-----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, UJBSZgf+u3Y3nTpSGb0MTfjhClP3aBg9i0tDyaUDty+w48F83C8JR/NxJwn99aBm 4MeSdL/DiIYWqiDO4Q858w== 0000774197-97-000032.txt : 19971115 0000774197-97-000032.hdr.sgml : 19971115 ACCESSION NUMBER: 0000774197-97-000032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 001-09130 FILM NUMBER: 97717235 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: SEC FILE NUMBER: 001-02323 FILM NUMBER: 97717236 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: SEC FILE NUMBER: 001-03583 FILM NUMBER: 97717237 BUSINESS ADDRESS: STREET 1: 300 MADISON AVE CITY: TOLEDO STATE: OH ZIP: 43652 BUSINESS PHONE: 2166229800 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 September 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 November 6, 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 7 Balance Sheet 8 Cash Flows 9 Management's Discussion and Analysis of Financial 10 Condition and Results of Operations The Cleveland Electric Illuminating Company and Subsidiary Income Statement 14 Balance Sheet 15 Cash Flows 16 Management's Discussion and Analysis of Financial 17 Condition and Results of Operations The Toledo Edison Company and Subsidiary Income Statement 21 Balance Sheet 22 Cash Flows 23 Management's Discussion and Analysis of Financial 24 Condition and Results of Operations PART II. OTHER INFORMATION Item 5. Other Information 27 Item 6. Exhibits and Reports on Form 8-K 28 Signatures 29 Exhibit Index 30 -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 Until the November 8, 1997 effective date of its merger with Ohio Edison Company (Ohio Edison) into FirstEnergy Corp. (FirstEnergy), as discussed in Note 9, Centerior Energy Corporation (Centerior Energy) was the parent company of Centerior 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 September 30, 1997 and results of operations and cash flows for the three months and nine months ended September 30, 1997 and 1996 have been included. All such adjustments were normal recurring adjustments, except for the items discussed in Notes 6, 7 and 8. 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 Reports on Form 10-Q for the quarter ended March 31, 1997 (First Quarter 1997 Form 10-Q) and the quarter ended June 30, 1997 (Second 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 September 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, 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 $63 million of outstanding first mortgage bonds that requires common stock dividends to be paid out of its total balance of retained earnings. At September 30, 1997, Toledo Edison's total retained earnings were $42 million. At September 30, 1997, Cleveland Electric and Toledo Edison had $124.8 million and $259.7 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 nine months ended September 30, 1997 and 1996 were as follows: 1997 1996 Paid February 15 $.20 $.20 Paid May 15 .20 .20 Paid August 15 .20 .20 Paid November 15 .20 .20 For information with respect to an additional cash dividend on Centerior Energy common stock in connection with Centerior Energy's merger with Ohio Edison, see Note 9. Common stock cash dividends declared by Cleveland Electric during the nine months ended September 30, 1997 and 1996 were as follows: 1997 1996 (millions) Paid in February $29.6 $29.6 Paid in May 29.6 46.6 Paid in August 29.6 29.6 Toledo Edison did not declare any common stock dividends during the nine months ended September 30, 1997 and 1996. (4) Mansfield Plant Leases As discussed in Note 4 to the financial statements in the Second Quarter 1997 Form 10-Q, the Operating Companies refinanced high-cost fixed obligations related to their 1987 sale and leaseback transaction for the Bruce Mansfield Generating Plant (Mansfield Plant) through a lower cost transaction in June and July 1997. At September 30, 1997, future minimum lease payments through the year 2016 under the original operating leases for the Mansfield Plant are $1.454 billion, $0.926 billion and $2.38 billion for Cleveland Electric, Toledo Edison and Centerior Energy, respectively. Amended operating leases which are expected to result in reduced future minimum lease payments are currently being negotiated with the owner participants. While the lease payments are made semiannually by the Operating Companies, rental expense is accrued on a straight-line basis over the remaining lease term. Once amended lease terms are finalized, rental expense accruals are expected to be at lower annual rates than the applicable amount recorded under the original leases ($70 million, $45 million and $115 million for Cleveland Electric, Toledo Edison and Centerior Energy, respectively). (5) Other Financing Activity During the three months ended September 30, 1997, the Operating Companies also issued and redeemed preferred stock and debt securities as follows: Cleveland Electric Cleveland Electric issued $54.6 million principal amount of First Mortgage Bonds, 6.10% Series due 2020-F, as collateral security for the sale by a public authority (water authority) of an equal principal amount of its tax-exempt bonds. The proceeds from the sale of the water authority's bonds were used to refund an equal principal amount of the water authority's tax-exempt bonds that were issued in 1987 with a 9.75% interest rate. In a corresponding transaction, Cleveland Electric's first mortgage bonds securing the water authority's 1987 bonds were defeased. At the same time, Cleveland Electric also issued $15.9 million principal amount of First Mortgage Bonds, 6.10% Series due 2020-H, as collateral security for the sale by another public authority (air authority) of an equal principal amount of its tax-exempt bonds. The proceeds from the sale of the air authority's bonds were used to refund an equal principal amount of the air authority's tax-exempt bonds that were issued in 1987 with a 9.75% interest rate. In a corresponding transaction, Cleveland Electric's first mortgage bonds securing the air authority's 1987 bonds were defeased. At the same time, Cleveland Electric also issued $62.56 million principal amount of First Mortgage Bonds, 6.00% Series due 2020-G, as collateral security for the sale by the air authority of an equal principal amount of another series of its tax-exempt bonds. The proceeds from the sale of this series of the air authority's bonds were used to refund equal principal amounts of two series of the air authority's tax-exempt bonds that were issued in 1976 and 1979, each with a 7% interest rate. In a corresponding transaction, Cleveland Electric's first mortgage bonds securing the air authority's 1976 and 1979 bonds were defeased. Cleveland Electric also issued $47.5 million principal amount of First Mortgage Bonds, Variable Rate Series due 2020-I, as collateral security for the sale by the water authority of an equal principal amount of another series of its tax-exempt bonds. The proceeds from the sale of this series of the water authority's bonds were used to refund an equal principal amount of the water authority's tax-exempt bonds that were issued in 1978 with a 6.2% interest rate. In a corresponding transaction, Cleveland Electric's first mortgage bonds securing the water authority's 1978 bonds were defeased. Principal and interest payments for the new water authority bond issue are supported by an irrevocable, direct-pay letter of credit which expires August 27, 2000. Mandatory redemptions consisted of $1 million of Serial Preferred Stock, $7.35 Series C, and $0.1 million of first mortgage bonds and pollution control notes. Toledo Edison Toledo Edison issued $10.1 million principal amount of First Mortgage Bonds, 6.10% Series due 2027, as collateral security for the sale by the air authority of an equal principal amount of its tax-exempt bonds. The proceeds from the sale of the air authority's bonds were used to refund an equal principal amount of the air authority's tax-exempt bonds that were issued in 1987 with a 9.875% interest rate. In a corresponding transaction, Toledo Edison's first mortgage bonds securing the air authority's 1987 bonds were defeased. Mandatory redemptions were $31.4 million of first mortgage bonds. (6) Write-down of an Investment In the third quarter of 1997, Centerior Energy wrote down the carrying value of an $11.7 million investment with a broker-dealer firm by $10.7 million to "Other Income and Deductions, Net". The net write-down was $6.9 million after taxes or $.05 per common share. For background information on the investment, see "3. Centerior Energy Investment" under "Item 5. Other Events" in the Companies' combined Current Report on Form 8-K/A dated August 27, 1997 (August 27, 1997 Form 8-K/A). (7) Sale and Disposal of Materials and Supplies In the third quarter of 1996, Cleveland Electric, Toledo Edison and Centerior Energy recorded $16.6 million, $6.1 million and $22.7 million charges, respectively, for the disposition of materials and supplies inventory. The sale and disposal of inventory were part of the reengineering of the supply chain process. The charges were recorded to "Other Operation and Maintenance Expenses". The net charges after taxes for Cleveland Electric, Toledo Edison and Centerior Energy were $10.8 million, $4 million and $14.8 million, respectively, or, for Centerior Energy, $.10 per common share. In the third quarter of 1997, Cleveland Electric, Toledo Edison and Centerior Energy recorded $2.3 million, $1.2 million and $3.5 million charges, respectively, for the disposition of additional materials and supplies inventory as part of the reengineering of the supply chain process. The net charges after taxes for Cleveland Electric, Toledo Edison and Centerior Energy were $1.5 million, $0.8 million and $2.3 million, respectively, or, for Centerior Energy, $.02 per common share. (8) 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. (9) Merger of Centerior Energy and Ohio Edison in November 1997 In September 1996, Centerior Energy and Ohio Edison entered into an agreement and plan of merger to form a new holding company, FirstEnergy. FirstEnergy received approvals for the merger from the FERC on October 29, 1997 and the Securities and Exchange Commission on November 5, 1997. The FERC approved the merger with the understanding that FirstEnergy would provide greater access to its transmission system as well as participate in the formation of a regional independent system operator, or ISO. In addition, on November 6, 1997, The Public Utilities Commission of Ohio (PUCO) closed its merger-related proceeding, approving agreed-upon conditions previously submitted by FirstEnergy. At the same time, the PUCO opened a proceeding relating to transmission issues, mitigation of stranded costs and FirstEnergy's participation in a regional ISO. The merger of Centerior Energy and Ohio Edison into FirstEnergy is effective November 8, 1997. After the merger, FirstEnergy will directly hold all of the issued and outstanding common stock of the six Centerior Energy wholly owned subsidiaries and Ohio Edison. In July 1997, FirstEnergy submitted to the PUCO staff for approval the regulatory accounting and cost recovery details for implementing the Rate Reduction and Economic Development Plan (Plan) for the Operating Companies, as required by the PUCO when it approved the Plan in January 1997. The Plan is effective for the Operating Companies upon the consummation of the merger and will extend through the year 2006. See Note 15 to the financial statements in Item 8 of the 1996 Form 10-K for a discussion of the significant provisions of the Plan. The Operating Companies have discontinued the application of Statement of Financial Accounting Standards (SFAS) 71 for their nuclear operations effective October 29, 1997. The Operating Companies believe the Plan will not provide for the full recovery of costs and a fair return on the investment associated with their nuclear operations. In accordance with SFAS 101, "Regulated Enterprises -- Accounting for the Discontinuation of Application of SFAS 71", the Operating Companies are required to remove from their balance sheets all regulatory assets and liabilities related to the portions of their businesses for which SFAS 71 is discontinued and to assess all other assets for impairment. The amounts at October 29, 1997 for the regulatory assets written off attributable to nuclear operations for Cleveland Electric, Toledo Edison and Centerior Energy are $499 million ($324 million after taxes), $295 million ($192 million after taxes) and $794 million ($516 million after taxes), respectively, or $3.49 per common share for Centerior Energy. The write-off was recorded as an extraordinary item for the period ended October 31, 1997. The regulatory assets attributable to nuclear operations written off primarily represent the net amounts due from customers for future federal income taxes when the taxes become payable, which, under the Plan, are no longer recoverable from customers. The remainder of the Operating Companies' businesses continue to comply with the provisions of SFAS 71. All remaining regulatory assets of the Operating Companies will continue to be recovered through rates set for the nonnuclear portions of their businesses. For financial reporting purposes, the net book value of the Operating Companies' nuclear generating units is not impaired as a result of the Plan. In connection with the consummation of the merger, an additional cash dividend on Centerior Energy common stock of $.035 per share was declared for share owners of record on November 7, 1997, payable on December 1, 1997. FirstEnergy is accounting for the merger with Centerior Energy as a purchase in accordance with generally accepted accounting principles. FirstEnergy has elected to apply, or "push down", the effects of purchase accounting to the financial statements of the Operating Companies. For background information, see Note 7 to the financial statements in the First Quarter 1997 Form 10-Q. (10) 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 and Second Quarter 1997 Form 10-Qs; and "Item 5. Other Events" in the August 27, 1997 Form 8-K/A.
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES INCOME STATEMENT (Unaudited) (Thousands, Except Per Share Amounts) Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------------- 1997 1996 1997 1996 -------- -------- ----------- ---------- OPERATING REVENUES $ 703,244 $ 727,119 $ 1,927,427 $ 1,941,340 OPERATING EXPENSES Fuel and Purchased Power 121,508 122,920 357,059 348,152 Other Operation and Maintenance 139,383 169,711 433,787 475,379 Generation Facilities Rental Expense, Net 39,892 39,853 119,559 119,559 Depreciation and Amortization 77,072 76,835 230,923 226,789 Taxes, Other Than Federal Income Taxes 79,726 80,129 239,348 247,492 Amortization of Deferred Operating Expenses, Net 10,858 10,853 32,574 32,264 Federal Income Taxes 53,961 54,385 107,389 93,739 -------- -------- ----------- ----------- Total Operating Expenses 522,400 554,686 1,520,639 1,543,374 -------- -------- ----------- ----------- OPERATING INCOME 180,844 172,433 406,788 397,966 NONOPERATING INCOME (LOSS) Allowance for Equity Funds Used During Construction 756 695 1,867 2,394 Other Income and Deductions, Net 9,267 (3,909) (3,529) (10,908) Federal Income Taxes - Credit (Expense) (5,621) 939 (5,205) 3,734 -------- -------- ----------- ----------- Total Nonoperating Income (Loss) 4,402 (2,275) (6,867) (4,780) -------- -------- ----------- ----------- INCOME BEFORE INTEREST CHARGES 185,246 170,158 399,921 393,186 INTEREST CHARGES Long-term Debt 93,698 81,192 248,369 247,841 Short-term Debt 3,967 2,300 7,646 6,498 Allowance for Borrowed Funds Used During Construction (854) (640) (1,680) (2,257) -------- -------- ----------- ----------- Net Interest Charges 96,811 82,852 254,335 252,082 -------- -------- ----------- ----------- INCOME AFTER INTEREST CHARGES 88,435 87,306 145,586 141,104 Preferred Dividend Requirements of Subsidiaries 13,061 13,815 39,876 42,092 -------- -------- ----------- ----------- NET INCOME $ 75,374 $ 73,491 $ 105,710 $ 99,012 ======== ======== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 148,025 148,026 148,026 148,027 ======== ======== =========== =========== EARNINGS PER COMMON SHARE $ .51 $ .50 $ .71 $ .67 ======== ======== =========== =========== 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 BALANCE SHEET (Thousands) September 30, December 31, 1997 1996 (Unaudited) ----------- ----------- ASSETS PROPERTY, PLANT AND EQUIPMENT Utility Plant In Service $ 10,028,501 $ 9,867,193 Accumulated Depreciation and Amortization (3,535,430) (3,272,158) ----------- ----------- 6,493,071 6,595,035 Construction Work In Progress 103,452 78,669 ----------- ----------- 6,596,523 6,673,704 Nuclear Fuel, Net of Amortization 147,896 189,148 Other Property, Less Accumulated Depreciation 47,381 89,291 ----------- ----------- 6,791,800 6,952,143 CURRENT ASSETS Cash and Temporary Cash Investments 175,821 138,068 Amounts Due from Customers and Others, Net 194,821 212,680 Materials and Supplies, at Average Cost Owned 80,005 84,846 Under Consignment 38,986 34,039 Taxes Applicable to Succeeding Years 110,584 249,961 Other 21,880 24,283 ----------- ----------- 622,097 743,877 REGULATORY AND OTHER ASSETS Regulatory Assets 2,237,045 2,277,083 Mansfield Capital Trust 878,797 -- Nuclear Plant Decommissioning Trusts 163,660 139,667 Investment in Partnership 40,327 23,245 Other 85,120 74,187 ----------- ----------- 3,404,949 2,514,182 ----------- ----------- $ 10,818,846 $ 10,210,202 =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common Stock Equity $ 1,973,919 $ 1,986,855 Preferred Stock With Mandatory Redemption Provisions 173,094 189,473 Without Mandatory Redemption Provisions 448,325 448,325 Long-Term Debt 4,203,655 3,444,241 ----------- ----------- 6,798,993 6,068,894 CURRENT LIABILITIES Current Portion of Long-Term Debt and Preferred Stock 102,159 196,033 Current Portion of Lease Obligations 75,499 87,836 Notes Payable to Banks and Others 85,000 -- Accounts Payable 128,189 138,005 Accrued Taxes 242,761 389,014 Accrued Interest 97,396 74,826 Dividends Declared 43,202 13,977 Other 62,960 72,653 ----------- ----------- 837,166 972,344 DEFERRED CREDITS AND OTHER LIABILITIES Unamortized Investment Tax Credits 242,683 251,547 Accumulated Deferred Federal Income Taxes 1,904,311 1,876,924 Unamortized Gain from Bruce Mansfield Plant Sale 456,746 474,757 Accumulated Deferred Rents for Bruce Mansfield Plant and Beaver Valley Unit 2 127,794 137,956 Nuclear Fuel Lease Obligations 99,890 122,655 Retirement Benefits 186,734 183,571 Other 164,529 121,554 ----------- ----------- 3,182,687 3,168,964 COMMITMENTS AND CONTINGENCIES (Note 10) ----------- ----------- $ 10,818,846 $ 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) Nine Months Ended September 30, ----------------------- 1997 1996 ----------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $105,710 $99,012 -------- -------- Adjustments to Reconcile Net Income to Cash from Operating Activities: Depreciation and Amortization 230,923 226,789 Deferred Federal Income Taxes 26,972 30,967 Deferred Fuel 28,567 10,777 Leased Nuclear Fuel Amortization 65,008 58,212 Amortization of Deferred Operating Expenses, Net 32,574 32,264 Allowance for Equity Funds Used During Construction (1,867) (2,394) Changes in Amounts Due from Customers and Others, Net 10,983 (22,997) Net Proceeds from Accounts Receivable Securitization -- 135,223 Changes in Materials and Supplies (106) 34,468 Changes in Accounts Payable (9,816) (38,487) Changes in Working Capital Affecting Operations 8,404 34,841 Other Noncash Items 6,112 (15,969) -------- -------- Total Adjustments 397,754 483,694 -------- -------- Net Cash from Operating Activities 503,464 582,706 CASH FLOWS FROM FINANCING ACTIVITIES Bank Loans, Commercial Paper and Other Short-Term Debt 85,000 -- First Mortgage Bond Issues 190,660 -- Secured Note Issues 720,000 -- Reacquired Common Stock (20) (20) Maturities, Redemptions and Sinking Funds (262,079) (178,153) Nuclear Fuel Lease Obligations (63,888) (67,962) Common Stock Dividends Paid (88,816) (88,816) Premiums, Discounts and Expenses (15,650) (561) -------- -------- Net Cash from Financing Activities 565,207 (335,512) CASH FLOWS FROM INVESTING ACTIVITIES Cash Applied to Construction (118,906) (107,451) Interest Capitalized as Allowance for Borrowed Funds Used During Construction (1,680) (2,257) Contributions to Nuclear Plant Decommissioning Trusts (16,162) (16,994) Investment in Mansfield Capital Trust (878,797) -- Investment in Partnership (17,082) (21,164) Other Cash Received 1,709 6,627 -------- -------- Net Cash from Investing Activities (1,030,918) (141,239) -------- -------- NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 37,753 105,955 CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 138,068 179,038 -------- -------- CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $175,821 $284,993 ======== ======== Other Payment Information: Interest (net of amounts capitalized) $223,000 $235,000 Federal Income Taxes 54,000 5,200 The accompanying notes as they relate to Centerior Energy are an integral part of this statement.
- 9 - 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 and Second Quarter 1997 Form 10-Qs. The information under "Capital Resources and Liquidity" remains unchanged with the following exceptions: As discussed in Note 4, the Operating Companies completed the refinancing of high-cost fixed obligations through a lower cost transaction in July 1997. During the third quarter of 1997, the Operating Companies issued and redeemed various securities as discussed in Note 5. In October 1997, Cleveland Electric issued $150 million principal amount of 7.43% Series C Secured Notes due 2009 and $300 million principal amount of 7.88% Series C Secured Notes due 2017. The Series C Secured Notes are secured by Cleveland Electric first mortgage bonds. Using available cash, short-term borrowings of $250 million (which have been repaid) and the net proceeds from the sales of the Series C Secured Notes, Cleveland Electric redeemed in October 1997 $50 million principal amount of First Mortgage Bonds, 9-1/4% Series due 2009, at 102.19% of face value; $300 million principal amount of First Mortgage Bonds, 9- 3/8% Series due 2017-A, at 104.38% of face value; and $100 million principal amount of First Mortgage Bonds, 10% Series due 2020-E, at 105.74% of face value. The premiums paid for the early redemption of the first mortgage bonds are recorded as part of the losses for the reacquisitions of the first mortgage bonds. Such losses were deferred and are being amortized over the lives of the new debt issues. At September 30, 1997, neither Operating Company would have been permitted to issue a material amount of additional first mortgage bonds, except in connection with refinancings. Since FirstEnergy has elected to apply purchase accounting to the Operating Companies, upon completion of Centerior Energy's merger with Ohio Edison, each Operating Company's available bondable property will be reduced to less than 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 any refinancings. Results of Operations Factors contributing to the 3.3% and 0.7% decreases in 1997 operating revenues from 1996 for the third quarter and nine months, respectively, are shown as follows: Changes for Period Ended September 30, 1997 Three Nine Factors Months Months (millions) Kilowatt-hour Sales Volume and Mix $ 7.1 $ 14.6 Unbilled Revenues (2.7) (4.7) Wholesale Revenues 5.9 13.7 Base Rates (22.0) (17.1) Fuel Cost Recovery Revenues (7.2) (9.2) Miscellaneous Revenues (5.0) (11.2) Total $(23.9) $(13.9) Percentage changes between 1997 and 1996 billed electric kilowatt-hour sales are summarized as follows: Changes for Period Ended September 30, 1997 Three Nine Customer Categories Months Months Residential (2.3)% (2.3)% Commercial (3.5) (1.9) Industrial 4.4 3.9 Other 0.8 17.8 Total 0.4 2.5 Third quarter 1997 total kilowatt-hour sales increased slightly as greater industrial and other sales were partially offset by fewer residential and commercial sales. Industrial sales increased primarily because of sales to the new North Star BHP Steel facility and continuing growth in sales to the broad-based, smaller industrial customer group. However, these industrial sales increases were partially offset by fewer sales to large automotive manufacturers. Other sales increased slightly as increased sales to public authorities were partially offset by lower wholesale sales. Residential and commercial sales declined because of the cooler summer weather in the 1997 period. On a weather-normalized basis, residential sales increased 1.9% for the 1997 period, while commercial sales decreased 1.3%. Kilowatt-hour sales data reflects a significant portion of the effect of hot weather in the second half of June 1997 because unbilled sales at the end of June 1997 were included in third quarter 1997 sales data. However, the estimated revenues from those unbilled sales were recorded in June 1997. Total kilowatt-hour sales increased for the nine-month period in 1997 as greater industrial and other sales were partially offset by fewer residential and commercial sales. Industrial sales increased primarily for the same reasons cited for the third quarter 1997 increase. Other sales increased as a result of a 22% increase in wholesale sales and an increase in sales to public authorities. Residential and commercial sales declined because of the milder weather in the 1997 period. On a weather-normalized basis, residential sales increased 1.5% for the 1997 period, while commercial sales decreased 0.4%. Wholesale sales in 1996 were suppressed by soft market conditions and, during the first six months of 1996, by limited power availability for bulk power transactions because of nuclear generating plant refueling and maintenance outages. Renegotiated contracts for certain large industrial customers of the Operating Companies resulted in a decrease in their base rates, contributing to the declines in 1997 base rates revenues. 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 third quarter of 1997 decreased about 6% and 10% for Cleveland Electric and Toledo Edison, respectively, compared to the weighted average of the respective fuel cost recovery factors used for the third quarter of 1996. The weighted average of the respective fuel cost recovery factors used for the 1997 nine-month period decreased about 1% and 8% for Cleveland Electric and Toledo Edison, respectively, compared to the weighted average of the respective fuel cost recovery factors used for the 1996 nine-month period. Significant portions of the 1997 third quarter and nine-month decreases in miscellaneous revenues relate to a canceled generating plant lease agreement for which revenues were recorded in 1996 and a refund payment was made in the 1997 first quarter. Third quarter operating expenses in 1997 decreased 5.8% from the 1996 amount. Other operation and maintenance expenses decreased as a result of ongoing cost cutting and work force reductions. Also, other operation and maintenance expenses for the 1996 third quarter included a $22.7 million charge for the disposition of materials and supplies inventory as discussed in Note 7. A similar $3.5 million charge was recorded for the 1997 third quarter. Third quarter nonoperating income in 1997 increased from the 1996 amount primarily because interest income from investments in the Mansfield Capital Trust in connection with the Mansfield Plant lease refinancing transaction discussed in Note 4 completely offset the write-down of the investment discussed in Note 6 and expenses related to the pending merger with Ohio Edison. Third quarter interest charges in 1997 increased from the 1996 amount primarily because of the issuance of $720 million aggregate principal amount of secured notes in June 1997 along with certain short-term borrowing arrangements in connection with the Mansfield Plant lease refinancing. However, the increased interest expense was completely offset by increased interest income included in nonoperating income. Nine-month operating expenses in 1997 decreased 1.5% from the 1996 amount. Other operation and maintenance expenses decreased for the same reasons cited for the third quarter 1997 decrease in these expenses. Taxes, other than federal income taxes, decreased primarily because of lower property and payroll tax accruals. Federal income taxes increased as a result of higher pretax operating income. 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. Depreciation and amortization expenses increased primarily because of changes in depreciation rates approved in the April 1996 PUCO rate order. The nine-month 1997 nonoperating loss resulted primarily from the aforementioned write-down of an investment, merger-related expenses and certain costs associated with an accounts receivable securitization. The nine-month 1996 nonoperating loss resulted primarily from Toledo Edison's write-down of two inactive production facilities as discussed in Note 8. Nine-month interest charges in 1997 increased from the 1996 amount primarily because the interest charges for the new secured notes and short-term borrowings for the Mansfield Plant lease refinancing exceeded the expense reduction from the redemption and refinancing of debt securities in 1996 and 1997. Nine-month preferred dividend requirements in 1997 decreased from the 1996 amount because of the redemption of preferred stock in 1996 and 1997.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY INCOME STATEMENT (Unaudited) (Thousands) Three Months Ended Nine Months Ended September 30, September 30, --------------------- ------------------------- 1997 1996 1997 1996 -------- -------- ---------- ---------- OPERATING REVENUES $ 499,468 $ 506,491 $ 1,359,341 $ 1,368,042 OPERATING EXPENSES Fuel and Purchased Power (1) 108,397 102,941 321,017 304,883 Other Operation and Maintenance 89,830 115,118 282,686 319,333 Generation Facilities Rental Expense, Net 13,892 13,892 41,675 41,675 Depreciation and Amortization 53,610 53,279 160,131 157,128 Taxes, Other Than Federal Income Taxes 56,864 56,537 170,824 176,297 Amortization of Deferred Operating Expenses, Net 6,567 6,567 19,701 19,510 Federal Income Taxes 38,837 37,434 74,393 66,804 -------- -------- ---------- ---------- Total Operating Expenses 367,997 385,768 1,070,427 1,085,630 -------- -------- ---------- ---------- OPERATING INCOME 131,471 120,723 288,914 282,412 NONOPERATING INCOME (LOSS) Allowance for Equity Funds Used During Construction 465 366 1,190 1,465 Other Income and Deductions, Net 12,107 (4,506) 427 (3,873) Federal Income Taxes - Credit (Expense) (5,028) 1,449 (2,958) 1,731 -------- -------- ---------- ---------- Total Nonoperating Income (Loss) 7,544 (2,691) (1,341) (677) -------- -------- ---------- ---------- INCOME BEFORE INTEREST CHARGES 139,015 118,032 287,573 281,735 INTEREST CHARGES Long-Term Debt 69,041 58,628 179,645 179,414 Short-Term Debt 2,961 1,063 7,426 3,127 Allowance for Borrowed Funds Used During Construction (729) (380) (1,440) (1,526) -------- -------- ---------- ---------- Net Interest Charges 71,273 59,311 185,631 181,015 -------- -------- ---------- ---------- NET INCOME 67,742 58,721 101,942 100,720 Preferred Dividend Requirements 8,876 9,563 27,287 29,408 -------- -------- ---------- ---------- EARNINGS AVAILABLE FOR COMMON STOCK $ 58,866 $ 49,158 $ 74,655 $ 71,312 ======== ======== ========== ========== (1) Includes purchased power expense for purchases from Toledo Edison. $ 28,118 $ 24,933 $ 86,492 $ 77,513 The accompanying notes as they relate to Cleveland Electric are an integral part of this statement.
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THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY BALANCE SHEET (Thousands) September 30, December 31, 1997 1996 (Unaudited) ----------- ----------- ASSETS PROPERTY, PLANT AND EQUIPMENT Utility Plant In Service $ 7,079,565 $ 6,938,535 Accumulated Depreciation and Amortization (2,448,138) (2,252,321) ----------- ----------- 4,631,427 4,686,214 Construction Work In Progress 69,262 56,853 ----------- ----------- 4,700,689 4,743,067 Nuclear Fuel, Net of Amortization 89,488 113,030 Other Property, Less Accumulated Depreciation 16,038 53,547 ----------- ----------- 4,806,215 4,909,644 CURRENT ASSETS Cash and Temporary Cash Investments 87,023 30,273 Amounts Due from Customers and Others, Net 168,206 189,547 Amounts Due from Affiliates 5,477 5,634 Materials and Supplies, at Average Cost Owned 48,518 51,686 Under Consignment 28,498 23,655 Taxes Applicable to Succeeding Years 78,735 181,609 Other 13,622 15,237 ----------- ----------- 430,079 497,641 REGULATORY AND OTHER ASSETS Regulatory Assets 1,328,356 1,349,693 Mansfield Capital Trust 558,813 -- Nuclear Plant Decommissioning Trusts 88,923 75,573 Other 69,367 44,980 ----------- ----------- 2,045,459 1,470,246 ----------- ----------- $ 7,281,753 $ 6,877,531 =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common Stock Equity $ 1,043,614 $ 1,044,283 Preferred Stock With Mandatory Redemption Provisions 171,404 186,118 Without Mandatory Redemption Provisions 238,325 238,325 Long-Term Debt 3,072,394 2,441,215 ----------- ----------- 4,525,737 3,909,941 CURRENT LIABILITIES Current Portion of Long-Term Debt and Preferred Stock 73,544 144,668 Current Portion of Lease Obligations 42,006 51,592 Notes Payable to Banks and Others 60,000 -- Accounts Payable 56,159 82,694 Accounts and Notes Payable to Affiliates 99,685 171,433 Accrued Taxes 199,064 315,998 Accrued Interest 70,246 52,487 Dividends Declared 5,685 15,228 Other 39,096 43,672 ----------- ----------- 645,485 877,772 DEFERRED CREDITS AND OTHER LIABILITIES Unamortized Investment Tax Credits 170,215 176,130 Accumulated Deferred Federal Income Taxes 1,340,431 1,305,601 Unamortized Gain from Bruce Mansfield Plant Sale 284,519 295,730 Accumulated Deferred Rents for Bruce Mansfield Plant 92,642 98,767 Nuclear Fuel Lease Obligations 60,791 73,947 Retirement Benefits 77,039 72,843 Other 84,894 66,800 ----------- ----------- 2,110,531 2,089,818 COMMITMENTS AND CONTINGENCIES (Note 10) ----------- ----------- $ 7,281,753 $ 6,877,531 =========== =========== The accompanying notes as they relate to Cleveland Electric are an integral part of this statement.
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THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY CASH FLOWS (Unaudited) (Thousands) Nine Months Ended September 30, --------------------- 1997 1996 --------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $101,942 $100,720 -------- -------- Adjustments to Reconcile Net Income to Cash from Operating Activities: Depreciation and Amortization 160,131 157,128 Deferred Federal Income Taxes 34,254 21,514 Deferred Fuel 17,197 3,245 Leased Nuclear Fuel Amortization 38,110 33,537 Amortization of Deferred Operating Expenses, Net 19,701 19,510 Allowance for Equity Funds Used During Construction (1,190) (1,465) Changes in Amounts Due from Customers and Others, Net 6,869 (10,719) Net Proceeds from Accounts Receivable Securitization -- 57,988 Changes in Materials and Supplies (1,675) 29,551 Changes in Accounts Payable (26,535) (36,552) Changes in Working Capital Affecting Operations (2,235) 38,596 Other Noncash Items (1,737) (7,157) -------- -------- Total Adjustments 242,890 305,176 -------- -------- Net Cash from Operating Activities 344,832 405,896 CASH FLOWS FROM FINANCING ACTIVITIES Bank Loans, Commercial Paper and Other Short-Term Debt 60,000 -- Notes Payable to Affiliates (68,618) 1,281 First Mortgage Bond Issues 180,560 -- Secured Note Issues 575,000 -- Equity Contributions from Parent 4,500 -- Maturities, Redemptions and Sinking Funds (210,714) (134,288) Nuclear Fuel Lease Obligations (37,636) (38,532) Dividends Paid (116,447) (135,598) Premiums, Discounts and Expenses (12,495) (307) -------- -------- Net Cash from Financing Activities 374,150 (307,444) CASH FLOWS FROM INVESTING ACTIVITIES Cash Applied to Construction (85,265) (74,747) Interest Capitalized as Allowance for Borrowed Funds Used During Construction (1,440) (1,526) Contributions to Nuclear Plant Decommissioning Trusts (8,784) (9,194) Investment in Mansfield Capital Trust (558,813) -- Other Cash Received (Applied) (7,930) 2,479 -------- -------- Net Cash from Investing Activities (662,232) (82,988) -------- -------- NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 56,750 15,464 CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 30,273 69,770 -------- -------- CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $87,023 $85,234 ======== ======== Other Payment Information: Interest (net of amounts capitalized) $162,000 $169,000 Federal Income Taxes (Refund) 26,300 (6,200) The accompanying notes as they relate to Cleveland Electric are an integral part of this statement.
- 16 - 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 and Second Quarter 1997 Form 10-Qs. The information under "Capital Resources and Liquidity" remains unchanged with the following exceptions: As discussed in Note 4, the Operating Companies completed the refinancing of high-cost fixed obligations through a lower cost transaction in July 1997. During the third quarter of 1997, Cleveland Electric issued and redeemed various securities as discussed in Note 5. In October 1997, Cleveland Electric issued $150 million principal amount of 7.43% Series C Secured Notes due 2009 and $300 million principal amount of 7.88% Series C Secured Notes due 2017. The Series C Secured Notes are secured by Cleveland Electric first mortgage bonds. Using available cash, short-term borrowings of $250 million (which have been repaid) and the net proceeds from the sales of the Series C Secured Notes, Cleveland Electric redeemed in October 1997 $50 million principal amount of First Mortgage Bonds, 9-1/4% Series due 2009, at 102.19% of face value; $300 million principal amount of First Mortgage Bonds, 9- 3/8% Series due 2017-A, at 104.38% of face value; and $100 million principal amount of First Mortgage Bonds, 10% Series due 2020-E, at 105.74% of face value. The premiums paid for the early redemption of the first mortgage bonds are recorded as part of the losses for the reacquisitions of the first mortgage bonds. Such losses were deferred and are being amortized over the lives of the new debt issues. At September 30, 1997, Cleveland Electric would not have been permitted to issue a material amount of additional first mortgage bonds, except in connection with refinancings. Since FirstEnergy has elected to apply purchase accounting to Cleveland Electric, upon completion of Centerior Energy's merger with Ohio Edison, Cleveland Electric's available bondable property will be reduced to less than 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 any refinancings. Results of Operations Factors contributing to the 1.4% and 0.6% decreases in 1997 operating revenues from 1996 for the third quarter and nine months, respectively, are shown as follows: Changes for Period Ended September 30, 1997 Three Nine Factors Months Months (millions) Kilowatt-hour Sales Volume and Mix $ 1.0 $ (7.8) Unbilled Revenues 4.5 (1.5) Wholesale Revenues 9.4 18.8 Base Rates (12.9) (4.6) Fuel Cost Recovery Revenues (3.9) (1.4) Miscellaneous Revenues (5.1) (12.2) Total $ (7.0) $ (8.7) Percentage changes between 1997 and 1996 billed electric kilowatt-hour sales are summarized as follows: Changes for Period Ended September 30, 1997 Three Nine Customer Categories Months Months Residential (1.0)% (1.7)% Commercial (3.4) (2.1) Industrial 0.6 0.3 Other 29.0 42.6 Total 2.9 3.9 Third quarter 1997 total kilowatt-hour sales increased as greater industrial and other sales were partially offset by fewer residential and commercial sales. Industrial sales increased slightly as more sales to the broad-based, smaller industrial customer group were partially offset by fewer sales to large automotive and primary metal manufacturers. Other sales increased as a result of a 24% increase in wholesale sales and an increase in sales to public authorities. Residential and commercial sales declined because of the cooler summer weather in the 1997 period. On a weather-normalized basis, residential sales increased 2.3% for the 1997 period, while commercial sales decreased 1.5%. Kilowatt-hour sales data reflects a significant portion of the effect of hot weather in the second half of June 1997 because unbilled sales at the end of June 1997 were included in third quarter 1997 sales data. However, the estimated revenues from those unbilled sales were recorded in June 1997. Total kilowatt-hour sales increased for the nine-month period in 1997 as greater industrial and other sales were partially offset by fewer residential and commercial sales. Industrial sales increased slightly as more sales to large chemical industry customers and the broad-based, smaller industrial customer group were partially offset by fewer sales to large automotive manufacturers. Other sales increased as a result of a 50% increase in wholesale sales and an increase in sales to public authorities. Residential and commercial sales declined because of the milder weather in the 1997 period. On a weather-normalized basis, residential sales increased 2% for the 1997 period, while commercial sales decreased 0.8%. Wholesale sales in 1996 were suppressed by soft market conditions and, during the first six months of 1996, by 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 their base rates, contributing to the declines 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 6% and 1% for the third quarter and nine months, respectively. Significant portions of the 1997 third quarter and nine-month decreases in miscellaneous revenues relate to a canceled generating plant lease agreement for which revenues were recorded in 1996 and a refund payment was made in the 1997 first quarter. Third quarter operating expenses in 1997 decreased 4.6% from the 1996 amount. Other operation and maintenance expenses decreased as a result of ongoing cost cutting and work force reductions. Also, other operation and maintenance expenses for the 1996 third quarter included a $16.6 million charge for the disposition of materials and supplies inventory as discussed in Note 7. A similar $2.3 million charge was recorded for the 1997 third quarter. Fuel and purchased power expenses increased as higher purchased power expense was partially offset by lower fuel expense related to less generation. Federal income taxes increased as a result of higher pretax operating income. Third quarter nonoperating income in 1997 increased from the 1996 amount primarily because interest income from the investment in the Mansfield Capital Trust in connection with the Mansfield Plant lease refinancing transaction discussed in Note 4 completely offset Cleveland Electric's share of expenses related to Centerior Energy's pending merger with Ohio Edison. Third quarter interest charges in 1997 increased from the 1996 amount primarily because of the issuance of $575 million aggregate principal amount of secured notes in June 1997 along with certain short-term borrowing arrangements in connection with the Mansfield Plant lease refinancing. However, the increased interest expense was completely offset by increased interest income included in nonoperating income. Nine-month operating expenses in 1997 decreased 1.4% from the 1996 amount. Other operation and maintenance expenses decreased for the same reasons cited for the third quarter 1997 decrease in these expenses. Taxes, other than federal income taxes, decreased primarily because of lower property and payroll tax accruals. 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. Depreciation and amortization expenses increased primarily because of changes in depreciation rates approved in the April 1996 PUCO rate order. The nine-month 1997 nonoperating loss resulted primarily from Cleveland Electric's share of merger-related expenses and certain costs associated with an accounts receivable securitization. Nine-month interest charges in 1997 increased from the 1996 amount primarily because the interest charges for the new secured notes and short-term borrowings for the Mansfield Plant lease refinancing exceeded the expense reduction from the redemption and refinancing of debt securities in 1996 and 1997. Nine-month preferred dividend requirements in 1997 decreased from the 1996 amount because of the redemption of preferred stock in 1996 and 1997.
THE TOLEDO EDISON COMPANY AND SUBSIDIARY INCOME STATEMENT (Unaudited) (Thousands) Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 1997 1996 1997 1996 -------- -------- -------- -------- OPERATING REVENUES (1) $ 241,282 $ 252,198 $ 680,486 $ 673,931 OPERATING EXPENSES Fuel and Purchased Power 45,477 46,928 133,292 126,348 Other Operation and Maintenance 54,740 59,287 166,512 174,050 Generation Facilities Rental Expense, Net 26,000 25,961 77,884 77,884 Depreciation and Amortization 23,462 23,556 70,792 69,661 Taxes, Other Than Federal Income Taxes 22,729 23,503 68,124 70,928 Amortization of Deferred Operating Expenses, Net 4,291 4,287 12,873 12,755 Federal Income Taxes 15,212 17,011 33,204 27,110 -------- -------- -------- -------- Total Operating Expenses 191,911 200,533 562,681 558,736 -------- -------- -------- -------- OPERATING INCOME 49,371 51,665 117,805 115,195 NONOPERATING INCOME (LOSS) Allowance for Equity Funds Used During Construction 291 330 677 929 Other Income and Deductions, Net 7,870 96 8,343 (8,683) Federal Income Taxes - Credit (Expense) (3,103) (92) (3,929) 3,218 -------- -------- -------- -------- Total Nonoperating Income (Loss) 5,058 334 5,091 (4,536) -------- -------- -------- -------- INCOME BEFORE INTEREST CHARGES 54,429 51,999 122,896 110,659 INTEREST CHARGES Long-Term Debt 24,656 22,564 68,723 68,427 Short-Term Debt 2,678 1,712 5,237 4,075 Allowance for Borrowed Funds Used During Construction (124) (260) (239) (731) -------- -------- -------- -------- Net Interest Charges 27,210 24,016 73,721 71,771 -------- -------- -------- -------- NET INCOME 27,219 27,983 49,175 38,888 Preferred Dividend Requirements 4,185 4,250 12,590 12,683 -------- -------- -------- -------- EARNINGS AVAILABLE FOR COMMON STOCK $ 23,034 $ 23,733 $ 36,585 $ 26,205 ======== ======== ======== ======== (1) Includes revenues from bulk power sales to Cleveland Electric. $ 28,118 $ 24,933 $ 86,492 $ 77,513 The accompanying notes as they relate to Toledo Edison are an integral part of this statement.
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THE TOLEDO EDISON COMPANY AND SUBSIDIARY BALANCE SHEET (Thousands) September 30, December 31, 1997 1996 (Unaudited) ----------- ----------- ASSETS PROPERTY, PLANT AND EQUIPMENT Utility Plant In Service $ 2,948,913 $ 2,928,657 Accumulated Depreciation and Amortization (1,087,291) (1,019,836) ----------- ----------- 1,861,622 1,908,821 Construction Work In Progress 27,622 21,479 ----------- ----------- 1,889,244 1,930,300 Nuclear Fuel, Net of Amortization 58,408 76,118 Other Property, Less Accumulated Depreciation 6,936 8,460 ----------- ----------- 1,954,588 2,014,878 CURRENT ASSETS Cash and Temporary Cash Investments 48,144 81,454 Amounts Due from Customers and Others, Net 9,110 16,308 Amounts Due from Affiliates 60,259 95,336 Materials and Supplies, at Average Cost Owned 31,487 33,160 Under Consignment 10,487 10,383 Taxes Applicable to Succeeding Years 31,849 68,352 Other 2,102 3,479 ----------- ----------- 193,438 308,472 REGULATORY AND OTHER ASSETS Regulatory Assets 908,929 927,629 Mansfield Capital Trust 319,984 -- Nuclear Plant Decommissioning Trusts 74,737 64,093 Other 35,208 42,408 ----------- ----------- 1,338,858 1,034,130 ----------- ----------- $ 3,486,884 $ 3,357,480 =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common Stock Equity $ 839,822 $ 803,237 Preferred Stock With Mandatory Redemption Provisions 1,690 3,355 Without Mandatory Redemption Provisions 210,000 210,000 Long-Term Debt 1,131,262 1,003,026 ----------- ----------- 2,182,774 2,019,618 CURRENT LIABILITIES Current Portion of Long-Term Debt and Preferred Stock 28,615 51,365 Current Portion of Lease Obligations 30,345 36,244 Accounts Payable 47,348 46,496 Accounts and Notes Payable to Affiliates 57,042 30,016 Accrued Taxes 47,303 72,829 Accrued Interest 27,052 22,348 Other 15,588 18,722 ----------- ----------- 253,293 278,020 DEFERRED CREDITS AND OTHER LIABILITIES Unamortized Investment Tax Credits 72,468 75,417 Accumulated Deferred Federal Income Taxes 559,139 565,600 Unamortized Gain from Bruce Mansfield Plant Sale 172,227 179,027 Accumulated Deferred Rents for Bruce Mansfield Plant and Beaver Valley Unit 2 35,153 39,188 Nuclear Fuel Lease Obligations 39,099 48,491 Retirement Benefits 104,529 102,214 Other 68,202 49,905 ----------- ----------- 1,050,817 1,059,842 COMMITMENTS AND CONTINGENCIES (Note 10) ----------- ----------- $ 3,486,884 $ 3,357,480 =========== =========== The accompanying notes as they relate to Toledo Edison are an integral part of this statement.
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THE TOLEDO EDISON COMPANY AND SUBSIDIARY CASH FLOWS (Unaudited) (Thousands) Nine Months Ended September 30, ----------------------- 1997 1996 --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $49,175 $38,888 -------- -------- Adjustments to Reconcile Net Income to Cash from Operating Activities: Depreciation and Amortization 70,792 69,661 Deferred Federal Income Taxes (6,462) 9,863 Deferred Fuel 11,369 7,532 Leased Nuclear Fuel Amortization 26,898 24,677 Amortization of Deferred Operating Expenses, Net 12,873 12,755 Allowance for Equity Funds Used During Construction (677) (929) Changes in Amounts Due from Customers and Others, Net 14,794 (11,753) Net Proceeds from Accounts Receivable Securitization -- 77,235 Changes in Materials and Supplies 1,569 4,918 Changes in Accounts Payable 852 2,738 Changes in Working Capital Affecting Operations 12,710 (3,260) Other Noncash Items 7,849 (8,812) -------- -------- Total Adjustments 152,567 184,625 -------- -------- Net Cash from Operating Activities 201,742 223,513 CASH FLOWS FROM FINANCING ACTIVITIES Notes Payable to Affiliates 24,500 (20,950) First Mortgage Bond Issue 10,100 -- Secured Note Issues 145,000 -- Maturities, Redemptions and Sinking Funds (51,365) (43,865) Nuclear Fuel Lease Obligations (26,252) (29,430) Dividends Paid (12,589) (12,702) Premiums, Discounts and Expenses (3,155) (254) -------- -------- Net Cash from Financing Activities 86,239 (107,201) CASH FLOWS FROM INVESTING ACTIVITIES Cash Applied to Construction (33,641) (32,704) Interest Capitalized as Allowance for Borrowed Funds Used During Construction (239) (731) Loans to Affiliates 38,817 (6,281) Contributions to Nuclear Plant Decommissioning Trusts (7,378) (7,800) Investment in Mansfield Capital Trust (319,984) -- Other Cash Received 1,134 2,199 -------- -------- Net Cash from Investing Activities (321,291) (45,317) -------- -------- NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (33,310) 70,995 CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 81,454 93,669 -------- -------- CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $48,144 $164,664 ======== ======== Other Payment Information: Interest (net of amounts capitalized) $65,000 $66,000 Federal Income Taxes 25,300 10,400 The accompanying notes as they relate to Toledo Edison are an integral part of this statement.
- 23 - 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 and Second Quarter 1997 Form 10-Qs. The information under "Capital Resources and Liquidity" remains unchanged with the following exceptions: As discussed in Note 4, the Operating Companies completed the refinancing of high-cost fixed obligations through a lower cost transaction in July 1997. During the third quarter of 1997, Toledo Edison issued and redeemed various securities as discussed in Note 5. At September 30, 1997, Toledo Edison would not have been permitted to issue a material amount of additional first mortgage bonds, except in connection with refinancings. Since FirstEnergy has elected to apply purchase accounting to Toledo Edison, upon completion of Centerior Energy's merger with Ohio Edison, Toledo Edison's available bondable property will be reduced to less than 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 any refinancings. Results of Operations Factors contributing to the 4.3% decrease and 1% increase in 1997 operating revenues from 1996 for the third quarter and nine months, respectively, are shown as follows: Changes for Period Ended September 30, 1997 Three Nine Factors Months Months (millions) Kilowatt-hour Sales Volume and Mix $ 6.1 $ 22.5 Unbilled Revenues (7.2) (3.2) Wholesale Revenues 1.9 9.0 Base Rates (9.1) (12.5) Fuel Cost Recovery Revenues (3.3) (7.8) Miscellaneous Revenues 0.7 (1.4) Total $(10.9) $ 6.6 Percentage changes between 1997 and 1996 billed electric kilowatt-hour sales are summarized as follows: Changes for Period Ended September 30, 1997 Three Nine Customer Categories Months Months Residential (5.4)% (3.7)% Commercial (4.0) (1.0) Industrial 11.3 10.5 Other -- 13.6 Total 2.7 6.6 Third quarter 1997 total kilowatt-hour sales increased as greater industrial 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. Residential and commercial sales declined because of a change in the meter reading schedule in August 1997, which reduced the number of days in the billing cycles, and the cooler summer weather in the 1997 period. On a weather-normalized basis, residential sales increased 0.7% for the 1997 period, while commercial sales decreased 0.3%. Kilowatt-hour sales data reflects a significant portion of the effect of hot weather in the second half of June 1997 because unbilled sales at the end of June 1997 were included in third quarter 1997 sales data. However, the estimated revenues from those unbilled sales were recorded in June 1997. Total kilowatt-hour sales increased for the nine-month period in 1997 as greater industrial and other sales were partially offset by fewer residential and commercial sales. Industrial sales increased primarily for the same reasons cited for the third quarter 1997 increase. Other sales increased primarily because of a 16% increase in wholesale sales. Residential and commercial sales declined because of the milder weather in the 1997 period. Weather-normalized residential and commercial sales increased 0.6% and 1.1% respectively, for the 1997 period. Wholesale sales in 1996 were suppressed by soft market conditions and, during the first six months of 1996, by 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 their base rates, contributing to the declines 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 8% for the third quarter and nine months, respectively. Third quarter operating expenses in 1997 decreased 4.3% from the 1996 amount. Other operation and maintenance expenses, exclusive of the inventory reduction charges recorded in the third quarter of both years, increased slightly. Other operation and maintenance expenses for the 1996 third quarter included a $6.1 million charge for the disposition of materials and supplies inventory as discussed in Note 7. A similar $1.2 million charge was recorded for the 1997 third quarter. Fuel and purchased power expenses decreased as lower fuel expense related to less generation was partially offset by higher purchased power expense. Federal income taxes decreased as a result of lower pretax operating income. Third quarter nonoperating income in 1997 increased from the 1996 amount primarily because of interest income from the investment in the Mansfield Capital Trust in connection with the Mansfield Plant lease refinancing transaction discussed in Note 4. Third quarter interest charges in 1997 increased from the 1996 amount primarily because of the issuance of $145 million aggregate principal amount of secured notes in June 1997 along with certain short-term borrowing arrangements in connection with the Mansfield Plant lease refinancing. However, the increased interest expense was completely offset by increased interest income included in nonoperating income. Nine-month operating expenses in 1997 increased 0.7% 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. 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, exclusive of the inventory reduction charges recorded in the third quarter of both years, 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. Nine-month nonoperating income in 1997 increased from the 1996 amount as interest income from the investment in the Mansfield Capital Trust in connection with the Mansfield Plant lease refinancing completely offset Toledo Edison's share of expenses related to Centerior Energy's pending merger with Ohio Edison. Also, the nine-month 1996 nonoperating loss resulted primarily from the write-down of two inactive production facilities as discussed in Note 8. Nine-month interest charges in 1997 increased from the 1996 amount primarily because the interest charges for the new secured notes and short-term borrowings for the Mansfield Plant lease refinancing exceeded the expense reduction from the redemption and refinancing of debt securities in 1996 and 1997. PART II. OTHER INFORMATION Item 5. Other Information 1. Cleveland Electric Collective Bargaining Agreement For additional information relating to this topic, see "2. Cleveland Electric Collective Bargaining Agreement" under "Item 5. Other Events" in the August 27, 1997 Form 8-K/A. Cleveland Electric withdrew its settlement offer to the union effective October 29, 1997. By its terms, the current contract between Cleveland Electric and Local 270 continues in full force and effect except that certain provisions, including one prohibiting a strike or lockout, are not in effect. There is a risk that a strike may occur at any time. However, Cleveland Electric believes that it would be able to continue to provide substantially normal electric service to its customers if any such event were to occur. 2. Proposed Air Quality Control Changes For additional information relating to this topic, see "Environmental Regulation - Air Quality Control" under "Item 1. Business" in the Companies' 1996 Form 10-K and "6. New Federal Rules" under "Part II., Item 5. Other Information" in the Second Quarter 1997 Form 10-Q. The U.S. Environmental Protection Agency has proposed regulations which would require 22 states, including Ohio, to revise their state implementation plans to reduce emissions of nitrogen oxide by the end of 2002. It is anticipated that required reductions could be achieved through additional emission controls on Ohio's 53 coal-fired electric power plants. The proposed controls could require the Operating Companies to incur capital costs of between approximately $250-345 million. 3. Conjunctive Electric Service (CES) For more information on the Operating Companies' conjunctive electric service (CES) tariff and pending PUCO and Ohio Supreme Court proceedings, see "Part II., Item 5. Other Information, 2. Conjunctive Electric Service" and "3. FirstEnergy Rate Plan" in the Second Quarter 1997 Form 10-Q. In the pending Ohio Supreme Court appeal challenging the PUCO's authority to require such tariffs, the PUCO and intervenors have filed briefs asserting that the matter is not yet ripe for adjudication because the PUCO has not yet determined the adequacy of the CES tariffs which have been filed. In connection with its November 6, 1997 merger-related order, see Note 9 to the financial statements included elsewhere in this report, the PUCO also reiterated the importance of developing CES tariffs in compliance with its guidelines. - 27 - 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 September 30, 1997, Centerior Energy, Cleveland Electric and Toledo Edison each filed two Current Reports on Form 8-K with the Securities and Exchange Commission. A Form 8-K dated July 8, 1997 and filed July 30, 1997 included two items under "Item 5. Other Events." The first item, "1. Refinancing of Mansfield SLOBs", reported on the refinancing of $873.2 million of secured lease obligation bonds issued in 1987 in connection with the Operating Companies' sale/leaseback of the Bruce Mansfield Generating Plant. The second item, "2. Pending Merger with Ohio Edison", reported on a July 16, 1997 order by the FERC relating to the merger of Centerior Energy and Ohio Edison. A Form 8-K/A dated August 27, 1997 and filed September 19, 1997 included three items under "Item 5. Other Events." The first item, "Refinancings", reported the refinancing of $190.7 million of the Operating Companies' first mortgage bonds securing certain tax-exempt bonds issued by public authorities. The second item, "Cleveland Electric Collective Bargaining Agreement", reported the status of negotiations for a new collective bargaining agreement. The third item, "Centerior Energy Investment", reported the loss of an investment and ensuing legal proceedings. - 28 - 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: November 7, 1997 - 29 - EXHIBIT INDEX The following exhibits are submitted herewith: CENTERIOR ENERGY EXHIBIT Exhibit Number Description 27(a) Financial Data Schedule for the period ended September 30, 1997. CLEVELAND ELECTRIC EXHIBITS Exhibit Number Description 27(b) Financial Data Schedule for the period ended September 30, 1997. TOLEDO EDISON EXHIBITS Exhibit Number Description 27(c) Financial Data Schedule for the period ended September 30, 1997. - 30 - 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 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 PER-BOOK 6,596,523 1,278,962 622,097 2,321,264 0 10,818,846 2,320,631 0 (346,712) 1,973,919 173,094 448,325 4,203,655 85,000 0 0 85,780 16,379 99,890 75,499 3,657,305 10,818,846 1,927,427 107,389 1,413,250 1,520,639 406,788 (6,867) 399,921 254,335 105,710 0 0 118,420 326,200 503,464 .71 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 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 PER-BOOK 4,700,689 753,312 430,079 1,397,673 0 7,281,753 1,242,148 83,118 (281,652) 1,043,614 171,404 238,325 3,072,394 103,000 0 0 58,830 14,714 60,791 42,006 2,476,675 7,281,753 1,359,341 74,393 996,034 1,070,427 288,914 (1,341) 287,573 185,631 101,942 27,287 74,655 88,816 247,669 344,832 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 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 PER-BOOK 1,889,244 460,916 193,438 943,286 0 3,486,884 195,687 602,113 42,022 839,822 1,690 210,000 1,131,262 24,500 0 0 26,950 1,665 39,099 30,345 1,181,551 3,486,884 680,486 33,204 529,477 562,681 117,805 5,091 122,896 73,721 49,175 12,590 36,585 0 78,531 201,742 0 0
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