariffs which will not
entertain substantive modificationspermit customers to
aggregate and negotiate their electric rates with the Certificate.
4. Chase Brassutilities.
3. FirstEnergy Rate Plan
For backgroundadditional information relating to this topic, see
"Item 1. Business-
Operations-Competitive Conditions-Toledo Edison""Management's Financial Analysis - Outlook-FirstEnergy Rate Plan"
in the Companies' 1996 Form 10-K.
Chase Brass & Copper Co., Inc. ("Chase Brass"),Various intervenors have filed a former Toledo
Edison customer,motion at the PUCO seeking
clarification of the status of the FirstEnergy Rate Plan in light
of their assertions that PUCO approval of such plan was conditioned
upon an acceptable CES tariff, and that the Operating Companies'
CES tariff, discussed in Item 2 above, is unacceptable.
FirstEnergy and the Operating Companies have responded that the
PUCO lacks authority to impose CES tariffs and that the PUCO has
not yet determined whether the Operating Companies' filed version
of a CES tariff is acceptable.
4. Plants to be Decommissioned
On June 24, 1997, Cleveland Electric's Board of Directors
authorized the decommissioning later this year of several older
coal-fired units with aggregate generating capacity of 266 MW.
This capacity can be economically replaced by purchasing power,
and the planned decommissioning will not materially adversely
affect Cleveland Electric's results of operations.
- 25 -
5. Ohio Abandons Nuclear Waste Project
The six-state Midwest Compact Commission has abandoned planning a
facility to store low-level radioactive waste from nuclear power
plants and other surrounding businessesproducers. Officials from the compact, which
included Ohio, said a facility is no longer needed and residenceswould cost
too much to build. Disposal sites in Jefferson Township, Ohio, have sought incorporation as a
municipalitySouth Carolina and Utah are
now open to be namedwaste generators. The decision has no immediate impact
on the Village of Holiday City.Companies' operations or costs, while long-term implications
are under study.
6. New Federal Rules
For additional information relating to this topic, see
"Environmental Regulation - Air Quality Control" under "Item 1.
Business" in the Companies' 1996 Form 10-K.
The Williams
County (Ohio) Board of CommissionersU.S. Environmental Protection Agency has issued new clean air
standards for ozone and fine particulates that could require the
Williams County Court
of Common Pleas issued an order permitting the areaOperating Companies to be
incorporated. Toledo Edison previously appealed the Court's order
to the Sixth District Court of Appeals, but the Court of Appeals
ruled against Toledo Edison, finding a lack of standing. Toledo
Edison then appealed to the Ohio Supreme Court. On April 23, 1997,
the Ohio Supreme Court denied Toledo Edison's appeal. Toledo
Edison does not plan to apply for reconsiderationinstall additional air pollution control
equipment and/or switch fuel sources at the Court.Operating Companies'
fossil-fueled plants after 2002. Compliance would be required by
2004. The new municipality can negotiate with otherrules have been challenged in court by trade
associations. The PUCO estimates the new rules will cost Ohio
utilities for
electric power.approximately $760 million per year, and increase the
average cost of electricity by 7%. The other businesses in the proposed municipality
previously terminatedCompanies are evaluating
their service with Toledo Edison and are
receiving electric service from the Village of Montpelier, one of
the consortium now supplying Chase Brass.
5. Davis-Besse Plant Outage
The Davis-Besse Nuclear Power Station automatically shut down on
Sunday, May 4, 1997, when a fire suppression system on the
station's main transformer malfunctioned. Although there was no
fire, protective circuitry disconnected the transformer from the
electrical system. Safety systems automatically take the plant
- 21 -
offline under these conditions. Plant personnel are investigating
the cause of the malfunction. It is anticipated that the plant
will be back on line by the end of May, 1997. This is the first
unplanned shut down at the plant in three years.options.
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 March 31,June 30, 1997, Centerior Energy, Cleveland
Electric and Toledo Edison each filed twoone Current ReportsReport on Form
8-K with the Securities and Exchange Commission.
A Form 8-K dated January 28,June 11, 1997 and filed that date included one
item under "Item 5. Other Events". That item, "Recent Financial
Results (Unaudited)", reported Centerior Energy's operating
revenues, net income and earnings per share for 1996.
A Form 8-K dated January 30, 1997 and filed on February 6,June 18, 1997 included one
item under "Item 5. Other Events". That item, "Rate
Reduction"Pending Merger
with Ohio Edison", reported on agreements reached with the City of
Cleveland and Economic Development Plan", discussed a rate
reduction plan approved byAmerican Municipal Power-Ohio and the PUCO forwithdrawal of
their opposition to the Operating Companies
which would take effect upon the consummation of thepending merger of Centerior Energy withand Ohio
Edison.Edison Company.
- 2226 -
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: May 15,August 14, 1997
- 2327 -
EXHIBIT INDEX
The following exhibits are submitted herewith:
CENTERIOR ENERGY EXHIBIT
Exhibit Number Description
27(a) Financial Data Schedule for the period
ended March 31,June 30, 1997.
CLEVELAND ELECTRIC EXHIBITSEXHIBIT
Exhibit Number Description
27(b) Financial Data Schedule for the period
ended March 31,June 30, 1997.
TOLEDO EDISON EXHIBITSEXHIBIT
Exhibit Number Description
27(c) Financial Data Schedule for the period
ended March 31,June 30, 1997.
- 2428 -