-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OeP4KLfNvTrbVYUMRJZsUnixk5USche5+vwQMY65NPJY2x+WQObje8PGp1osSMFm S3+8mxpDH6RBoviJvdYURQ== 0000774197-97-000028.txt : 19970815 0000774197-97-000028.hdr.sgml : 19970815 ACCESSION NUMBER: 0000774197-97-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTERIOR ENERGY CORP CENTRAL INDEX KEY: 0000774197 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 341479083 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09130 FILM NUMBER: 97663251 BUSINESS ADDRESS: STREET 1: 6200 OAK TREE BLVD CITY: INDEPENDENCE STATE: OH ZIP: 44131 BUSINESS PHONE: 2164473100 MAIL ADDRESS: STREET 1: PO BOX 94661 CITY: CLEVELAND STATE: OH ZIP: 44101-4661 FORMER COMPANY: FORMER CONFORMED NAME: NORTH HOLDING CO /OH/ DATE OF NAME CHANGE: 19851002 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLEVELAND ELECTRIC ILLUMINATING CO CENTRAL INDEX KEY: 0000020947 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 340150020 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-02323 FILM NUMBER: 97663252 BUSINESS ADDRESS: STREET 1: 55 PUBLIC SQ STREET 2: PO BOX 5000 CITY: CLEVELAND STATE: OH ZIP: 44101 BUSINESS PHONE: 2166229800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOLEDO EDISON CO CENTRAL INDEX KEY: 0000352049 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 344375005 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03583 FILM NUMBER: 97663253 BUSINESS ADDRESS: STREET 1: 300 MADISON AVE CITY: TOLEDO STATE: OH ZIP: 43652 BUSINESS PHONE: 4192495000 10-Q 1 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 June 30, 1997 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) 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 August 8, 1997, there were 148,024,178 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. -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 and Subsidiary 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 and Subsidiary Income Statement 19 Balance Sheet 20 Cash Flows 21 Management's Discussion and Analysis of Financial 22 Condition and Results of Operations PART II. OTHER INFORMATION Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K 26 Signatures 27 Exhibit Index 28 -ii- CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES, THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY, AND THE TOLEDO EDISON COMPANY 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 June 30, 1997 and results of operations and cash flows for the three months and six months ended 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. In 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 financing transaction discussed in Note 4. The subsidiary was capitalized with Toledo Edison having a 90% interest and 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- 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 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, - 1 - 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 matured August 1, 1997) that requires common stock dividends to be paid out of its total balance of retained earnings. At June 30, 1997, Toledo Edison's total retained earnings were $19 million. At June 30, 1997, Cleveland Electric and Toledo Edison had $95.6 million and $236.6 million, respectively, of appropriated retained earnings for the payment of dividends. See "Management's Financial Analysis -- Capital Resources and 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 six months ended 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 six months ended 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 six months ended 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 June 30, 1997, the Operating Companies also redeemed preferred stock and debt securities as follows: Cleveland Electric Mandatory redemptions consisted of $3 million of Serial Preferred Stock, $88.00 Series 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 $1.7 million of 9-3/8% Cumulative Preferred Stock, $100 par value, and $0.2 million of 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. (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; "Part II, Item 5. Other Information" in this Quarterly Report on Form 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). The merger remains subject to the approval of the FERC and the Securities and Exchange Commission. For a discussion of the status of the FERC approval process, see "2. Pending Merger with Ohio Edison" under "Item 5. Other Events" in the July 8, 1997 Form 8-K and "1. Pending Merger with Ohio Edison" under "Part II, Item 5. Other Information" in this Quarterly Report on Form 10-Q. - 4 - CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES INCOME STATEMENT (Unaudited) (Thousands, Except Per Share Amounts) Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------------- 1997 1996 1997 1996 -------- -------- ----------- ----------- OPERATING REVENUES $ 612,575 $ 608,966 $ 1,224,183 $ 1,214,221 OPERATING EXPENSES Fuel and Purchased Power 113,720 110,248 235,551 225,232 Other Operation and Maintenance 151,820 149,763 294,404 305,668 Generation Facilities Rental Expense, Net 39,814 39,853 79,667 79,706 Depreciation and Amortization 76,740 76,722 153,851 149,954 Taxes, Other Than Federal Income Taxes 80,008 83,411 159,622 167,363 Amortization of Deferred Operating Expenses, Net 10,858 10,868 21,716 21,411 Federal Income Taxes 26,062 21,361 53,428 39,354 -------- -------- ----------- ----------- Total Operating Expenses 499,022 492,226 998,239 988,688 -------- -------- ----------- ----------- OPERATING INCOME 113,553 116,740 225,944 225,533 NONOPERATING INCOME (LOSS) Allowance for Equity Funds Used During Construction 453 788 1,111 1,699 Other Income and Deductions, Net (6,969) (539) (12,796) (6,999) Federal Income Taxes - Credit 446 880 416 2,795 -------- -------- ----------- ----------- Total Nonoperating Income (Loss) (6,070) 1,129 (11,269) (2,505) -------- -------- ----------- ----------- INCOME BEFORE INTEREST CHARGES 107,483 117,869 214,675 223,028 INTEREST CHARGES Long-term Debt 78,168 83,331 154,671 166,649 Short-term Debt 2,031 2,322 3,679 4,198 Allowance for Borrowed Funds Used During Construction (263) (774) (826) (1,617) -------- -------- ----------- ----------- Net Interest Charges 79,936 84,879 157,524 169,230 -------- -------- ----------- ----------- INCOME AFTER INTEREST CHARGES 27,547 32,990 57,151 53,798 Preferred Dividend Requirements of Subsidiaries 13,308 14,042 26,815 28,277 -------- -------- ----------- ----------- NET INCOME $ 14,239 $ 18,948 $ 30,336 $ 25,521 ======== ======== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 148,026 148,027 148,026 148,027 ======== ======== =========== =========== EARNINGS PER COMMON SHARE $ .10 $ .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) June 30, December 31, 1997 1996 (Unaudited) ----------- ----------- ASSETS PROPERTY, PLANT AND EQUIPMENT Utility Plant In Service $ 9,999,234 $ 9,867,193 Accumulated Depreciation and Amortization (3,467,146) (3,272,158) ----------- ----------- 6,532,088 6,595,035 Construction Work In Progress 96,773 78,669 ----------- ----------- 6,628,861 6,673,704 Nuclear Fuel, Net of Amortization 162,770 189,148 Other Property, Less Accumulated Depreciation 48,943 89,291 ----------- ----------- 6,840,574 6,952,143 CURRENT ASSETS Cash and Temporary Cash Investments 108,550 138,068 Amounts Due from Customers and Others, Net 193,561 212,680 Materials and Supplies, at Average Cost Owned 84,054 84,846 Under Consignment 37,198 34,039 Taxes Applicable to Succeeding Years 182,489 249,961 Other 57,021 24,283 ----------- ----------- 662,873 743,877 REGULATORY AND OTHER ASSETS Regulatory Assets 2,248,339 2,277,083 Mansfield Capital Trust 906,488 -- Nuclear Plant Decommissioning Trusts 158,273 139,667 Investment in Partnership 35,327 23,245 Other 87,555 74,187 ----------- ----------- 3,435,982 2,514,182 ----------- ----------- $ 10,939,429 $ 10,210,202 =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common Stock Equity $ 1,928,170 $ 1,986,855 Preferred Stock With Mandatory Redemption Provisions 174,094 189,473 Without Mandatory Redemption Provisions 448,325 448,325 Long-Term Debt 4,132,863 3,444,241 ----------- ----------- 6,683,452 6,068,894 CURRENT LIABILITIES Current Portion of Long-Term Debt and Preferred Stock 204,339 196,033 Current Portion of Lease Obligations 79,696 87,836 Notes Payable to Banks and Others 155,000 -- Accounts Payable 129,672 138,005 Accrued Taxes 306,711 389,014 Accrued Interest 76,405 74,826 Dividends Declared 44,042 13,977 Other 66,447 72,653 ----------- ----------- 1,062,312 972,344 DEFERRED CREDITS AND OTHER LIABILITIES Unamortized Investment Tax Credits 245,637 251,547 Accumulated Deferred Federal Income Taxes 1,896,246 1,876,924 Unamortized Gain from Bruce Mansfield Plant Sale 462,710 474,757 Accumulated Deferred Rents for Bruce Mansfield Plant and Beaver Valley Unit 2 141,711 137,956 Nuclear Fuel Lease Obligations 104,733 122,655 Retirement Benefits 185,700 183,571 Other 156,928 121,554 ----------- ----------- 3,193,665 3,168,964 COMMITMENTS AND CONTINGENCIES (Note 7) ----------- ----------- $ 10,939,429 $ 10,210,202 =========== =========== The accompanying notes as they relate to Centerior Energy are an integral part of this statement.
- 6 - CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES CASH FLOWS (Unaudited) (Thousands) Six Months Ended June 30, ----------------------- 1997 1996 ----------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $30,336 $25,521 -------- -------- Adjustments to Reconcile Net Income to Cash from Operating Activities: Depreciation and Amortization 153,851 149,954 Deferred Federal Income Taxes 19,071 35,638 Deferred Fuel 18,891 1,591 Leased Nuclear Fuel Amortization 42,820 35,798 Amortization of Deferred Operating Expenses, Net 21,716 21,411 Allowance for Equity Funds Used During Construction (1,111) (1,699) Changes in Amounts Due from Customers and Others, Net 12,243 (40,574) Changes in Materials and Supplies (2,367) 9,103 Changes in Accounts Payable (8,333) 1,290 Changes in Working Capital Affecting Operations (52,196) (56,419) Other Noncash Items 15,522 (25,643) -------- -------- Total Adjustments 220,107 130,450 -------- -------- Net Cash from Operating Activities 250,443 155,971 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 -- (20) Maturities, Redemptions and Sinking Funds (38,879) (94,479) Nuclear Fuel Lease Obligations (43,921) (52,851) Common Stock Dividends Paid (59,210) (59,211) Premiums, Discounts and Expenses (81) (474) -------- -------- Net Cash from Financing Activities 732,909 (107,035) CASH FLOWS FROM INVESTING ACTIVITIES Cash Applied to Construction (79,265) (75,305) Interest Capitalized as Allowance for Borrowed Funds Used During Construction (826) (1,617) Contributions to Nuclear Plant Decommissioning Trusts (10,775) (5,897) Investment in Mansfield Capital Trust (906,488) -- Investment in Partnership (12,082) (17,000) Other Cash Received (Applied) (3,434) 8,284 -------- -------- Net Cash from Investing Activities (1,012,870) (91,535) -------- -------- NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (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 $108,550 $136,439 ======== ======== Other Payment Information: Interest (net of amounts capitalized) $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.
- 7 - 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 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 second quarter of 1997, the Operating Companies redeemed various securities as discussed in Note 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 the 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'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 facilities and, therefore, that they will not need to issue first mortgage bonds, except in connection with planned refinancings. - 8 - Results of Operations Factors contributing to the 0.6% and 0.8% increases in 1997 operating revenues from 1996 for the second quarter and six months, respectively, are shown as follows: Changes for Period Ended June 30, 1997 Three Six Factors Months Months (millions) Kilowatt-hour Sales Volume and Mix $ 0.7 $ 7.6 Unbilled Revenues 13.0 (2.0) Wholesale Revenues 1.8 7.7 Base Rates (12.7) 4.9 Fuel Cost Recovery Revenues (2.8) (2.0) Miscellaneous Revenues 3.6 (6.2) Total $ 3.6 $10.0 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 (4.5)% (2.3)% Commercial (3.5) (0.9) Industrial 5.5 3.6 Other 12.6 30.2 Total 1.5 3.6 Second quarter 1997 total kilowatt-hour sales increased as increases in industrial and wholesale sales 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. Wholesale sales (included in the "Other" category) increased 26%. Residential and commercial sales declined because of the milder 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 1.4% and 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 net changes in 1997 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 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 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 increased from the 1996 amount primarily because of the retroactive effect of a reclassification of certain revenues as credits to operating expenses. The reclassification was recorded in the 1996 second quarter. A significant portion of the six-month decrease in miscellaneous revenues in 1997 related to a canceled generating plant lease agreement for which a refund payment was made in the 1997 first quarter. Second quarter operating expenses in 1997 increased 1.4% from the 1996 amount. Fuel and purchased power expenses increased as higher purchased power expense 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. Other operation and maintenance expenses decreased as a result of ongoing cost cutting and work force reductions. Taxes, other than federal income taxes, decreased for the same reason cited for the second quarter 1997 decrease in these expenses. The six-month 1997 nonoperating loss resulted primarily from both merger-related expenses and certain costs associated with an accounts receivable securitization. The six-month 1996 nonoperating loss resulted primarily from Toledo Edison's write-down of two inactive production facilities as discussed in Note 6. Six-month 1997 interest charges and preferred dividend requirements decreased primarily because of the same reason cited for the second quarter 1997 decrease in these charges. New Accounting Standards In June 1997, the Financial Accounting Standards Board (FASB) issued two new statements of financial accounting standards, one for the reporting of comprehensive income and one for the disclosures about segments of an enterprise and related information. Both statements are effective for 1998 reporting. The Companies have not completed analyses to determine the effects of adopting the new standards. - 11 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY INCOME STATEMENT (Unaudited) (Thousands) Three Months Ended Six Months Ended June 30, June 30, --------------------- ------------------------- 1997 1996 1997 1996 -------- -------- ---------- ---------- OPERATING REVENUES $ 428,246 $ 434,025 $ 859,873 $ 861,551 OPERATING EXPENSES Fuel and Purchased Power (1) 102,090 98,216 212,620 201,942 Other Operation and Maintenance 101,409 99,083 192,856 204,215 Generation Facilities Rental Expense, Net 13,891 13,891 27,783 27,783 Depreciation and Amortization 53,224 53,033 106,521 103,849 Taxes, Other Than Federal Income Taxes 57,274 59,750 113,960 119,760 Amortization of Deferred Operating Expenses, Net 6,567 6,575 13,134 12,943 Federal Income Taxes 16,353 17,565 35,556 29,370 -------- -------- ---------- ---------- Total Operating Expenses 350,808 348,113 702,430 699,862 -------- -------- ---------- ---------- OPERATING INCOME 77,438 85,912 157,443 161,689 NONOPERATING INCOME (LOSS) Allowance for Equity Funds Used During Construction 398 601 725 1,099 Other Income and Deductions, Net (7,031) (1,016) (11,680) 633 Federal Income Taxes - Credit 1,412 1,034 2,070 282 -------- -------- ---------- ---------- Total Nonoperating Income (Loss) (5,221) 619 (8,885) 2,014 -------- -------- ---------- ---------- INCOME BEFORE INTEREST CHARGES 72,217 86,531 148,558 163,703 INTEREST CHARGES Long-Term Debt 56,211 60,626 110,604 120,786 Short-Term Debt 2,288 1,372 4,465 2,064 Allowance for Borrowed Funds Used During Construction (252) (627) (711) (1,146) -------- -------- ---------- ---------- Net Interest Charges 58,247 61,371 114,358 121,704 -------- -------- ---------- ---------- NET INCOME 13,970 25,160 34,200 41,999 Preferred Dividend Requirements 9,096 9,813 18,411 19,845 -------- -------- ---------- ---------- EARNINGS AVAILABLE FOR COMMON STOCK $ 4,874 $ 15,347 $ 15,789 $ 22,154 ======== ======== ========== ========== (1) Includes purchased power expense for purchases from Toledo Edison. $ 29,454 $ 25,908 $ 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) June 30, December 31, 1997 1996 (Unaudited) ----------- ----------- ASSETS PROPERTY, PLANT AND EQUIPMENT Utility Plant In Service $ 7,053,571 $ 6,938,535 Accumulated Depreciation and Amortization (2,400,777) (2,252,321) ----------- ----------- 4,652,794 4,686,214 Construction Work In Progress 67,121 56,853 ----------- ----------- 4,719,915 4,743,067 Nuclear Fuel, Net of Amortization 97,922 113,030 Other Property, Less Accumulated Depreciation 14,999 53,547 ----------- ----------- 4,832,836 4,909,644 CURRENT ASSETS Cash and Temporary Cash Investments 22,126 30,273 Amounts Due from Customers and Others, Net 160,110 189,547 Amounts Due from Affiliates 3,160 5,634 Materials and Supplies, at Average Cost Owned 52,453 51,686 Under Consignment 27,028 23,655 Taxes Applicable to Succeeding Years 130,591 181,609 Other 47,530 15,237 ----------- ----------- 442,998 497,641 REGULATORY AND OTHER ASSETS Regulatory Assets 1,333,979 1,349,693 Mansfield Capital Trust 569,389 -- Nuclear Plant Decommissioning Trusts 85,995 75,573 Other 72,259 44,980 ----------- ----------- 2,061,622 1,470,246 ----------- ----------- $ 7,337,456 $ 6,877,531 =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common Stock Equity $ 1,009,866 $ 1,044,283 Preferred Stock With Mandatory Redemption Provisions 172,404 186,118 Without Mandatory Redemption Provisions 238,325 238,325 Long-Term Debt 3,011,080 2,441,215 ----------- ----------- 4,431,675 3,909,941 CURRENT LIABILITIES Current Portion of Long-Term Debt and Preferred Stock 134,874 144,668 Current Portion of Lease Obligations 46,329 51,592 Notes Payable to Banks and Others 70,000 -- Accounts Payable 71,373 82,694 Accounts and Notes Payable to Affiliates 129,282 171,433 Accrued Taxes 242,541 315,998 Accrued Interest 53,932 52,487 Dividends Declared 5,686 15,228 Other 39,689 43,672 ----------- ----------- 793,706 877,772 DEFERRED CREDITS AND OTHER LIABILITIES Unamortized Investment Tax Credits 172,186 176,130 Accumulated Deferred Federal Income Taxes 1,328,181 1,305,601 Unamortized Gain from Bruce Mansfield Plant Sale 288,256 295,730 Accumulated Deferred Rents for Bruce Mansfield Plant 101,750 98,767 Nuclear Fuel Lease Obligations 63,429 73,947 Retirement Benefits 75,750 72,843 Other 82,523 66,800 ----------- ----------- 2,112,075 2,089,818 COMMITMENTS AND CONTINGENCIES (Note 7) ----------- ----------- $ 7,337,456 $ 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) Six Months Ended June 30, --------------------- 1997 1996 --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $34,200 $41,999 -------- -------- Adjustments to Reconcile Net Income to Cash from Operating Activities: Depreciation and Amortization 106,521 103,849 Deferred Federal Income Taxes 22,197 22,905 Deferred Fuel 12,775 (52) Leased Nuclear Fuel Amortization 25,186 20,338 Amortization of Deferred Operating Expenses, Net 13,134 12,943 Allowance for Equity Funds Used During Construction (725) (1,099) Changes in Amounts Due from Customers and Others, Net 14,965 (35,708) Changes in Materials and Supplies (4,140) 7,415 Changes in Accounts Payable (11,321) 4,886 Changes in Working Capital Affecting Operations (55,980) (31,895) Other Noncash Items 5,636 (12,856) -------- -------- Total Adjustments 128,248 90,726 -------- -------- Net Cash from Operating Activities 162,448 132,725 CASH FLOWS FROM FINANCING ACTIVITIES Bank Loans, Commercial Paper and Other Short-Term Debt 70,000 100,000 Notes Payable to Affiliates (40,967) 41,411 Secured Note Issues 575,000 -- Maturities, Redemptions and Sinking Funds (29,014) (50,614) Nuclear Fuel Lease Obligations (25,861) (29,533) Dividends Paid (77,952) (96,388) Premiums, Discounts and Expenses (53) (249) -------- -------- Net Cash from Financing Activities 471,153 (35,373) CASH FLOWS FROM INVESTING ACTIVITIES Cash Applied to Construction (54,261) (51,455) Interest Capitalized as Allowance for Borrowed Funds Used During Construction (711) (1,146) Contributions to Nuclear Plant Decommissioning Trusts (5,856) (3,204) Investment in Mansfield Capital Trust (569,389) -- Purchases of Accounts Receivable from Affiliate -- (76,326) Other Cash Received (Applied) (11,531) 6,174 -------- -------- Net Cash from Investing Activities (641,748) (125,957) -------- -------- NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (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 $22,126 $41,165 ======== ======== Other Payment Information: Interest (net of amounts capitalized) $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 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 second quarter of 1997, Cleveland Electric redeemed various 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 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 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 refinance 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 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 June 30, 1997, Cleveland Electric would not 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 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 1.3% and 0.2% decreases in 1997 operating revenues from 1996 for the second quarter and six months, respectively, are shown as follows: - 15 - Changes for Period Ended June 30, 1997 Three Six Factors Months Months (millions) Kilowatt-hour Sales Volume and Mix $(9.5) $(8.8) Unbilled Revenues 6.0 (6.0) Wholesale Revenues 1.9 9.4 Base Rates (6.7) 8.3 Fuel Cost Recovery Revenues 0.2 2.5 Miscellaneous Revenues 2.3 (7.1) Total $(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 wholesale 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 from the April 1996 rate order issued by the PUCO and renegotiated contracts for certain large industrial customers which resulted in a decrease in base rates for those customers. The increases in 1997 fuel cost recovery revenues included in customer bills resulted from increases in the fuel cost recovery factors used in 1997 to calculate these revenues compared to those used in 1996. The increases in the weighted averages of the fuel cost recovery factors for 1997 were about 0.3% and 2% for the second quarter and six months, respectively. Second quarter miscellaneous revenues in 1997 increased from the 1996 amount primarily because of the retroactive effect of a reclassification of certain revenues as credits to operating expenses. The reclassification was recorded in the 1996 second quarter. A significant portion of the six-month decrease in miscellaneous revenues in 1997 related to a canceled generating plant lease agreement for which a refund payment was made in the 1997 first quarter. Second quarter operating expenses in 1997 increased 0.8% from the 1996 amount. Fuel and purchased power expenses increased as higher purchased power expense 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. Other operation and maintenance expenses decreased as a result of ongoing cost cutting and work force reductions. Taxes, other than federal income taxes, decreased for 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. - 17 - Six-month 1997 interest charges and preferred dividend requirements decreased primarily because of the same reason cited for the second quarter 1997 decrease in these charges. New Accounting Standards In June 1997, the FASB issued two new statements of financial accounting standards, one for the reporting of comprehensive income and one for the disclosures about segments of an enterprise and related information. Both statements are effective for 1998 reporting. Cleveland Electric has not completed analyses to determine the effects of adopting the new standards. - 18 - THE TOLEDO EDISON COMPANY AND SUBSIDIARY INCOME STATEMENT (Unaudited) (Thousands) Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 1997 1996 1997 1996 -------- -------- -------- -------- OPERATING REVENUES (1) $ 222,144 $ 210,940 $ 439,204 $ 421,733 OPERATING EXPENSES Fuel and Purchased Power 44,501 40,652 87,815 79,420 Other Operation and Maintenance 55,455 58,244 111,772 114,763 Generation Facilities Rental Expense, Net 25,923 25,962 51,884 51,923 Depreciation and Amortization 23,516 23,689 47,330 46,105 Taxes, Other Than Federal Income Taxes 22,601 23,572 45,395 47,425 Amortization of Deferred Operating Expenses, Net 4,291 4,293 8,582 8,468 Federal Income Taxes 9,780 3,872 17,992 10,099 -------- -------- -------- -------- Total Operating Expenses 186,067 180,284 370,770 358,203 -------- -------- -------- -------- OPERATING INCOME 36,077 30,656 68,434 63,530 NONOPERATING INCOME (LOSS) Allowance for Equity Funds Used During Construction 54 186 386 599 Other Income and Deductions, Net 900 374 473 (8,779) Federal Income Taxes - Credit (Expense) (601) 115 (826) 3,310 -------- -------- -------- -------- Total Nonoperating Income (Loss) 353 675 33 (4,870) -------- -------- -------- -------- INCOME BEFORE INTEREST CHARGES 36,430 31,331 68,467 58,660 INTEREST CHARGES Long-Term Debt 21,956 22,704 44,067 45,863 Short-Term Debt 1,369 1,145 2,559 2,363 Allowance for Borrowed Funds Used During Construction (11) (146) (115) (471) -------- -------- -------- -------- Net Interest Charges 23,314 23,703 46,511 47,755 -------- -------- -------- -------- NET INCOME 13,116 7,628 21,956 10,905 Preferred Dividend Requirements 4,211 4,229 8,405 8,433 -------- -------- -------- -------- EARNINGS AVAILABLE FOR COMMON STOCK $ 8,905 $ 3,399 $ 13,551 $ 2,472 ======== ======== ======== ======== (1) Includes revenues from bulk power sales to Cleveland Electric. $ 29,454 $ 25,908 $ 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) June 30, December 31, 1997 1996 (Unaudited) ----------- ----------- ASSETS PROPERTY, PLANT AND EQUIPMENT Utility Plant In Service $ 2,945,663 $ 2,928,657 Accumulated Depreciation and Amortization (1,066,369) (1,019,836) ----------- ----------- 1,879,294 1,908,821 Construction Work In Progress 23,883 21,479 ----------- ----------- 1,903,177 1,930,300 Nuclear Fuel, Net of Amortization 64,848 76,118 Other Property, Less Accumulated Depreciation 7,003 8,460 ----------- ----------- 1,975,028 2,014,878 CURRENT ASSETS Cash and Temporary Cash Investments 22,502 81,454 Amounts Due from Customers and Others, Net 29,007 16,308 Amounts Due from Affiliates 92,949 95,336 Materials and Supplies, at Average Cost Owned 31,601 33,160 Under Consignment 10,170 10,383 Taxes Applicable to Succeeding Years 51,898 68,352 Other 2,498 3,479 ----------- ----------- 240,625 308,472 REGULATORY AND OTHER ASSETS Regulatory Assets 914,600 927,629 Mansfield Capital Trust 337,099 -- Nuclear Plant Decommissioning Trusts 72,277 64,093 Other 32,669 42,408 ----------- ----------- 1,356,645 1,034,130 ----------- ----------- $ 3,572,298 $ 3,357,480 =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common Stock Equity $ 816,795 $ 803,237 Preferred Stock With Mandatory Redemption Provisions 1,690 3,355 Without Mandatory Redemption Provisions 210,000 210,000 Long-Term Debt 1,121,783 1,003,026 ----------- ----------- 2,150,268 2,019,618 CURRENT LIABILITIES Current Portion of Long-Term Debt and Preferred Stock 69,465 51,365 Current Portion of Lease Obligations 33,367 36,244 Notes Payable to Banks and Others 30,000 -- Accounts Payable 44,574 46,496 Accounts and Notes Payable to Affiliates 81,964 30,016 Accrued Taxes 64,849 72,829 Accrued Interest 22,337 22,348 Other 17,162 18,722 ----------- ----------- 363,718 278,020 DEFERRED CREDITS AND OTHER LIABILITIES Unamortized Investment Tax Credits 73,451 75,417 Accumulated Deferred Federal Income Taxes 562,474 565,600 Unamortized Gain from Bruce Mansfield Plant Sale 174,454 179,027 Accumulated Deferred Rents for Bruce Mansfield Plant and Beaver Valley Unit 2 39,960 39,188 Nuclear Fuel Lease Obligations 41,303 48,491 Retirement Benefits 104,332 102,214 Other 62,338 49,905 ----------- ----------- 1,058,312 1,059,842 COMMITMENTS AND CONTINGENCIES (Note 7) ----------- ----------- $ 3,572,298 $ 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) Six Months Ended June 30, ------------------- 1997 1996 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $21,956 $10,905 -------- -------- Adjustments to Reconcile Net Income to Cash from Operating Activities: Depreciation and Amortization 47,330 46,105 Deferred Federal Income Taxes (3,126) 13,368 Deferred Fuel 6,116 1,643 Leased Nuclear Fuel Amortization 17,634 15,461 Amortization of Deferred Operating Expenses, Net 8,582 8,468 Allowance for Equity Funds Used During Construction (386) (599) Changes in Amounts Due from Customers and Others, Net (5,103) (4,461) Sales of Accounts Receivable to Affiliate -- 76,326 Changes in Materials and Supplies 1,772 1,689 Changes in Accounts Payable (1,922) 2,553 Changes in Working Capital Affecting Operations (3,947) (30,245) Other Noncash Items 9,886 (12,787) -------- -------- Total Adjustments 76,836 117,521 -------- -------- Net Cash from Operating Activities 98,792 128,426 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 -- Maturities, Redemptions and Sinking Funds (9,865) (43,865) Nuclear Fuel Lease Obligations (18,060) (23,318) Dividends Paid (8,397) (8,437) Premiums, Discounts and Expenses (28) (225) -------- -------- Net Cash from Financing Activities 193,650 (96,795) CASH FLOWS FROM INVESTING ACTIVITIES Cash Applied to Construction (25,004) (23,850) Interest Capitalized as Allowance for Borrowed Funds Used During Construction (115) (471) Loans to Affiliates 11,166 (46,411) Contributions to Nuclear Plant Decommissioning Trusts (4,919) (2,693) Investment in Mansfield Capital Trust (337,099) -- Other Cash Received 4,577 397 -------- -------- Net Cash from Investing Activities (351,394) (73,028) -------- -------- NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (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 $22,502 $52,272 ======== ======== Other Payment Information: Interest (net of amounts capitalized) $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 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 second quarter of 1997, Toledo Edison redeemed various 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 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 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 refinance 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 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 June 30, 1997, Toledo Edison would not 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 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 5.3% and 4.1% increases in 1997 operating revenues from 1996 for the second quarter and six months, respectively, are shown as follows: Changes for Period Ended June 30, 1997 Three Six Factors Months Months (millions) Kilowatt-hour Sales Volume and Mix $10.2 $16.4 Unbilled Revenues 7.0 4.0 Wholesale Revenues 4.2 7.1 Base Rates (6.0) (3.4) Fuel Cost Recovery Revenues (3.0) (4.5) Miscellaneous Revenues (1.2) (2.1) Total $11.2 $17.5 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 (2.4)% (2.8)% Commercial (1.5) 0.7 Industrial 11.9 10.0 Other 21.1 21.0 Total 9.4 8.7 Second quarter 1997 total kilowatt-hour sales increased primarily because of increased industrial and wholesale sales. Industrial sales increased 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. Wholesale sales increased 24%. While residential sales declined because of the milder weather in the 1997 period, commercial sales increased slightly. Weather-normalized residential and commercial sales increased 0.5% and 1.9%, respectively, for the 1997 period. - 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 decreases in the fuel cost recovery factors used in 1997 to calculate these revenues compared to those used in 1996. The decreases in the weighted averages of the fuel cost recovery factors for 1997 were about 10% and 7% for the second quarter and six months, respectively. Second quarter operating expenses in 1997 increased 3.2% from the 1996 amount. Fuel and purchased power expenses increased as higher purchased power expense 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. Other operation and maintenance expenses and taxes, other than federal income taxes, decreased for the same reasons cited for the second quarter 1997 decreases in these expenses. The six-month 1996 nonoperating loss resulted primarily from the write- down of two inactive production facilities as discussed in Note 6. Six-month 1997 interest charges and preferred dividend requirements decreased primarily because of the same reason cited for the second quarter 1997 decrease in these charges. New Accounting Standards In June 1997, the FASB issued two new statements of financial accounting standards, one for the reporting of comprehensive income and one for the disclosures about segments of an enterprise and related information. Both statements are effective for 1998 reporting. Toledo Edison has not completed analyses to determine the effects of adopting the new standards. - 24 - PART II. OTHER INFORMATION Item 5. Other Information 1. Pending Merger with Ohio Edison For additional information relating to this topic, see "Outlook- Pending Merger with Ohio Edison" under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Companies' 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 Toledo and Enron Capital and Trade Resources have moved to intervene. The Operating Companies have filed merit briefs asserting that the PUCO is without statutory authority to require utilities to file tariffs which will permit customers to aggregate and negotiate their electric rates with the utilities. 3. FirstEnergy Rate Plan For additional information relating to this topic, see "Management's Financial Analysis - Outlook-FirstEnergy Rate Plan" in the Companies' 1996 Form 10-K. Various intervenors have filed a 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 producers. Officials from the compact, which included Ohio, said a facility is no longer needed and would cost too much to build. Disposal sites in South Carolina and Utah are now open to waste generators. The decision has no immediate impact on the 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 U.S. Environmental Protection Agency has issued new clean air standards for ozone and fine particulates that could require the Operating Companies to install additional air pollution control equipment and/or switch fuel sources at the Operating Companies' fossil-fueled plants after 2002. Compliance would be required by 2004. The new rules have been challenged in court by trade associations. The PUCO estimates the new rules will cost Ohio utilities approximately $760 million per year, and increase the average cost of electricity by 7%. The Companies are evaluating their 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 June 30, 1997, Centerior Energy, Cleveland Electric and Toledo Edison each filed one Current Report on Form 8-K with the Securities and Exchange Commission. A Form 8-K dated June 11, 1997 and filed June 18, 1997 included one item under "Item 5. Other Events". That item, "Pending Merger with Ohio Edison", reported on agreements reached with the City of Cleveland and American Municipal Power-Ohio and the withdrawal of their opposition to the pending merger of Centerior Energy and Ohio Edison Company. - 26 - 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: August 14, 1997 - 27 - EXHIBIT INDEX The following exhibits are submitted herewith: CENTERIOR ENERGY EXHIBIT Exhibit Number Description 27(a) Financial Data Schedule for the period ended June 30, 1997. CLEVELAND ELECTRIC EXHIBIT Exhibit Number Description 27(b) Financial Data Schedule for the period ended June 30, 1997. TOLEDO EDISON EXHIBIT Exhibit Number Description 27(c) Financial Data Schedule for the period ended June 30, 1997. - 28 - EX-27 2
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED FORM 10-Q FINANCIAL STATEMENTS FOR CENTERIOR ENERGY CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000774197 CENTERIOR ENERGY CORPORATION 1,000 US DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 PER-BOOK 6,628,861 1,312,702 662,873 2,334,993 0 10,939,429 2,320,651 0 (392,481) 1,928,170 174,094 448,325 4,132,863 155,000 0 0 187,960 16,379 104,733 79,696 3,712,209 10,939,429 1,224,183 53,428 944,811 998,239 225,944 (11,269) 214,675 157,524 30,336 0 0 88,816 332,343 250,443 .2 0
EX-27 3
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED FORM 10-Q FINANCIAL STATEMENTS FOR THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000020947 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 1,000 US DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 PER-BOOK 4,719,915 768,355 442,998 1,406,188 0 7,337,456 1,242,148 78,618 (310,900) 1,009,866 172,404 238,325 3,011,080 140,651 0 0 120,160 14,714 63,429 46,329 2,520,498 7,337,456 859,873 35,556 666,874 702,430 157,443 (8,885) 148,558 114,358 34,200 18,411 15,789 59,210 251,507 162,448 0 0
EX-27 4
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED FORM 10-Q FINANCIAL STATEMENTS FOR THE TOLEDO EDISON COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000352049 THE TOLEDO EDISON COMPANY 1,000 US DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 PER-BOOK 1,903,177 482,078 240,625 946,418 0 3,572,298 195,687 602,113 18,995 816,795 1,690 210,000 1,121,783 85,000 0 0 67,800 1,665 41,303 33,367 1,192,895 3,572,298 439,204 17,992 352,778 370,770 68,434 33 68,467 46,511 21,956 8,405 13,551 0 80,836 98,792 0 0
-----END PRIVACY-ENHANCED MESSAGE-----