-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, TETo+P4dERFVBc6qa1y7SMgM4m/m/t1+UUH3UMYkPh1J+IwaexZs/I0fDGwrVV3S KBUKX8CXKP6PGGXbmgswNw== 0000950152-95-000907.txt : 19950511 0000950152-95-000907.hdr.sgml : 19950511 ACCESSION NUMBER: 0000950152-95-000907 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19950509 SROS: NYSE 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: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-58293 FILM NUMBER: 95535824 BUSINESS ADDRESS: STREET 1: 55 PUBLIC SQ STREET 2: PO BOX 5000 CITY: CLEVELAND STATE: OH ZIP: 44101 BUSINESS PHONE: 2166229800 S-2/A 1 CLEVELAND ELECTRIC ILLUMINATING S-2/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1995 FILE NO. 33-58293 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------ AMENDMENT NO. 1 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ THE CLEVELAND ELECTRIC ILLUMINATING COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) OHIO (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 34-0150020 (I.R.S. EMPLOYER IDENTIFICATION NO.) 55 Public Square, Cleveland, Ohio 44101 (216) 622-9800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) JANIS T. PERCIO, Secretary c/o Centerior Energy Corporation P. O. Box 94661 Cleveland, Ohio 44101-4661 (216) 447-3100 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------ COPIES TO: TERRENCE G. LINNERT, Esq. Centerior Energy Corporation P.O. Box 94661 Cleveland, Ohio 44101-4661 ROBERT A. WEIBLE, Esq. Baker & Hostetler 3200 National City Center Cleveland, Ohio 44114 ------------------ CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROPOSED PROPOSED TITLE OF EACH CLASS OF AMOUNT TO MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE - ------------------------------ First Mortgage Bonds $300,000,000 100%* $300,000,000* $103,449**
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- *Estimated solely for the purpose of determining the registration fee. **$51,724.50 of this fee was previously paid. Amending the Prospectus and Part II and filing an exhibit. 2 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY ------------------ CROSS REFERENCE SHEET
FORM S-2 ITEM LOCATION IN PROSPECTUS ----------------------------------------------- ----------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus......... Facing Page of the Registration Statement, Cross Reference Sheet and Outside Front Cover Page 2. Inside Front and Outside Cover Pages of Prospectus..................................... Inside Front Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges...................... Summary Information, Investment Considerations and The Company 4. Use of Proceeds................................ Use of Proceeds 5. Determination of Offering Price................ Not Applicable 6. Dilution....................................... Not Applicable 7. Selling Security Holders....................... Not Applicable 8. Plan of Distribution........................... Underwriting 9. Description of Securities to be Registered..... Description of New Bonds 10. Interests of Named Experts and Counsel......... Legal Opinions and Experts 11. Information with Respect to the Registrant..... Summary Information, The Company and Financial Statements 12. Incorporation of Certain Information by Reference...................................... Incorporation of Certain Documents by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.................................... Not Applicable
3 $300,000,000 The Cleveland Electric Illuminating Company FIRST MORTGAGE BONDS, 9 1/2% SERIES DUE 2005-B ------------------ Interest payable May 15 and November 15 ------------------ THE FIRST MORTGAGE BONDS, 9 1/2% SERIES DUE 2005-B (THE "NEW BONDS") WILL BE REDEEMABLE AT THE OPTION OF THE COMPANY, IN WHOLE OR IN PART, AT ANY TIME ON OR AFTER MAY 15, 2002, UPON NOT LESS THAN 30 DAYS' NOTICE AT A REDEMPTION PRICE EQUAL TO 100.00% OF THE PRINCIPAL AMOUNT THEREOF, PLUS ACCRUED INTEREST. SEE "DESCRIPTION OF NEW BONDS -- REDEMPTION" HEREIN. THE NEW BONDS WILL BE ISSUED ONLY IN BOOK-ENTRY FORM THROUGH THE FACILITIES OF THE DEPOSITORY TRUST COMPANY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------ PROSPECTIVE PURCHASERS OF THE NEW BONDS SHOULD BE AWARE OF CERTAIN INVESTMENT CONSIDERATIONS IN EVALUATING AN INVESTMENT IN THE NEW BONDS. SEE "INVESTMENT CONSIDERATIONS" HEREIN. ------------------ PRICE 99.808% AND ACCRUED INTEREST, IF ANY ------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3) ------------------ ------------------ ------------------ Per Bond........................... 99.808% 2.000% 97.808% Total.............................. $299,424,000 $6,000,000 $293,424,000
- --------------- (1) Plus accrued interest, if any, from May 16, 1995. (2) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (3) Before deduction of estimated expenses of $317,000 payable by the Company. ------------------ The New Bonds are offered, subject to prior sale, when, as and if accepted by the Underwriters and subject to approval of certain legal matters by Baker & Hostetler, counsel for the Underwriters. It is expected that delivery of the New Bonds will be made on or about May 16, 1995, through the book-entry facilities of the Depository Trust Company against payment therefor in immediately available funds. ------------------ MORGAN STANLEY & CO. LEHMAN BROTHERS Incorporated May 9, 1995 4 NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. TABLE OF CONTENTS
PAGE ---- Available Information................................................................. 3 Incorporation of Certain Documents by Reference....................................... 3 Summary Information................................................................... 5 Investment Considerations............................................................. 8 Use of Proceeds....................................................................... 10 Capitalization........................................................................ 11 Selected Financial Information........................................................ 12 The Company........................................................................... 13 General............................................................................. 13 Strategy............................................................................ 13 Competition......................................................................... 14 Sales of Electricity................................................................ 15 Rate and Regulatory Matters......................................................... 15 1995 Rate Requests.................................................................. 16 Fuel Supply......................................................................... 16 Nuclear Units....................................................................... 17 Construction Program................................................................ 19 Regulation.......................................................................... 20 Properties.......................................................................... 21 Legal Proceedings................................................................... 21 Proposed Merger Between the Company and Toledo Edison................................. 21 Description of New Bonds.............................................................. 26 Legal Opinions........................................................................ 32 Experts............................................................................... 32 Underwriting.......................................................................... 33 Index to Financial Statements......................................................... F-1
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NEW BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 5 AVAILABLE INFORMATION The Cleveland Electric Illuminating Company ("Company") is subject to the informational requirements of the Securities Exchange Act of 1934 ("Exchange Act") and in accordance therewith files reports and other information with the Securities and Exchange Commission ("SEC"). Such reports and other information can be inspected and copied at the public reference facilities maintained by the SEC at its principal office located at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549-1004 and at its regional offices located at 500 West Madison, 14th Floor, Chicago, IL 60661-2511 and 7 World Trade Center, 13th Floor, New York, NY 10048. Copies of such material also can be obtained at prescribed rates from the Public Reference Section of the SEC at its principal office. Such material can also be inspected at the New York Stock Exchange. The Company has filed with the SEC a Registration Statement on Form S-2 (together with any amendments thereto, the "Registration Statement") under the Securities Act of 1933 ("Securities Act") with respect to the securities offered hereby. This Prospectus, which constitutes a part of the Registration Statement, omits certain information set forth in the Registration Statement as permitted by the rules and regulations of the SEC. For further information, reference is made to the Registration Statement, including the exhibits filed therewith. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company hereby incorporates in this Prospectus by reference the following documents heretofore filed with the SEC, pursuant to the Exchange Act, to which reference hereby is made: 1. The Company's Annual Report on Form 10-K for the year ended December 31, 1994 ("Form 10-K"). The report of Arthur Andersen LLP on the consolidated financial statements and schedule of the Company as of December 31, 1994 and for the three years then ended, included in the Form 10-K and incorporated by reference in this Prospectus, includes an explanatory paragraph that describes a change made in the method of accounting for postretirement benefits other than pensions in 1993, as discussed in Note 9 to the financial statements. THE COMPANY HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF THE DOCUMENT REFERRED TO ABOVE WHICH HAS BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS, OTHER THAN EXHIBITS TO SUCH DOCUMENT UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THE INFORMATION THAT THIS PROSPECTUS INCORPORATES. REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO JANIS T. PERCIO, SECRETARY, THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, C/O CENTERIOR ENERGY CORPORATION, P.O. BOX 94661, CLEVELAND, OH 44101-4661, OR TELEPHONE (216) 447-3100. 3 6 (THIS PAGE INTENTIONALLY LEFT BLANK) 4 7 SUMMARY INFORMATION THE FOLLOWING MATERIAL IS QUALIFIED IN ITS ENTIRETY BY THE INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. THE COMPANY The Company, which was incorporated under the laws of the State of Ohio in 1892, is a public utility engaged in the generation, purchase, transmission, distribution and sale of electric energy in an area of approximately 1,700 square miles in northeastern Ohio, including the City of Cleveland. The Company also provides electric energy at wholesale to other electric utility companies and to two municipal electric systems in its service area. The Company serves approximately 747,000 customers and derives approximately 77% of its total electric retail revenue from customers outside the City of Cleveland. Principal industries served by the Company include those producing steel and other primary metals; automotive and other transportation equipment; chemicals; electrical and nonelectrical machinery; fabricated metal products; and rubber and plastic products. Nearly all of the Company's operating revenues are derived from the sale of electric energy. The Company's energy sources for 1994 consisted of 67% coal and 33% nuclear. At December 31, 1994, the Company had 3,547 employees. The Company and The Toledo Edison Company ("Toledo Edison") are wholly owned electric utility subsidiaries of Centerior Energy Corporation ("Centerior Energy"). See "Proposed Merger Between the Company and Toledo Edison" for a discussion of the planned merger of Toledo Edison into the Company. In January 1994, the Company, Centerior Energy and Toledo Edison announced a comprehensive strategic action plan ("Strategic Plan") to strengthen their financial and competitive position through the year 2001. The Strategic Plan objectives include achieving profitable revenue growth, becoming industry leaders in customer satisfaction and attaining increasingly competitive power supply costs. The attainment of such objectives would allow the companies to significantly reduce fixed-income obligations while maximizing share owner return. During 1994, the Company, Centerior Energy and Toledo Edison made significant strides in achieving the objectives of the Strategic Plan. In February 1994, Centerior Energy reduced its quarterly common stock dividend from $.40 per share to $.20 per share, which reduced its cash outflow by over $110,000,000 annually. The Company's operation and maintenance expenses were reduced by approximately $71,000,000 from 1993 due to aggressive cost reduction measures. The Company also reduced its fixed-income obligations by $77,000,000 in 1994. In addition, the Company and Toledo Edison initiated a marketing plan designed to increase total retail revenues by 2-3% annually through 2001. THE OFFERING Securities to be Offered........... $300,000,000 principal amount of First Mortgage Bonds, 9 1/2% Series due 2005-B ("New Bonds"). Interest Payment Dates............. May 15 and November 15, commencing November 15, 1995. Maturity........................... May 15, 2005. Redemption......................... The New Bonds will be redeemable at any time or from time to time on or after May 15, 2002, at the option of the Company, in whole or in part at a redemption price equal to 100.00% of the principal amount thereof, plus accrued interest to the date of redemption. See "Description of New Bonds -- Redemption".
5 8 Security........................... The New Bonds and all of the Company's first mortgage bonds of other series currently outstanding and hereafter issued under the First Mortgage (as defined under "Description of New Bonds -- General") will be secured equally and ratably (except as to any sinking or analogous fund established for any particular series of first mortgage bonds) by a valid and perfected first lien, subject only to certain permitted liens and other encumbrances, on substantially all the property owned and franchises held by the Company, with certain exceptions. See "Description of New Bonds -- Security". Limitations on the Issuance of Additional First Mortgage The First Mortgage contains certain limitations on the Bonds............................ amount of additional first mortgage bonds that may be issued. See "Description of New Bonds -- Issuance of Additional First Mortgage Bonds". Use of Proceeds.................... To reimburse the Company for cash expended in the optional redemption of $26,000,000 of first mortgage bonds or to repay any short-term debt incurred in connection therewith, to help fund required sinking fund payments and maturing securities in 1995 and for general corporate purposes. See "Use of Proceeds".
6 9 SUMMARY FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1990 1991 1992 1993 1994 ---------- ---------- ---------- ---------- ----------- (DOLLARS IN THOUSANDS) INCOME STATEMENT DATA Operating Revenues................... $1,691,159 $1,825,738 $1,743,167 $1,751,330 $1,698,021 Operating Income..................... $ 346,381 $ 415,690 $ 383,534 $ 222,941 $ 396,009 Deferred Carrying Charges, Net (a)... $ 161,598 $ 87,615 $ 59,112 $ (487,410) $ 25,369 Write-off of Perry Nuclear Power Plant Unit 2....................... -- -- -- $ (350,537) -- Income (Loss) Before Interest Charges............................ $ 493,945 $ 492,655 $ 448,031 $ (347,193) $ 427,456 Interest Charges..................... $ 251,617 $ 246,497 $ 243,092 $ 239,954 $ 242,025 Earnings (Loss) Before Interest Charges, Income Taxes, Depreciation and Amortization ("EBITDA") (b).... $ 758,971 $ 793,361 $ 721,993 $ (413,594) $ 708,083 Net Income (Loss).................... $ 242,328 $ 246,158 $ 204,939 $ (587,147) $ 185,431 Ratio of Earnings to Fixed Charges (c)................................ 1.94 2.08 1.89 --(d) 1.81 Ratio of EBITDA to Interest Charges............................ 3.02 3.22 2.97 -- 2.93 BALANCE SHEET DATA Total Assets....................... $7,820,759 $7,942,182 $8,122,723 $7,159,173 $7,150,640 Long-Term Debt..................... $2,631,911 $2,682,805 $2,515,436 $2,793,162 $2,543,036 Preferred Stock With Mandatory Redemption Provisions..................... $ 171,162 $ 268,368 $ 313,818 $ 285,225 $ 245,971 Without Mandatory Redemption Provisions..................... $ 217,334 $ 217,334 $ 144,021 $ 240,871 $ 240,871 Common Stock Equity................ $1,884,258 $1,897,401 $1,864,988 $1,039,947 $1,058,190 Total Capitalization............... $4,904,665 $5,065,908 $4,838,263 $4,359,205 $4,088,068
DECEMBER 31, 1994 --------------------------------------------------- AS OUTSTANDING PERCENT ADJUSTED(E) PERCENT ----------- ------- ----------- ------- (DOLLARS IN THOUSANDS) CAPITALIZATION SUMMARY Long-Term Debt................................................... $2,543,036 62.2 $2,817,036 64.6 Serial Preferred Stock........................................... 486,842 11.9 486,842 11.2 Common Stock Equity.............................................. 1,058,190 25.9 1,058,190 24.2 ----------- ------- ----------- ------- Total Capitalization....................................... $4,088,068 100.0 $4,362,068 100.0 ========== ======= =========== =======
- --------------- (a) In 1993, the Company wrote off $518,739,000 of deferred carrying charges. (b) EBITDA consists of income before interest charges, plus income taxes charged to operating expenses and to other income, plus depreciation and amortization. EBITDA is not a measure of operating results, but rather is a measure of debt service ability. EBITDA is not required by generally accepted accounting principles and should not be considered as an alternative to net income or any other measure of performance required by generally accepted accounting principles or as an indicator of the Company's operating performance. (c) For the purpose of computing the ratio of earnings to fixed charges, earnings consist of net income plus fixed charges and current and deferred income taxes. Fixed charges consist of total interest charges (including interest on first mortgage bonds, bank loans, commercial paper, pollution control notes and other interest included in operation expenses; amortization of net premium, discount and expense on debt; and capitalized interest on nuclear fuel lease obligations) and an estimate of the interest element of rentals (including the interest component of certain sale and leaseback rentals, leased nuclear fuel in the reactor and other miscellaneous rentals). (d) Not meaningful due to a net loss. For the year ended December 31, 1993, the net loss before income taxes and fixed charges was $501,503,000. Fixed charges during the period were $333,610,000. The net loss before income taxes and fixed charges included write-offs of $986,036,000 related to the Company's investment in Perry Nuclear Power Plant Unit 2 and phase-in plan deferred charges, and other charges of $78,675,000 attributable to an early retirement program. Excluding these write-offs and other charges, the ratio of earnings to fixed charges would have been 1.68. (e) As adjusted for the proposed issuance of the New Bonds, the planned issuance of $53,900,000 principal amount of first mortgage bonds in the second quarter of 1995 in connection with the refinancing of certain pollution control facilities and the related refunding of $53,900,000 principal amount of First Mortgage Bonds, 11 1/8% Series due 2014 in the second quarter of 1995 and the redemption of $26,000,000 principal amount of First Mortgage Bonds, 13 3/4% Series due 2005-A in the second quarter of 1995. 7 10 INVESTMENT CONSIDERATIONS Prospective purchasers of the New Bonds should be aware of the investment considerations set forth below in evaluating an investment in the New Bonds. The information below is qualified in its entirety by the information appearing in the Financial Statements included as a part of this Prospectus and in the documents incorporated in this Prospectus by reference and should be read in conjunction with the other information set forth in this Prospectus. COMPETITION The Company faces competitive challenges due to regulatory and tax constraints and its high retail cost structure. Currently, the Company's most pressing competition comes from the two municipal electric systems in its service area. The Company's rates are generally higher than those of the two municipal systems due largely to their exemption from taxation, the lower cost financing available to them, the continued availability to them of lower cost power through short-term power purchases and their access to cheaper governmental power. The Company faces the threat that municipalities in its service area could establish new electric systems and continue expanding existing systems. The largest municipal system in the Company's service area, Cleveland Public Power ("CPP"), is constructing new transmission and distribution facilities extending into eastern portions of Cleveland and plans to expand to western portions of Cleveland, both of which are now served exclusively by the Company. CPP's expansion has resulted in a reduction in the Company's annual net income by about $4,000,000 in 1993 and an additional $3,000,000 in 1994. The Company estimates that its net income will continue to be reduced by an additional $4,000,000 to $5,000,000 each year in the 1995-1999 period because of CPP's expansion. The Energy Policy Act of 1992 ("Energy Act") will continue to increase competition in the electric utility industry by allowing broader access by others to a utility's transmission system. It should not significantly increase the competitive threat to the Company since the Company has been required to wheel electricity to municipal systems in its service area since 1977 under operating licenses for its nuclear generating units. Further, legislative developments could eventually require utilities to deliver power from other utilities or generation sources to their retail customers. RATE MATTERS Under a Rate Stabilization Program approved by The Public Utilities Commission of Ohio ("PUCO") in October 1992 ("Rate Stabilization Program"), the Company agreed to freeze base rates until 1996 and limit rate increases through 1998. In exchange, the Company is permitted to defer through 1995 and subsequently recover certain costs not currently recovered in rates and to accelerate the amortization of certain benefits. Amortization and recovery of the deferrals are expected to begin in 1996 with future rate recognition and will continue over the average life of the related assets, or between 17 and 30 years. The continued use of these regulatory accounting measures in 1995 will be dependent upon the Company's continuing assessment and conclusion that there will be probable recovery of such deferrals in future rates. The Company's analysis leading to certain year-end 1993 financial actions and the strategic plan, as discussed in "The Company -- Strategy", also included an evaluation of the Company's regulatory accounting measures. The Company decided that, once the deferral of expenses and acceleration of benefits under the Rate Stabilization Program are completed in 1995, the Company should no longer plan to use these measures to the extent it has in the past. On April 17, 1995, the Company and Toledo Edison each filed a request with the PUCO for a rate increase to be effective in 1996. The Company's requested increase is $82,800,000 in annual revenues and Toledo Edison's requested increase is $34,800,000. The requested rates would result in an average increase of 4.9% in the Company's existing rates and an average increase of 4.7% in Toledo Edison's existing rates. The rate increases are necessary to recover capital investment and increases in costs incurred since the Company's and Toledo Edison's last rate cases, which were decided in January 1989, and to recover certain costs deferred since 1992. See "Rate and Regulatory Matters" and "1995 Rate Requests" under "The Company". 8 11 REGULATORY ACCOUNTING The Company complies with the provisions of Statement of Financial Accounting Standards 71 ("SFAS 71") which governs accounting for the effects of certain types of rate regulation. The Company continually monitors changes in market and regulatory conditions and considers the effects of such changes in assessing the continuing applicability of SFAS 71. Criteria that could give rise to discontinuation of the application of SFAS 71 include (1) increasing competition which significantly restricts the Company's ability to establish rates to recover operating costs, return requirements and the amortization of regulatory assets and (2) a significant change in the manner in which rates are set by the PUCO from cost-based regulations to some other form of regulations. In the event the Company determines it no longer meets the criteria for following SFAS 71, the Company would be required to record a before-tax charge to write off its regulatory assets, which totaled $1,277,000,000 at December 31, 1994. In addition, the Company would be required to evaluate whether the changes in the competitive and regulatory environment which led to discontinuing the application of SFAS 71 would also result in an impairment of the net book value of the Company's property, plant and equipment. NUCLEAR OPERATIONS The Company has interests in three nuclear generating units -- Davis-Besse Nuclear Power Station ("Davis-Besse"), Perry Nuclear Power Plant Unit 1 ("Perry Unit 1") and Beaver Valley Power Station Unit 2 ("Beaver Valley Unit 2"). The Company operates Perry Unit 1. For seven months in 1994, Perry Unit 1 was out of service for its fourth refueling and maintenance outage. Work was also performed in connection with the comprehensive course of action that the Company developed in 1993 to improve the operating performance of Perry Unit 1. Work in connection with that course of action is ongoing. The Company's three nuclear units may be impacted by activities or events beyond its control. Operating nuclear units have experienced unplanned outages or extensions of scheduled outages because of equipment problems or new regulatory requirements. A major accident at a nuclear facility anywhere in the world could cause the United States Nuclear Regulatory Commission ("NRC") to limit or prohibit the operation or licensing of any domestic nuclear unit. If one of the Company's nuclear units is taken out of service for an extended period for any reason, including an accident at such unit or any other nuclear facility, the Company cannot predict whether regulatory authorities would impose unfavorable rate treatment. Such treatment could include taking the affected unit out of rate base, thereby not permitting the Company to recover its investment in and earn a return on that asset, or disallowing certain construction or maintenance costs. An extended outage coupled with unfavorable rate treatment could have a material adverse effect on the Company's financial condition and results of operations. LIQUIDITY At December 31, 1994, the Company would have been permitted to issue approximately $487,000,000 of additional first mortgage bonds. See "Description of New Bonds -- Issuance of Additional First Mortgage Bonds". The Perry Nuclear Power Plant Unit 2 ("Perry Unit 2") and deferred charge write-offs recorded at December 31, 1993 caused Centerior Energy, the Company and Toledo Edison to violate certain covenants contained in various unsecured debt agreements to which the Company is a party, including the revolving credit facility described below. The affected creditors waived those violations in exchange for a subordinate mortgage security interest on the Company's and Toledo Edison's properties. This transaction was completed in August 1994. Although the Company does not expect to raise funds through the sale of debt junior to first mortgage bonds, it retains the ability to do so. The Company also is able to raise funds through the sale of preferred stock and preference stock. The Company is a party to a $205,000,000 revolving credit facility which runs through mid-1996. At December 31, 1994, the Company had $66,000,000 of cash and temporary cash investments. The Company is unable to issue commercial paper because of its below investment grade commercial paper ratings. 9 12 In mid-1995, certain letters of credit now in effect in connection with the sale and leaseback of Beaver Valley Unit 2 will expire. The Company and Toledo Edison are required to procure replacement letters of credit in an aggregate amount of approximately $226,000,000. The letters of credit now in effect are secured by the Company's and Toledo Edison's subordinate mortgages. The Company and Toledo Edison are planning to secure the replacement letters of credit by a combination of first mortgage bonds of the Company and Toledo Edison, while the subordinate mortgage interests would be released. The Company, Centerior Energy and Toledo Edison also plan to secure the $205,000,000 revolving credit facility with a combination of first mortgage bonds of the Company and Toledo Edison. The financing resources discussed above are expected to be sufficient for the Company's needs over the next several years. However, the availability and cost of capital to meet the Company's external financing needs also depend upon such factors as financial market conditions and the Company's credit ratings. Current credit ratings for the Company are as follows:
STANDARD & MOODY'S POOR'S INVESTORS CORPORATION SERVICE, INC. ----------- ------------- First mortgage bonds............................. BB Ba2 Unsecured notes.................................. B+ Ba3 Preferred stock.................................. B b2
USE OF PROCEEDS The net proceeds to the Company from the sale of the New Bonds will be added to the general funds of the Company and used to reimburse the Company for cash expended in the optional redemption of $26,000,000 of First Mortgage Bonds, 13 3/4% Series due 2005-A, or to repay any short-term debt incurred in connection therewith, to help fund required sinking fund payments and maturing securities in 1995 and for general corporate purposes. 10 13 CAPITALIZATION The following table sets forth the unaudited consolidated capitalization of the Company at December 31, 1994, and as adjusted for the issuance of the New Bonds, the planned issuance of $53,900,000 principal amount of first mortgage bonds in the second quarter of 1995 in connection with the refinancing of certain pollution control facilities and the related refunding of $53,900,000 principal amount of First Mortgage Bonds, 11 1/8% Series due 2014 and the redemption of $26,000,000 principal amount of First Mortgage Bonds, 13 3/4% Series due 2005-A in the second quarter of 1995.
ADJUSTMENTS ------------------------ DECEMBER 31, 1994 DECEMBER 31, 1994 ISSUANCE REFUNDINGS PRO FORMA ----------------- ---------- ---------- ----------------- (DOLLARS IN THOUSANDS) Current liabilities: Long-term debt and preferred stock due within one year..................... $ 281,785 $ -- $ -- $ 281,785 ================= ========= ========== ================= Capitalization: Common stock equity: Common Shares without par value: 105,000,000 authorized; 79,590,689 outstanding............ $ 1,241,087 $ $ $ 1,241,087 Other paid in capital.... 78,624 78,624 Retained earnings (deficit).............. (261,521) (261,521) ----------------- ---------- ---------- ----------------- Total common stock equity.............. 1,058,190 -- -- 1,058,190 ----------------- ---------- ---------- ----------------- Preferred stock: With mandatory redemption provisions............... 245,971 245,971 Without mandatory redemption provisions............... 240,871 240,871 ----------------- ---------- ---------- ----------------- Total preferred stock............... 486,842 -- -- 486,842 ----------------- ---------- ---------- ----------------- Long-term debt, net of amount due within one year: Outstanding first mortgage bonds.................... 2,495,696(a) 2,495,696(a) New Bonds................... 300,000 300,000 First mortgage bonds (refunding).............. 53,900 53,900 First Mortgage Bonds, 11 1/8% Series due 2014..................... (53,900) (53,900) First Mortgage Bonds, 13 3/4% Series due 2005-A................... (26,000) (26,000) Term bank loans............. 1,600 1,600 Pollution control notes..... 51,920 51,920 Other....................... (6,180) (6,180) ----------------- ---------- ---------- ----------------- Total long-term debt... 2,543,036 353,900 (79,900) 2,817,036 ----------------- ---------- ---------- ----------------- Total capitalization... $ 4,088,068 $ 353,900 $(79,900) $ 4,362,068 ================= ========= ========== =================
- --------------- (a) Includes $515,500,000 of first mortgage bonds securing a corresponding amount of the Company's outstanding medium-term notes. 11 14 SELECTED FINANCIAL INFORMATION
1990 1991 1992 1993 1994 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) INCOME STATEMENT DATA Operating Revenues................... $1,691,159 $1,825,738 $1,743,167 $1,751,330 $1,698,021 Fuel and Purchased Power Expense..... $ 412,397 $ 455,055 $ 434,238 $ 423,200 $ 390,779 Other Operation and Maintenance Expense............................ $ 514,186 $ 469,530 $ 464,912 $ 488,958 $ 449,873 Depreciation and Amortization Expense............................ $ 169,526 $ 170,571 $ 179,335 $ 181,565 $ 195,172 Operating Income..................... $ 346,381 $ 415,690 $ 383,534 $ 222,941 $ 396,009 Deferred Carrying Charges, Net (a)... $ 161,598 $ 87,615 $ 59,112 $ (487,410) $ 25,369 Write-off of Perry Unit 2............ $ -- $ -- $ -- $ (350,537) $ -- Income (Loss) Before Interest Charges............................ $ 493,945 $ 492,655 $ 448,031 $ (347,193) $ 427,456 Interest Charges..................... $ 251,617 $ 246,497 $ 243,092 $ 239,954 $ 242,025 Earnings (Loss) Before Interest Charges, Income Taxes, Depreciation and Amortization ("EBITDA") (b).... $ 758,971 $ 793,361 $ 721,993 $ (413,594) $ 708,083 Net Income (Loss).................... $ 242,328 $ 246,158 $ 204,939 $ (587,147) $ 185,431 Preferred Dividend Requirements...... $ 36,682 $ 35,857 $ 40,538 $ 44,650 $ 45,437 Earnings (Loss) Available for Common Stock.............................. $ 205,646 $ 210,301 $ 164,401 $ (631,797) $ 139,994 Ratio of Earnings to Fixed Charges (c)................................ 1.94 2.08 1.89 --(d) 1.81 Ratio of EBITDA to Interest Charges............................ 3.02 3.22 2.97 -- 2.93 OTHER DATA Utility Plant Additions.............. $ 164,619 $ 150,005 $ 156,022 $ 175,290 $ 156,133 BALANCE SHEET DATA Total Assets......................... $7,820,759 $7,942,182 $8,122,723 $7,159,173 $7,150,640 Current Portion of Long-Term Debt and Preferred Stock.................... $ 97,988 $ 92,857 $ 309,838 $ 70,394 $ 281,785 Long-Term Debt....................... $2,631,911 $2,682,805 $2,515,436 $2,793,162 $2,543,036 Preferred Stock With Mandatory Redemption Provisions....................... $ 171,162 $ 268,368 $ 313,818 $ 285,225 $ 245,971 Without Mandatory Redemption Provisions....................... $ 217,334 $ 217,334 $ 144,021 $ 240,871 $ 240,871 Common Stock Equity.................. $1,884,258 $1,897,401 $1,864,988 $1,039,947 $1,058,190 Total Capitalization............. $4,904,665 $5,065,908 $4,838,263 $4,359,205 $4,088,068
- --------------- (a) In 1993, the Company wrote off $518,739,000 of deferred carrying charges. (b) EBITDA consists of income before interest charges, plus income taxes charged to operating expenses and to other income, plus depreciation and amortization. EBITDA is not a measure of operating results, but rather is a measure of debt service ability. EBITDA is not required by generally accepted accounting principles and should not be considered as an alternative to net income or any other measure of performance required by generally accepted accounting principles or as an indicator of the Company's operating performance. (c) For the purpose of computing the ratio of earnings to fixed charges, earnings consist of net income plus fixed charges and current and deferred income taxes. Fixed charges consist of total interest charges (including interest on first mortgage bonds, bank loans, commercial paper, pollution control notes and other interest included in operation expenses; amortization of net premium, discount and expense on debt; and capitalized interest on nuclear fuel lease obligations) and an estimate of the interest element of rentals (including the interest component of certain sale and leaseback rentals, leased nuclear fuel in the reactor and other miscellaneous rentals). (d) Not meaningful due to a net loss. For the year ended December 31, 1993, the net loss before income taxes and fixed charges was $501,503,000. Fixed charges during the period were $333,610,000. The net loss before income taxes and fixed charges included write-offs of $986,036,000 related to the Company's investment in Perry Nuclear Power Plant Unit 2 and phase-in plan deferred charges, and other charges of $78,675,000 attributable to an early retirement program. Excluding these write-offs and other charges, the ratio of earnings to fixed charges would have been 1.68. 12 15 THE COMPANY GENERAL The Company, which was incorporated under the laws of the State of Ohio in 1892, is a public utility engaged in the generation, purchase, transmission, distribution and sale of electric energy in an area of approximately 1,700 square miles in northeastern Ohio, including the City of Cleveland. The Company also provides electric energy at wholesale to other electric utility companies and to two municipal electric systems (directly and through American Municipal Power-Ohio ("AMP-Ohio")) in its service area. The Company serves approximately 747,000 customers and derives approximately 77% of its total electric retail revenue from customers outside the City of Cleveland. Principal industries served by the Company include those producing steel and other primary metals; automotive and other transportation equipment; chemicals; electrical and nonelectrical machinery; fabricated metal products; and rubber and plastic products. Nearly all of the Company's operating revenues are derived from the sale of electric energy. At December 31, 1994, the Company had 3,547 employees of which about 54% were represented by one union having a collective bargaining agreement with the Company. The mailing address of the Company's principal offices is P.O. Box 5000, Cleveland, OH 44101, and its telephone number is (216) 622-9800. The Company and Toledo Edison are wholly owned electric utility subsidiaries of Centerior Energy, a holding company formed by them for the purpose of enabling them to affiliate. The affiliation became effective in April 1986. Centerior Energy has a third subsidiary, Centerior Service Company ("Service Company"), which furnishes certain administrative and other services to the two utility subsidiaries and to Centerior Energy. The Company and Toledo Edison operate as separate companies, each serving the customers in its respective service area. In March 1994, Centerior Energy announced a plan to merge Toledo Edison into the Company. See "Proposed Merger Between the Company and Toledo Edison". STRATEGY In January 1994, the Company, Centerior Energy and Toledo Edison announced the Strategic Plan to strengthen their financial and competitive position through the year 2001. The Strategic Plan objectives include achieving profitable revenue growth, becoming industry leaders in customer satisfaction and attaining increasingly competitive power supply costs. The attainment of such objectives would allow the companies to significantly reduce fixed-income obligations while maximizing share owner return. Several actions were taken at that time. Centerior Energy reduced its quarterly common stock dividend from $.40 per share to $.20 per share effective with the dividend payable in February 1994, which reduced its cash outflow by over $110,000,000 annually. The Company and Toledo Edison also wrote off their investments in Perry Unit 2 and certain deferred charges related to a January 1989 rate agreement. The aggregate after-tax effect of these write-offs for the Company was $691,000,000, which resulted in a net loss in 1993 and a retained earnings deficit. The write-offs are discussed in Notes 4(b) and 7 to the Financial Statements included as a part of this Prospectus. The Company also recognized other one-time charges totaling $25,000,000 after taxes primarily related to a performance improvement plan for Perry Unit 1. Throughout 1994, the Company, Centerior Energy and Toledo Edison made significant strides in achieving the objectives of the Strategic Plan. The Company's operation and maintenance expenses were reduced by approximately $71,000,000 from 1993 due to aggressive cost reduction measures. The Company also reduced its fixed-income obligations by $77,000,000 in 1994. In addition, the Company and Toledo Edison initiated a marketing plan designed to increase total retail revenues by 2-3% annually through 2001. To achieve the Strategic Plan's objectives, the Company will continue to control expenditures and reduce its outstanding debt and preferred stock. In addition, the Company will work to increase revenues by finding new uses for existing assets and resources, implementing new marketing programs and restructuring rates when appropriate. See "The Company -- 1995 Rate Requests". The Company will also work to improve the operating performance of its generating plants and take other appropriate actions. 13 16 COMPETITION The Company is addressing its competitive environment by implementing strategies designed to create and enhance its competitive advantages and to overcome the competitive disadvantages that it faces due to regulatory and tax constraints and its high retail cost structure. Currently, the Company's most pressing competition comes from the two municipal electric systems in its service area. The Company's rates are generally higher than those of the two municipal systems due largely to the municipal systems' exemption from taxation, the lower cost financing available to them, the continued availability to them of lower-cost power through short-term power purchases and their access to cheaper governmental power. The Company is seeking to address the tax disparity through the legislative process. In 1994, the Ohio Governor's Tax Commission recommended the replacement of the gross receipts and personal property taxes currently levied only on investor-owned utilities and collected through rates with a different tax collected from customers of all electric utilities, including municipal systems. Investor-owned utilities would reduce rates upon repeal of the existing taxes. The Company is now working to submit this proposal to the Ohio legislature. The largest municipal system in the Company's service area, CPP, is operated by the City of Cleveland in competition with the Company. CPP is primarily an electric distribution system which currently supplies electric power in approximately 50% of the City's geographical area (expected to increase to 100% by the end of 1999) and to approximately 30% (about 66,000) of the electric consumers in the City -- equal to about 9% of all customers served by the Company. The Company makes power available to CPP on a wholesale basis, subject to Federal Energy Regulatory Commission ("FERC") regulation. In 1994, the Company directly and through AMP-Ohio provided about 1% of CPP's energy requirements. The balance of CPP's power is purchased from other sources and wheeled over the Company's transmission system. CPP's kilowatt-hour sales and revenues are equal to about 5% of the Company's kilowatt-hour sales and revenues. Much of the area served by CPP overlaps the Company's service area. CPP is constructing new transmission and distribution facilities extending into eastern portions of Cleveland and plans to expand to western portions of Cleveland, both of which are now served exclusively by the Company. CPP's expansion has resulted in a reduction in the Company's annual net income by about $4,000,000 in 1993 and an additional $3,000,000 in 1994. The Company estimates that its net income will continue to be reduced by an additional $4,000,000 to $5,000,000 each year in the 1995-1999 period because of CPP's expansion. Despite CPP's expansion efforts, the Company has been successful in retaining most of the large industrial and commercial customers in the expansion areas by providing economic incentives in exchange for sole-supplier contracts. The Company has similar contracts with customers in other areas. Approximately 90% of the Company's industrial revenues under contract will not be up for renewal until 1997 or later. As these contracts expire, the Company expects to renegotiate them and retain the customers. In addition, an increasing number of CPP customers are converting back to the Company's service. However, competition for such customers will continue. In March 1995, one of the Company's large commercial customers, comprising medical and educational institutions, signed a five-year contract for electric service with CPP beginning in September 1996 when that customer's contract with the Company terminates. The loss of this customer to CPP would reduce the Company's net income by about $5,000,000 based on 1994 sales. On May 3, 1995, the Company filed a complaint with the PUCO against this customer and American Electric Power Company ("AEP") alleging, among other things, that the purchase of power from CPP by this customer is in reality a direct purchase from AEP and, thus, a sham transaction in violation of Ohio's certified territory statute. Although there continues to be interest in some other communities in the municipalization of electric service, the Company believes that it offers the best value and most reliable source of electric service in its territory. The Energy Act will continue to increase competition in the electric utility industry by allowing broader access to a utility's transmission system. This should not significantly increase the competitive threat to the Company since it has been required to wheel electricity to municipal systems in its service area since 1977 under its operating licenses for its nuclear generating units. Further, legislative developments could eventually require utilities to deliver power from other utilities or generation sources to their retail customers. To combat 14 17 this threat, the Company is offering incentives such as energy-efficiency improvements and reductions in demand charges for increased electricity usage to its industrial and commercial customers in return for long-term commitments from these customers. Currently, one commercial customer and one industrial customer of the Company have cogeneration installations. SALES OF ELECTRICITY The Company's kilowatt-hour sales follow a seasonal pattern marked by increased customer usage in the summer for air conditioning and in the winter for heating. Historically, the Company has experienced its heaviest demand for electric service during the summer months because of a significant air conditioning load on its system and a relatively low amount of electric heating load in the winter. The Company's largest customer is a steel manufacturer which has two major steel producing facilities. Sales to these facilities accounted for 3.7% of the Company's 1994 total electric operating revenues. The loss of these facilities would reduce the Company's net income by about $27,000,000 based on 1994 sales levels. RATE AND REGULATORY MATTERS Under Ohio law, rate base is the original cost less depreciation of a utility's total plant adjusted for certain items. The law permits the PUCO, in its discretion, to include construction work in progress in rate base under certain conditions. Current Ohio law further provides that requested rates can be collected by a public utility, subject to refund, if the PUCO does not make a decision within 275 days after the rate request application is filed. If the PUCO does not make its final decision within 545 days, revenues collected thereafter are not subject to refund. A notice of intent to file an application for a rate increase cannot be filed before the issuance of a final order in any prior pending application for a rate increase or until 275 days after the filing of the prior application, whichever is earlier. The minimum period by which the notice of intent to file must precede the actual filing is 30 days. The test year for determining rates may not end more than nine months after the date the application for a rate increase is filed. Under Ohio law, electric rates are adjusted every six months to reflect changes in fuel costs. The PUCO reviews such adjustments annually. Any difference between actual fuel costs during a six-month period and the fuel revenues recovered in that period is deferred and is taken into account in setting the fuel recovery factor for a subsequent six-month period. Also, under Ohio law, municipalities may regulate rates charged by a utility subject to appeal to the PUCO if not acceptable to the utility. If municipally fixed rates are accepted by the utility, such rates are binding on both parties for the specified term and cannot be changed by the PUCO. The Rate Stabilization Program applicable to the Company and Toledo Edison remains in effect. Under this program, the Company agreed to freeze base rates until 1996 and limit rate increases through 1998. In exchange, the Company is permitted to defer through 1995 and subsequently recover certain costs not currently recovered in rates and to accelerate the amortization of certain benefits. Amortization and recovery of the deferrals are expected to begin in 1996 with future rate recognition and will continue over the average life of the related assets, or between 17 and 30 years. The continued use of these regulatory accounting measures in 1995 will be dependent upon the Company's continuing assessment and conclusion that there will be probable recovery of such deferrals in future rates. Rate-regulated utilities are subject to SFAS 71 which governs accounting for the effects of certain types of rate regulation. Pursuant to SFAS 71, certain incurred costs are deferred for recovery in future rates. The Company continually monitors changes in market and regulatory conditions and considers the effects of such changes in assessing the continuing applicability of SFAS 71. Criteria that could give rise to discontinuation of the application of SFAS 71 include (1) increasing competition which significantly restricts the Company's ability to establish rates to recover operating costs, return requirements and the amortization of regulatory assets and (2) a significant change in the manner in which rates are set by the PUCO from cost-based regulations to some other form of regulations. In the event the Company determines that it no longer meets 15 18 the criteria for following SFAS 71, the Company would be required to record a before-tax charge to write off its regulatory assets, which totaled $1,277,000,000 at December 31, 1994. In addition, the Company would be required to evaluate whether the changes in the competitive and regulatory environment which led to discontinuing the application of SFAS 71 would also result in an impairment of the net book value of the Company's property, plant and equipment. The Company's analysis leading to certain year-end 1993 financial actions and its strategic plan also included an evaluation of its regulatory accounting measures. The remaining recovery periods for all remaining regulatory assets are between 17 and 34 years. The Company believes its rates will provide for recovery of these assets over the relevant periods and SFAS 71 continues to apply. In addition, the Company has decided that, once the deferral of expenses and acceleration of benefits under the Rate Stabilization Program are completed in 1995, it should no longer plan to use these measures to the extent it has in the past. 1995 RATE REQUESTS On April 17, 1995, the Company and Toledo Edison each filed a request with the PUCO for a rate increase to be effective in 1996. The Company's requested increase is $82,800,000 in annual revenues and Toledo Edison's requested increase is $34,800,000. The requested rates would result in an average increase of 4.9% in the Company's existing rates and an average increase of 4.7% in Toledo Edison's existing rates. The Company and Toledo Edison plan to freeze rates until at least 2002 if their rate requests are approved, although they are not precluded from requesting additional rate increases. This plan is premised on the Company and Toledo Edison obtaining full recovery of all costs including an acceptable rate of return on equity in order to continue to apply SFAS 71 for financial reporting purposes. The Company and Toledo Edison plan to avoid the need for further rate increases through additional cost reductions, an enhanced marketing plan designed to increase retail revenues and other efforts. The Company and Toledo Edison will periodically assess their continued compliance with SFAS 71 criteria and the appropriateness of continuing to record additional deferrals pursuant to the Rate Stabilization Program. They will modify their intended course of action as necessary to maintain compliance. The rate increases are necessary to recover capital investment and increases in costs incurred since the Company's and Toledo Edison's last rate cases, which were decided in January 1989, and to recover certain costs deferred since 1992. The amounts of the requested rate increases are lower than the authorized limits set forth in the Rate Stabilization Program. The additional cash resulting from the rate increases will strengthen the Company's and Toledo Edison's financial and competitive positions. FUEL SUPPLY Generation by type of fuel for 1994 was 67% coal-fired and 33% nuclear. Coal. In 1994, the Company burned 5,304,000 tons of coal for electric generation. The Company normally maintains a reserve supply of coal sufficient for about 30 days of normal operations. In 1994, about 49% of the Company's coal requirements were purchased under long-term contracts, with the longest remaining term being almost nine years. In most cases, these contracts provide for adjusting the price of the coal on the basis of changes in coal quality and mining costs. The sulfur content of the coal purchased under these contracts ranges from less than 1% to about 4%. The balance of the Company's coal was purchased on the spot market with sulfur content ranging from less than 1% to 3.5%. One of the Company's long-term coal supply contracts is with The Ohio Valley Coal Company ("Ohio Valley"). The Company has agreed to pay Ohio Valley certain amounts to cover Ohio Valley's costs regardless of the amount of coal actually delivered. Included in those costs are amounts sufficient to service certain long-term debt and lease obligations incurred by Ohio Valley. If the coal sales agreement is terminated for any reason, the Company must assume certain of Ohio Valley's debt and lease obligations and may incur other expenses including mine closing costs, if necessary. At December 31, 1994, the principal amount of debt and termination values of leased property covered by the Company's agreement was $21,309,000, while the unfunded costs of closing this mine, as estimated by Ohio Valley, were $54,000,000. The coal supply agreement with Ohio Valley is scheduled to continue until September 1997. The Company expects that Ohio 16 19 Valley revenues from sales of coal will continue to be sufficient for Ohio Valley to meet its debt and lease obligations and mine closing costs over the life of the contract. The Company and Toledo Edison are members of the Central Area Power Coordination Group, a power pool created in 1967 with Duquesne Light Company ("Duquesne"), Ohio Edison Company and Pennsylvania Power Company (each, a "CAPCO Group Company" and collectively, the "CAPCO Group Companies"). The CAPCO Group Companies have a long-term contract with Quarto Mining Company ("Quarto") and Consolidation Coal Company for the supply of about 75%-85% of the annual coal needs of the Bruce Mansfield Generating Plant ("Mansfield Plant"). The contract runs through at least the end of 1999, and the price of coal is adjustable to reflect changes in labor, materials, transportation and other costs. The CAPCO Group Companies have guaranteed, severally and not jointly, the debt and lease obligations incurred by Quarto to develop, equip and operate two of the mines which supply the Mansfield Plant. At December 31, 1994, the total dollar amount of Quarto's debt and lease obligations guaranteed by the Company was $28,698,000 and by Toledo Edison was $16,772,000. The Company and Toledo Edison expect that Quarto revenues from sales of coal to the CAPCO Group Companies will continue to be sufficient for Quarto to meet its debt and lease obligations. The Company's least cost plan for complying with the Clean Air Act Amendments of 1990 ("Clean Air Act Amendments"), which was included in the agreement approved by the PUCO in February 1993 in connection with the Company's and Toledo Edison's 1992 long-term forecast, calls for greater use of low-sulfur coal and less use of high-sulfur coal. Some of the low-sulfur coal required to comply with Phase 1 of the Clean Air Act Amendments was contracted for in 1992. Additional supplies of low-sulfur coal will be purchased in 1997. Nuclear. The acquisition and utilization of nuclear fuel involves six distinct steps: (i) supply of uranium oxide raw materials, (ii) conversion to uranium hexafluoride, (iii) enrichment, (iv) fabrication into fuel assemblies, (v) utilization as fuel in a nuclear reactor and (vi) storing or disposing of spent fuel. The Company and Toledo Edison have inventories of raw material sufficient to provide nuclear fuel through 1996 for the operation of their nuclear generating units and have contracts for fabrication services for all of that fuel. The CAPCO Group Companies have a 30-year contract with the United States Enrichment Corporation ("USEC") which will supply all of the needed enrichment services for their nuclear units' fuel supply through 1995. Beyond 1995, the amount of enrichment services under the USEC contract varies by CAPCO Group Company, with the Company's and Toledo Edison's enrichment services reduced to 70% of their requirements in 1996-1999 and to zero in 2000-2002. The additional required enrichment services are available. Substantial additional fuel will have to be obtained in the future over the remaining useful lives of the units. There is a plentiful supply of uranium oxide raw materials to meet the industry's nuclear fuel needs. Oil. The Company and Toledo Edison have adequate supplies of oil and fuel for their oil-fired electric generating units, which are used primarily as reserve and peaking capacity. NUCLEAR UNITS The Company's generating facilities include, among others, three nuclear units owned or leased by the CAPCO Group Companies -- Perry Unit 1, Beaver Valley Unit 2 and Davis-Besse. These three units are in commercial operation. The Company has responsibility for operating Perry Unit 1, Duquesne has responsibility for operating Beaver Valley Unit 2 and Toledo Edison has responsibility for operating Davis-Besse. The Company and Toledo Edison own, respectively, 31.11% and 19.91% of Perry Unit 1, 24.47% and 1.65% of Beaver Valley Unit 2 and 51.38% and 48.62% of Davis-Besse. The Company and Toledo Edison also lease, as joint lessees, another 18.26% of Beaver Valley Unit 2 as a result of a September 1987 sale and leaseback transaction. Davis-Besse was placed in commercial operation in 1977, and its operating license expires in 2017. Perry Unit 1 and Beaver Valley Unit 2 were placed in commercial operation in 1987, and their operating licenses expire in 2026 and 2027, respectively. In January 1989, the PUCO approved nuclear plant performance standards for the Company and Toledo Edison based on rolling three-year industry averages of availability for pressurized water reactors and for 17 20 boiling water reactors over the 1988-1998 period. Availability is the ratio of the number of hours a unit is available to generate electricity (whether or not the unit is operated) to the number of hours in the period, expressed as a percentage. The three-year operating availability averages of the Company's and Toledo Edison's nuclear units are compared against the industry averages for the same three-year period with a resultant penalty or banked benefit. If the industry performance standards are not met, a penalty would be incurred which would require the Company and Toledo Edison to refund incremental replacement power costs to customers through the semiannual fuel cost rate adjustment. If the performance of these nuclear units exceeds the industry standards, a banked benefit results which can be used to offset disallowances of incremental replacement power costs should future performance be below industry standards. The relevant industry standards for the 1992-1994 period (as of November 30, 1994) are 79.6% for pressurized water reactors such as Davis-Besse and Beaver Valley Unit 2 and 73% for boiling water reactors such as Perry Unit 1. The 1992-1994 combined availability average for Davis-Besse and Beaver Valley Unit 2 was 89.5% and the availability average for Perry Unit 1 was 57.1%. At December 31, 1994, the total banked benefit for the Company and Toledo Edison is estimated to be between $20,000,000 and $22,000,000. All three nuclear units have received generally favorable evaluations from the NRC in their most recent Systematic Assessment of Licensee Performance ("SALP") reviews. Each of the functional areas evaluated is rated according to three performance categories, with category 1 indicating performance substantially exceeding regulatory requirements and that reduced NRC attention may be appropriate; category 2 indicating performance above that needed to meet regulatory requirements and that NRC attention may be maintained at normal levels; and category 3 indicating performance does not significantly exceed that needed to meet minimal regulatory requirements and that NRC attention should be increased above normal levels. The most recent review periods and SALP review scores for Beaver Valley Unit 2, Perry Unit 1 and Davis-Besse are:
BEAVER VALLEY UNIT 2 PERRY UNIT 1 DAVIS-BESSE ----------------- ---------------- --------------- SALP Review Period 6/14/92-11/27/93 2/1/93-1/7/95 7/1/93-1/21/95 Operations 1 2 1 Engineering 2 2 1 Maintenance 2 2 1 Plant Support 1 2 1
In 1980, Congress passed the Low-Level Radioactive Waste Policy Act which requires that the disposal site for low-level radioactive waste will be within the boundaries of the state where such waste was generated. The Act encourages states to form compacts among themselves to develop regional disposal facilities. Failure by a state or compact to begin implementation of a program could result in access denial to the two facilities currently accepting low-level radioactive waste. Ohio is part of the Midwest Compact and has responsibility for siting and constructing a disposal facility, but, to date, has made little progress. Therefore, effective July 1994, the Company and Toledo Edison are no longer able to ship low-level radioactive waste produced at their nuclear plants to off-site disposal facilities. Their ability to ship off-site in the future depends on whether the State of Ohio develops a low-level radioactive waste disposal facility within the next several years. As an interim solution, the Company and Toledo Edison have constructed storage facilities to house the waste at each nuclear site. Off-site disposal of spent nuclear fuel is unavailable, but the CAPCO Group Companies have contracts with the United States Department of Energy which provide for the future acceptance of spent fuel for disposal by the Federal government. Pursuant to the Nuclear Waste Policy Act of 1982, the Federal government has indicated it will begin accepting spent fuel from utilities by the year 2010. On-site storage capacity at Davis-Besse, Perry Unit 1 and Beaver Valley Unit 2 should be sufficient through 1996, 2013 and 2011, respectively. An additional on-site storage facility is being constructed at Davis-Besse to provide storage capacity through 2017. Any additional storage capacity needed at Perry Unit 1 and Beaver Valley Unit 2 for the period until the government accepts the fuel can, likewise, be provided by constructing an additional on- site storage facility. 18 21 CONSTRUCTION PROGRAM The Company carries on a continuous program of constructing transmission, distribution and generating facilities and modifying existing generating facilities to meet anticipated demand for electric service, to comply with governmental regulations and to protect the environment. The Company's and Toledo Edison's 1994 long-term (20-year) forecast, as filed with the PUCO, projects long-term annual growth rates in peak demand and kilowatt-hour sales of 0.5% and 1.0%, respectively, for the companies after demand-side management considerations. The Company's and Toledo Edison's integrated resource plan for the 1990s (which is included in the long-term forecast) combines peak clipping demand-side management programs with maximum utilization of existing generating capacity to postpone the need for new generating units until the next decade. Lake Shore Unit 18, a 245,000-kilowatt unit which was placed on cold standby status in October 1993, is scheduled to resume active status in 1998. According to the current long-term integrated resource plan, the next increment of generating capacity that the Company and Toledo Edison plan to put into service will be two 150,000-kilowatt units and one 80,000-kilowatt unit in 2008. The following tables show, categorized by major components, the construction expenditures by the Company and Toledo Edison and, by aggregating them, for Centerior Energy during 1992, 1993 and 1994 and the estimated cost of their construction programs for 1995 through 1999, in each case including allowance for funds used during construction and excluding nuclear fuel:
ACTUAL ESTIMATED ---------------------- ---------------------------------------- CLEVELAND ELECTRIC 1992 1993 1994 1995 1996 1997 1998 1999 - ----------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- (MILLIONS OF DOLLARS) Transmission, Distribution and General Facilities........... $ 73 $ 85 $ 53 $ 86 $ 94 $ 97 $ 79 $ 88 Renovation and Modification of Generating Units Nuclear.......................... 26 16 18 17 18 16 13 14 Nonnuclear....................... 56 65 61 53 35 53 54 60 Clean Air Act Amendments Compliance....................... 1 9 24 20 2 11 23 17 ---- ---- ---- ---- ---- ---- ---- ---- Total.................... $156 $175 $156 $176 $149 $177 $169 $179 ==== ==== ==== ==== ==== ==== ==== ====
ACTUAL ESTIMATED ---------------------- ---------------------------------------- TOLEDO EDISON 1992 1993 1994 1995 1996 1997 1998 1999 - ----------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- (MILLIONS OF DOLLARS) Transmission, Distribution and General Facilities........... $ 25 $ 22 $ 18 $ 32 $ 33 $ 29 $ 26 $ 24 Renovation and Modification of Generating Units Nuclear.......................... 12 15 10 13 14 12 10 11 Nonnuclear....................... 7 6 12 13 15 5 17 26 Clean Air Act Amendments Compliance....................... -- -- 1 6 3 7 2 7 ---- ---- ---- ---- ---- ---- ---- ---- Total.................... $ 44 $ 43 $ 41 $ 64 $ 65 $ 53 $ 55 $ 68 ==== ==== ==== ==== ==== ==== ==== ====
ACTUAL ESTIMATED ---------------------- ---------------------------------------- CENTERIOR ENERGY 1992 1993 1994 1995 1996 1997 1998 1999 - ----------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- (MILLIONS OF DOLLARS) Transmission, Distribution and General Facilities........... $ 98 $107 $ 71 $118 $127 $126 $105 $112 Renovation and Modification of Generating Units Nuclear.......................... 38 31 28 30 32 28 23 25 Nonnuclear....................... 63 71 73 66 50 58 71 86 Clean Air Act Amendments Compliance....................... 1 9 25 26 5 18 25 24 ---- ---- ---- ---- ---- ---- ---- ---- Total.................... $200 $218 $197 $240 $214 $230 $224 $247 ==== ==== ==== ==== ==== ==== ==== ====
19 22 REGULATION State Utility Commissions. The Company is subject to the jurisdiction of the PUCO with respect to rates, service, accounting, issuance of securities and other matters. Under Ohio law, municipalities may regulate rates, subject to appeal to the PUCO if not acceptable to the utility. See "Rate and Regulatory Matters" for a description of certain aspects of Ohio rate-making law. The Company is also subject to the jurisdiction of the Pennsylvania Public Utility Commission in certain respects relating to its ownership interests in generating facilities located in Pennsylvania. The PUCO is composed of five commissioners appointed by the Governor of Ohio from nominees recommended by a Public Utility Commission Nominating Council. Nominees must have at least three years' experience in one of several disciplines. Not more than three commissioners may belong to the same political party. Under Ohio law, a public utility must file annually with the PUCO a long-term forecast of customer loads, facilities needed to serve those loads and prospective sites for those facilities. This forecast must include the following: (1) Demand Forecast -- the utility's 20-year forecast of sales and peak demand, before and after the effects of demand-side management programs. (2) Integrated Resource Plan (required biennially) -- the utility's projected mix of resource options to meet the projected demand. (3) Short-Term Implementation Plan and Status Report (required biennially) -- the utility's discussion of how it plans to implement its integrated resource plan over the next four years. Estimates of annual expenditures and security issuances associated with the integrated resource plan over the four-year period must also be provided. The PUCO must hold a public hearing on the long-term forecast at least once every five years to determine the reasonableness of the forecast. The PUCO and the Ohio Power Siting Board ("OPSB") are required to consider the record of such hearings in proceedings for approving facility sites, changing rates, approving security issues and initiating energy conservation programs. Ohio law also permits electric utilities under PUCO jurisdiction to submit environmental compliance plans for PUCO review and approval. Ohio law requires that the PUCO make certain statutory findings prior to approving the environmental compliance plan, which includes that the plan is a reasonable least cost strategy for compliance with air quality requirements. In February 1993, the PUCO approved the Company's and Toledo Edison's 1992 long-term forecast and environmental compliance plan. In April 1995, the PUCO approved the Company's and Toledo Edison's 1994 long-term forecast. The PUCO has scheduled hearings in April 1995 on the Company's and Toledo Edison's updated environmental compliance plan which was filed in January 1995. The PUCO has jurisdiction over certain transactions by companies in an electric utility holding company system if it includes at least one Ohio electric utility and is exempt from regulation under Section 3(a)(1) or (2) of the Public Utility Holding Company Act of 1935. Consequently, the Company must obtain PUCO approval to invest in, lend funds to, guarantee the obligations of or otherwise finance or transfer assets to any nonutility company in the Centerior Energy holding company system, unless the transaction is in the ordinary course of business operations in which one company acts for or with respect to another company. Also, Centerior Energy must obtain PUCO approval to make any investment in any nonutility subsidiaries, affiliates or associates if such investment would cause all such capital investments to exceed 15% of Centerior Energy's consolidated capitalization unless such funds were provided by nonutility subsidiaries, affiliates or associates. The PUCO has a reserve capacity policy for electric utilities in Ohio stating that (i) 20% of service area peak load excluding interruptible load is an appropriate generic benchmark for an electric utility's reserve margin; (ii) a reserve margin exceeding 20% gives rise to a presumption of excess capacity, but may be appropriate if it confers a positive net present benefit to customers or is justified by unique system characteristics; and (iii) appropriate remedies for excess capacity (possibly including disallowance of costs in rates) will be determined by the PUCO on a case-by-case basis. Over the 1995-1997 period, the Company forecasts its capacity margins at the time of its projected peak loads to range from 12% to 13%, excluding the capacity on cold standby status. 20 23 Ohio Power Siting Board. The OPSB has state-wide jurisdiction, except to the extent preempted by Federal law, over the location, need for and certain environmental aspects of electric generating units with a capacity of 50,000 kilowatts or more and transmission lines with a rating of at least 125 kV. Federal Energy Regulatory Commission. The Company is subject to the jurisdiction of the FERC with respect to the transmission and sale of power at wholesale in interstate commerce, interconnections with other utilities, accounting and certain other matters. The Company is also subject to FERC jurisdiction with respect to its ownership and operation of the Seneca Power Plant, a pumped-storage, hydroelectric generating station in Pennsylvania ("Seneca") that the Company jointly owns with Pennsylvania Electric Company. Nuclear Regulatory Commission. The nuclear generating units in which the Company has an interest are subject to regulation by the NRC. The NRC's jurisdiction encompasses broad supervisory and regulatory powers over the construction and operation of nuclear reactors, including matters of health and safety, antitrust considerations and environmental impacts. Owners of nuclear units are required to purchase the full amount of nuclear liability insurance available. See Note 5(b) to the Financial Statements included as a part of this Prospectus. Other Regulation. The Company is subject to regulation by Federal, state and local authorities with regard to the location, construction and operation of certain facilities. The Company is also subject to regulation by local authorities with respect to certain zoning and planning matters. PROPERTIES For a description of the Company's properties, see "Description of New Bonds -- Title to Property". LEGAL PROCEEDINGS Westinghouse Lawsuit. In April 1991, the CAPCO Group Companies filed a lawsuit against Westinghouse Electric Corporation ("Westinghouse") in the United States District Court for the Western District of Pennsylvania. The suit alleges that six steam generators supplied by Westinghouse for Beaver Valley Units 1 and 2 contain serious defects, particularly defects causing tube corrosion and cracking. Steam generator maintenance costs have increased due to these defects and will likely continue to increase. The condition of the steam generators is being monitored closely. If the corrosion and cracking continue, replacement of the steam generators could be required earlier than their 40-year design life. The suit seeks monetary and corrective relief. On September 12, 1994, a jury trial began. On October 24, 1994, the court dismissed four of the five claims against Westinghouse, leaving only a fraud claim. On December 6, 1994, the jury rendered a verdict in favor of Westinghouse on the fraud claim. The CAPCO Group Companies have appealed the decision to the United States Court of Appeals for the Third Circuit. The Company believes that the outcome of this lawsuit will not have a materially adverse effect on its financial position or results of operation. Garfield Heights. In March 1994, the City Council of Garfield Heights, a suburb of Cleveland, passed an ordinance calling for a 30% reduction in rates for the Company's customers in that city, which would be a reduction in the Company's annual revenues of $5,500,000. The Company appealed that ordinance to the PUCO. On January 23, 1995, the staff of the PUCO issued its report on the matter concluding that a rate reduction for Garfield Heights is not warranted. The PUCO held public hearings in March 1995 but has not ruled on the matter. PROPOSED MERGER BETWEEN THE COMPANY AND TOLEDO EDISON Since the Company and Toledo Edison affiliated in 1986, efforts have been made to consolidate operations and administration as much as possible to achieve maximum cost savings. In March 1994, Centerior announced a plan to merge Toledo Edison into the Company. Toledo Edison, which was incorporated under the laws of the State of Ohio in 1901, is a public utility engaged in the generation, purchase, transmission, distribution and sale of electric energy in an area of approximately 2,500 square miles in northwestern Ohio, including the City of Toledo. Toledo Edison also 21 24 provides electric energy at wholesale to other electric utility companies and to 13 municipally owned distribution systems (through AMP-Ohio) and one rural electric cooperative distribution system in its service area. Toledo Edison serves approximately 287,000 customers and derives approximately 57% of its total electric retail revenue from customers outside the City of Toledo. Principal industries served by Toledo Edison include metal casting, forming and fabricating; petroleum refining; automotive equipment and assembly; food processing; and glass. Nearly all of Toledo Edison's operating revenues are derived from the sale of electric energy. At December 31, 1994, Toledo Edison had 1,887 employees of which about 56% were represented by three unions having collective bargaining agreements with Toledo Edison. On May 2, 1994, the Company and Toledo Edison filed a joint application for authorization and approval of the merger with the FERC. The PUCO, AMP-Ohio and the cities of Cleveland, Clyde and Bryan, Ohio have intervened in the FERC proceedings. The PUCO intervened as the state commission having jurisdiction, but has not opposed the Company and Toledo Edison application. On December 1, 1994, the PUCO approved the merger. The Pennsylvania Public Utility Commission approved the merger on July 7, 1994. The other intervenors have opposed the merger citing concerns primarily relating to the merger's impact on competition. On December 8, 1994, the FERC advised the Company and Toledo Edison by letter that the application to merge would be rejected unless the companies provide additional information and file a single system open-access transmission tariff offering comparable service. The Company and Toledo Edison plan to file in May 1995 the additional information requested by the FERC and an open-access transmission tariff offering comparable service. The Company and Toledo Edison do not expect the NRC to take action on their request for authorization to transfer certain NRC licenses to the merged entity until approvals have been obtained from the FERC and the preferred share owners, as discussed below. The merger also must be approved by share owners of Toledo Edison's preferred stock. Share owners of the Company's preferred stock must approve the authorization of additional shares of preferred stock. Debt holders of the merging companies will become debt holders of the successor corporation. The merging companies plan to seek preferred stock share owner approval in mid-1995. The merger is expected to be effective in late 1995. Upon completion of the merger, the Company will provide electric service to an area of approximately 4,200 square miles in northeastern and northwestern Ohio, including the cities of Cleveland and Toledo, with an estimated population of about 2,450,000. The Company will also provide electric energy at wholesale to other electric utility companies and to two municipal electric systems, 13 municipally owned distribution systems and one rural electric cooperative distribution system in its service area. The Company will serve over 1,030,000 customers and is expected to derive approximately 70% of its total electric retail revenue from customers outside the cities of Cleveland and Toledo. Nearly all of the Company's operating revenues will be derived from the sale of electric energy. EFFECT OF PROPOSED MERGER ON FIRST MORTGAGE. Substantially all of the fixed properties and the franchises of the Company (the "CEI Mortgaged Property") are subject to the lien of the First Mortgage (for the purpose of this discussion, the "CEI First Mortgage"). As a result of the merger of Toledo Edison into the Company, the Company will acquire all of the assets of Toledo Edison. Substantially all of the fixed properties and franchises of Toledo Edison (the "TE Mortgaged Property") are subject to the lien of the Indenture dated as of April 1, 1947 from Toledo Edison to The Chase National Bank of the City of New York (predecessor of The Chase Manhattan Bank (National Association)), as trustee, as supplemented and amended (the "TE First Mortgage"). As a result of the merger, the TE Mortgaged Property will become subject to the lien of the CEI First Mortgage, which lien will be junior to the lien of the TE First Mortgage. After the merger, the only assets of the Company which will be subject to the lien of the TE First Mortgage will be the TE Mortgaged Property at the time of the merger and properties thereafter acquired by the Company which are betterments, extensions, improvements, additions, repairs, renewals, replacements, substitutions and alterations to, upon, for and of the TE Mortgaged Property and all property held or acquired for use or used upon or in connection with or appertaining to the TE Mortgaged Property. The lien of the CEI First Mortgage will, after the merger, continue to be a first lien on substantially all of the CEI Mortgaged Property. After the merger, the existing junior liens of the subordinate mortgages of the Company and Toledo Edison will be junior to the liens of the CEI First Mortgage and the TE First Mortgage. 22 25 The Company expects that it will, after the merger, enter into a new indenture (the "New Indenture") which will prohibit the issuance of any bonds under the TE First Mortgage or the CEI First Mortgage, except to the trustee under the New Indenture in the same principal amounts as, and as the basis for the issuance of, bonds issued by the Company under the New Indenture. The New Indenture trustee will hold such TE First Mortgage bonds and CEI First Mortgage bonds for the benefit of the holders of the New Indenture bonds, which are thus expected to be rated the same as the TE First Mortgage bonds and the CEI First Mortgage bonds. A substantial portion of the properties owned by the Company after the merger, including some or all of the CEI Mortgaged Property and TE Mortgaged Property, will be subject to the lien of the New Indenture, and such lien will be junior to the liens of the CEI First Mortgage and the TE First Mortgage, but senior to the existing liens of the subordinate mortgages of the Company and Toledo Edison. At such time as the New Indenture trustee holds all of the outstanding CEI First Mortgage bonds or TE First Mortgage bonds, such bonds will be canceled, the indenture under which such bonds were issued will be discharged, and the lien of the New Indenture will become a first mortgage lien on the properties which were subject to the first mortgage lien of the discharged indenture. COMBINED PRO FORMA CONDENSED FINANCIAL STATEMENTS FOR THE COMPANY AND TOLEDO EDISON The following pro forma condensed balance sheet and income statements give effect to the agreement between the Company and Toledo Edison to merge Toledo Edison into the Company. These statements are unaudited and based on accounting for the merger on a method similar to a pooling of interests. These statements combine the two companies' condensed historical balance sheets at December 31, 1994 and December 31, 1993 and their condensed historical income statements for each of the three years ended December 31, 1994. The following pro forma data is not necessarily indicative of the results of operations or the financial condition which would have been reported had the merger been in effect during those periods or which may be reported in the future. 23 26 COMBINED PRO FORMA CONDENSED BALANCE SHEETS OF THE COMPANY AND TOLEDO EDISON (UNAUDITED) (DOLLARS ARE IN MILLIONS)
AT DECEMBER 31, 1994 ------------------------------------------------ HISTORICAL -------------------- CLEVELAND TOLEDO ADJUST- PRO FORMA ELECTRIC EDISON MENTS TOTALS --------- ------ ------- --------- Assets Property, Plant and Equipment.................. $ 7,637 $3,435 $ -- $11,072 Less: Accumulated Depreciation and Amortization................................. 2,486 1,273 -- 3,759 --------- ------ ------- --------- Net Property, Plant and Equipment............ 5,151 2,162 -- 7,313 Current Assets................................. 584 322 (22)(A) 884 Deferred Charges and Other Assets.............. 1,416 1,018 (7)(B) 2,427 --------- ------ ------- --------- Total Assets................................... $ 7,151 $3,502 $ (29) $10,624 ========= ====== ======= ========= Capitalization and Liabilities Capitalization: Common Stock Equity.......................... $ 1,058 $ 685 $ -- $ 1,743 Preferred Stock: With Mandatory Redemption Provisions...... 246 7 -- 253 Without Mandatory Redemption Provisions... 241 210 -- 451 Long-term Debt............................... 2,543 1,154 -- 3,697 --------- ------ ------- --------- Total Capitalization...................... 4,088 2,056 -- 6,144 Current Liabilities............................ 958 316 (24)(A) 1,250 Deferred Credits and Other Liabilities......... 2,105 1,130 (5)(A,B) 3,230 --------- ------ ------- --------- Total Capitalization and Liabilities...... $ 7,151 $3,502 $ (29) $10,624 ========= ====== ======= =========
AT DECEMBER 31, 1993 ------------------------------------------------ HISTORICAL -------------------- CLEVELAND TOLEDO ADJUST- PRO FORMA ELECTRIC EDISON MENTS TOTALS --------- ------ ------- --------- Assets Property, Plant and Equipment.................. $ 7,538 $3,402 $ -- $10,940 Less: Accumulated Depreciation and Amortization................................. 2,309 1,171 -- 3,480 --------- ------ ------- --------- Net Property, Plant and Equipment............ 5,229 2,231 -- 7,460 Current Assets................................. 632 314 (20)(A) 926 Deferred Charges and Other Assets.............. 1,298 965 (9)(B) 2,254 --------- ------ ------- --------- Total Assets................................... $ 7,159 $3,510 $ (29) $10,640 ========= ====== ======= ========= Capitalization and Liabilities Capitalization: Common Stock Equity.......................... $ 1,040 $ 623 $ (1)(R) $ 1,662 Preferred Stock: With Mandatory Redemption Provisions...... 285 28 -- 313 Without Mandatory Redemption Provisions... 241 210 -- 451 Long-term Debt............................... 2,793 1,225 1(R) 4,019 --------- ------ ------- --------- Total Capitalization...................... 4,359 2,086 -- 6,445 Current Liabilities............................ 733 329 (21)(A) 1,041 Deferred Credits and Other Liabilities......... 2,067 1,095 (8)(A,B) 3,154 --------- ------ ------- --------- Total Capitalization and Liabilities...... $ 7,159 $3,510 $ (29) $10,640 ========= ====== ======= =========
24 27 COMBINED PRO FORMA CONDENSED INCOME STATEMENTS OF THE COMPANY AND TOLEDO EDISON (UNAUDITED) (DOLLARS ARE IN MILLIONS)
YEAR ENDED DECEMBER 31, 1994 ------------------------------------------------- HISTORICAL -------------------- CLEVELAND TOLEDO ADJUST- PRO FORMA ELECTRIC EDISON MENTS TOTALS --------- ------ ------- --------- Operating Revenues............................ $ 1,698 $ 865 $(141)(C) $ 2,422 Operating Expenses............................ 1,302 685 (143)(C,D) 1,844 --------- ------ ------- --------- Operating Income............................ 396 180 2 578 Deferred Carrying Charges and Other Nonoperating Income......................... 31 17 (2)(D,E,R) 46 --------- ------ ------- --------- Income Before Interest Charges.............. 427 197 -- 624 Interest Charges.............................. 242 115 (1)(E) 356 --------- ------ ------- --------- Net Income.................................. $ 185 $ 82 $ 1 $ 268 ========= ====== ======= ========= Ratio of Earnings to Fixed Charges............ 1.81 1.51 -- 1.69
YEAR ENDED DECEMBER 31, 1993 ------------------------------------------------- HISTORICAL -------------------- CLEVELAND TOLEDO ADJUST- PRO FORMA ELECTRIC EDISON MENTS TOTALS --------- ------ ------- --------- Operating Revenues............................ $ 1,751 $ 871 $(147)(C) $ 2,475 Operating Expenses............................ 1,529 782 (148)(C,D) 2,163 --------- ------ ------- --------- Operating Income............................ 222 89 1 312 Write-off of Perry Unit 2..................... (351) (232 ) -- (583) Deferred Carrying Charges, Net and Other Nonoperating Income (Loss).................. (218) (31 ) (1)(D) (250) --------- ------ ------- --------- (Loss) Before Interest Charges.............. (347) (174 ) -- (521) Interest Charges.............................. 240 115 -- 355 --------- ------ ------- --------- Net (Loss).................................. $ (587) $(289 ) $ -- $ (876) ========= ====== ======= ========= Ratio of Earnings to Fixed Charges............ --(*) -- (*) -- --(*)
- --------------- (*) Not meaningful due to a net loss. For the year ended December 31, 1993, the net loss before income taxes and fixed charges for the Company, Toledo Edison and on the combined pro forma basis was $501,503,000, $195,267,000 and $696,771,000, respectively. Such fixed charges during the period were $333,610,000, $233,487,000 and $567,096,000, respectively. The net loss before income taxes and fixed charges included write-offs of $986,036,000, $473,200,000 and $1,459,237,000, respectively, related to the Company's and Toledo Edison's investment in Perry Unit 2 and phase-in plan deferred charges. Other charges of $78,675,000, $55,695,000 and $134,370,000, respectively, attributable to an early retirement program, also contributed to the net loss. Excluding these write-offs and other charges, the ratio of earnings to fixed charges for the Company, Toledo Edison and on the combined pro forma basis would have been 1.68, 1.42 and 1.57, respectively. 25 28
YEAR ENDED DECEMBER 31, 1992 -------------------------------------------------- HISTORICAL -------------------- CLEVELAND TOLEDO ADJUST- PRO FORMA ELECTRIC EDISON MENTS TOTALS --------- ------ ------- --------- Operating Revenues.......................... $ 1,743 $845 $(149)(C) $ 2,439 Operating Expenses.......................... 1,358 695 (150)(C,D) 1,903 --------- ------ ------- --------- Operating Income.......................... 385 150 1 536 Deferred Carrying Charges and Other Nonoperating Income....................... 63 42 (1)(D) 104 --------- ------ ------- --------- Income Before Interest Charges............ 448 192 -- 640 Interest Charges............................ 243 121 -- 364 --------- ------ ------- --------- Net Income................................ $ 205 $ 71 $ -- $ 276 ========= ====== ======= ========= Ratio of Earnings to Fixed Charges.......... 1.89 1.43 -- 1.70
- --------------- NOTES TO COMBINED PRO FORMA CONDENSED BALANCE SHEETS AND INCOME STATEMENTS (UNAUDITED) The Pro Forma Financial Statements include the following adjustments: Elimination of intercompany accounts and notes receivable and accounts and notes (A) payable. (B) Reclassification of prepaid pension costs. (C) Elimination of intercompany operating revenues and operating expenses. (D) Elimination of intercompany working capital transactions. (E) Elimination of intercompany interest income and interest expense. (R) Rounding adjustments.
DESCRIPTION OF NEW BONDS GENERAL The New Bonds will be issued as a series of the Company's First Mortgage Bonds ("First Mortgage Bonds") under the Mortgage and Deed of Trust, dated July 1, 1940, from the Company to Guaranty Trust Company of New York as trustee, under which The Chase Manhattan Bank (National Association) is successor trustee ("First Mortgage Trustee"), as supplemented and modified by sixty-eight supplemental indentures and as to be further supplemented by a Sixty-Ninth Supplemental Indenture dated May 1, 1995 and a Seventieth Supplemental Indenture ("Seventieth Supplemental Indenture") to be dated May 2, 1995 (the Mortgage and Deed of Trust as so supplemented called the "First Mortgage"), copies of which are exhibits to the Registration Statement. The New Bonds will be issued under the First Mortgage and the Seventieth Supplemental Indenture. The following summaries of certain provisions of the First Mortgage do not purport to be complete and are subject to, and qualified in their entirety by, all of the provisions of the First Mortgage. For a discussion of the effect on the First Mortgage of the proposed merger of Toledo Edison into the Company, see "Proposed Merger Between the Company and Toledo Edison -- Effect of Proposed Merger on First Mortgage". The Articles cited below refer to Articles of the First Mortgage. FORM, MATURITY, INTEREST AND PAYMENT The New Bonds will be fully registered bonds only, in denominations of $1,000 or any integral multiple thereof, will be dated as of the date of authentication, will mature on May 15, 2005 and will bear interest at the rate per annum set forth in their title, payable semiannually on May 15 and November 15 in each year to Bondholders of record at the close of business on the last day (whether or not a business day) of the calendar month preceding the interest payment date, the first interest payment date being November 15, 1995. Interest on the New Bonds will be computed on the basis of twelve 30-day months and a 360-day year. Principal and 26 29 interest and premium, if any, will be payable at the agency of the Company in the borough of Manhattan, The City of New York, currently designated as The Chase Manhattan Bank (National Association). REDEMPTION The New Bonds will be redeemable at any time or from time to time on or after May 15, 2002, at the option of the Company, in whole or in part, on at least thirty days' prior notice, upon payment of 100.00% of the principal amount thereof, together in each case with accrued interest to the date of redemption. SECURITY The New Bonds and all First Mortgage Bonds of other series currently outstanding and hereafter issued under the First Mortgage will, in the opinion of counsel for the Company, be secured equally and ratably (except as to any sinking or analogous fund established for the First Mortgage Bonds of any particular series) by a valid and perfected first lien, subject only to certain permitted liens and other encumbrances, on substantially all the property owned and franchises held by the Company, except the following: (a) cash, receivables and contracts not pledged or required to be pledged under the First Mortgage and leases in which the Company is lessor; (b) securities not specifically pledged or required to be pledged under the First Mortgage; (c) property held for consumption in operation or in advance of use for fixed capital purposes or for resale or lease to customers; (d) electric energy and other materials or products produced or purchased by the Company for sale, distribution or use in the ordinary conduct of its business; and (e) all the property of any other corporation which may now or hereafter be wholly or substantially wholly owned by the Company. (Clauses preceding Article I) All property acquired by the Company after June 30, 1940, other than the property excepted from the lien of the First Mortgage, becomes subject to the lien thereof upon acquisition. (Article I and granting and other clauses preceding Article I) Under certain conditions, the First Mortgage permits the Company to acquire property subject to a lien prior to the lien of the First Mortgage. (Article IV) Property subject to the lien of the First Mortgage will be released from the lien upon the sale or transfer of such property if the Company deposits the fair value of the property with the First Mortgage Trustee and meets certain other conditions specified in the First Mortgage. (Article VII) Moneys received by the First Mortgage Trustee for the release of property will, under certain circumstances, be applied to redeem outstanding First Mortgage Bonds, be applied to satisfy other obligations of the Company or be paid over to the Company from time to time based upon property additions or refundable First Mortgage Bonds. (Article VIII) In the Nineteenth Supplemental Indenture, the First Mortgage was modified to permit the Company without the vote or consent of the holders of any First Mortgage Bonds issued after November 1976 (a) to exclude nuclear fuel from the lien of the First Mortgage to the extent not excluded therefrom by its existing provisions and (b) to revise the definition of property additions which can constitute bondable property to include facilities outside the State even though they are not physically connected with property of the Company in the State and to clarify its general scope. TITLE TO PROPERTY The generating plants and other principal facilities of the Company are owned by the Company, except as follows: (a) The Company and Toledo Edison jointly lease from others for a term of about 29 1/2 years starting on October 1, 1987 undivided 6.5%, 45.9% and 44.38% tenant-in-common interests in Units 1, 2 and 3, respectively, of the Mansfield Plant and also jointly lease from others for the same term an 18.26% undivided tenant-in-common interest in Beaver Valley Unit 2, all located in Shippingport, Pennsylvania. The Company owns another 24.47% interest in Beaver Valley Unit 2 as a tenant-in-common. (b) Most of the Lake Shore Plant ("Lake Shore") facilities are situated on artificially filled land, extending beyond the natural shoreline of Lake Erie as it existed in 1910. As of December 31, 1994, the cost of the Company's facilities, other than water intake and discharge facilities, located on such artificially filled land aggregated approximately $107,221,000. 27 30 Title to land under the water of Lake Erie within the territorial limits of the State (including artificially filled land) is in the State in trust for the people of the State for the public uses to which it may be adapted, subject to the powers of the United States, the public rights of navigation, water commerce and fishery and the rights of upland owners to wharf out or fill to make use of the water. The State is required by statute, after appropriate proceedings, to grant a lease to an upland owner, such as the Company, which erected and maintained facilities on such filled land prior to October 13, 1955. The Company does not have such a lease from the State with respect to the artificially filled land on which its Lake Shore facilities are located, but the Company's position, on advice of counsel for the Company, is that the Lake Shore facilities and occupancy may not be disturbed because they do not interfere with the free flow of commerce in navigable channels and also constitute, at least in part, and are on land filled pursuant to, the exercise by it of its property rights as owner of the land above the shoreline adjacent to the filled land. The Company does hold permits, under Federal statutes relating to navigation, to occupy such artificially filled land. (c) The facilities at Seneca are located on land owned by the United States and occupied by the Company and Pennsylvania Electric Company pursuant to a license issued by the Federal Energy Regulatory Commission for a 50-year period starting December 1, 1965 for the construction, operation and maintenance of a pumped-storage hydroelectric plant. (d) The water intake and discharge facilities at the electric generating plants located along Lake Erie and the Ohio River are extended into the lake and river under the Company's property rights as owner of the land above the water line and pursuant to permits under Federal statutes relating to navigation. (e) The transmission system is located on land, easements or rights-of-way owned by the Company. The distribution system also is located, in part, on land owned by the Company, but, for the most part, it is located on lands owned by others and on streets and highways. In most cases, the Company has obtained permission from the apparent owner, or, if located on streets and highways, from the apparent owner of the abutting property. The electric underground transmission and distribution systems are located for the most part in public streets. The Pennsylvania portions of the main transmission lines from Seneca, the Mansfield Plant and Beaver Valley Unit 2 are not owned by the Company. The fee title which the Company has as a tenant-in-common owner, and the leasehold interests it has as a joint lessee, of certain generating units do not include the right to require a partition or sale for division of proceeds of the units without the concurrence of all the other owners and their respective mortgage trustees and the First Mortgage Trustee. ISSUANCE OF ADDITIONAL FIRST MORTGAGE BONDS In addition to the $2,697,780,000 principal amount of First Mortgage Bonds outstanding at December 31, 1994 and the principal amount of the New Bonds, additional First Mortgage Bonds may be issued under Article III of the First Mortgage, ranking equally and ratably with such outstanding First Mortgage Bonds and the New Bonds and without limit as to amount, on the basis of: (a) 70% of bondable property (as described under "Description of New Bonds -- Security") not previously used as the basis for issuance of First Mortgage Bonds or applied for some other purpose under the First Mortgage; (b) the deposit of cash (which may be withdrawn thereafter on the basis of bondable property or refundable First Mortgage Bonds); and (c) substitution for refundable First Mortgage Bonds. First Mortgage Bonds become refundable First Mortgage Bonds when they are paid upon maturity, redemption or purchase out of money deposited with the First Mortgage Trustee for such payment or when money for such payment is irrevocably deposited with the First Mortgage Trustee. (Articles I, III and VIII) In general, all property subject to the lien of the First Mortgage which is used or useful in the Company's electric business (including property not located in the State if it is physically connected with property of the Company in the State, either directly or through other property of the Company), which is not subject to an unfunded prior lien and as to which the Company has good title and corporate power to own and operate, is bondable property and as such is available as a basis for the issuance of First Mortgage Bonds. The facilities of the Company on the artificially filled land at Lake Shore will become bondable property only when the Company acquires, under conditions specified in the First Mortgage, either good title to such land or the right to occupy it; and the facilities of the Company on the land at Seneca are not now bondable property. See "Description of New Bonds -- Title to Property". The tenant-in-common 28 31 interests owned by the Company in certain generating units qualify as bondable property, except that its interest in property located in Pennsylvania, including Beaver Valley Unit 2, does not qualify because it is located outside the State and is not physically connected with property of the Company in the State. With certain exceptions, property which the Company leases from others is not bondable property. (Articles I and III) Also, with certain exceptions, in order to issue additional First Mortgage Bonds based on bondable property, net earnings of the Company available for interest and property retirement appropriations for any 12 consecutive months within the 15 calendar months immediately preceding the month in which application for authentication and delivery of such additional First Mortgage Bonds is made must be at least twice the annual interest charges on all First Mortgage Bonds outstanding and on the issue applied for. (Article III) At December 31, 1994, the Company would have been permitted to issue approximately $487,000,000 of additional First Mortgage Bonds. The amount of additional First Mortgage Bonds which may be issued will fluctuate depending upon the amount of available refundable First Mortgage Bonds, available bondable property, earnings and interest rates. COVENANT TO CHARGE EARNINGS NOT APPLICABLE TO THE NEW BONDS The supplemental indentures applicable to First Mortgage Bonds issued prior to 1974 contain a covenant to the effect that, so long as any of those First Mortgage Bonds remain outstanding (which will be until November 15, 2005, assuming no prior redemption), the Company will charge against earnings, and credit to reserves for depreciation and retirement of property, an amount not less than 15% of gross operating revenues for each year (after deducting the costs of purchased power and net electric energy received on interchange), less the amounts expended for maintenance and repairs during the year. The Seventieth Supplemental Indenture will not extend such covenant to the New Bonds. REMEDIES IN THE EVENT OF DEFAULT Events of default under the First Mortgage include the failure of the Company (a) to pay the principal of or premium, if any, on any First Mortgage Bond when due; (b) to pay any interest on or sinking fund obligation of any First Mortgage Bond within 30 days after it is due; (c) to pay the principal of or interest on any prior lien bonds within any allowable period; (d) to discharge, appeal or obtain the stay of any final judgment against the Company in excess of $100,000 within 30 days after it is rendered; or (e) to perform any other covenant in the First Mortgage within 60 days after notice to the Company from the First Mortgage Trustee or the holders of not less than 15% in principal amount of the First Mortgage Bonds. Events of default also include certain events of bankruptcy, insolvency or reorganization in bankruptcy or insolvency of the Company. (Article IX) The Company is required to furnish periodically to the First Mortgage Trustee a certificate as to the absence of any default or as to compliance with the terms of the First Mortgage, and such a certificate is also required in connection with the issuance of any additional First Mortgage Bonds and in certain other circumstances. (Article III) The First Mortgage provides that the First Mortgage Trustee, within 90 days after notice of defaults under the First Mortgage (60 days with respect to events of default described in (e) above), is required to give notice of such defaults to all holders of First Mortgage Bonds, but, except in the case of a default resulting from the failure to make any payment of principal of or interest on the First Mortgage Bonds or in the payment of any sinking or purchase fund installments, the First Mortgage Trustee may withhold such notice if it determines in good faith that it is in the best interests of the holders of the First Mortgage Bonds to do so. (Article XIII) Upon the occurrence of any event of default, the First Mortgage Trustee or the holders of not less than 25% in principal amount of the First Mortgage Bonds may declare the principal amount of all First Mortgage Bonds due, and, if the Company cures all defaults before a sale of the mortgaged property, the holders of a majority in principal amount of the First Mortgage Bonds may waive the default. If any event of default occurs, the First Mortgage Trustee also may (a) take possession of and operate the mortgaged property for the purpose of paying the principal of and interest on the First Mortgage Bonds; (b) sell at public auction all of the mortgaged property, or such parts thereof as the holders of a majority in principal amount of the First Mortgage Bonds may request or, in the absence of such request, as the First Mortgage Trustee may determine; 29 32 (c) bring suit to enforce payment of the principal of and interest on the First Mortgage Bonds, to foreclose the First Mortgage or for the appointment of a receiver of the mortgaged property; and (d) pursue any other remedy. (Article IX) No holder of First Mortgage Bonds may institute any action, suit or proceeding for any remedy under the First Mortgage unless he has previously given the First Mortgage Trustee written notice of a default by the Company, and in addition: (a) the holders of not less than 25% in principal amount of the First Mortgage Bonds have requested the First Mortgage Trustee and afforded it a reasonable opportunity to exercise its powers under the First Mortgage or to institute such action, suit or proceeding in its own name; (b) such holder has offered to the First Mortgage Trustee security and indemnity satisfactory to it against the costs, expenses and liabilities to be incurred thereby; and (c) the First Mortgage Trustee has refused or neglected to comply with such request within a reasonable time. The holders of a majority in principal amount of the First Mortgage Bonds, upon furnishing the First Mortgage Trustee with security and indemnification satisfactory to it, may require the First Mortgage Trustee to pursue any available remedy, and any holder of the First Mortgage Bonds has the absolute and unconditional right to enforce the payment of the principal of and interest on his First Mortgage Bonds. (Article IX) MODIFICATION OF FIRST MORTGAGE AND FIRST MORTGAGE BONDS Certain modifications which do not in any manner impair any of the rights of the holders of any series of First Mortgage Bonds then outstanding or of the First Mortgage Trustee may be made without the vote of the holders of the First Mortgage Bonds by supplemental indenture entered into between the Company and the First Mortgage Trustee. (Article XIV) Modifications of the First Mortgage or any indenture supplemental thereto, and of the rights and obligations of the Company and of holders of all series of First Mortgage Bonds outstanding, may be made with the consent of the Company by the vote of the holders of at least 80% in principal amount of the outstanding First Mortgage Bonds entitled to vote at a meeting of the holders of the First Mortgage Bonds or, if one or more, but less than all, of the series of First Mortgage Bonds outstanding under the First Mortgage are affected by any such modification, by the vote of the holders of at least 80% in principal amount of the outstanding First Mortgage Bonds entitled to vote of each series so affected; but no such modification may be made which will affect the terms of payment of the principal of or premium, if any, or interest on any First Mortgage Bond issued under the First Mortgage or to change the voting percentage described above to less than 80% with respect to any First Mortgage Bonds outstanding when such modification becomes effective. First Mortgage Bonds owned or held by or for the account or benefit of the Company or an affiliate of the Company (as defined in the First Mortgage) are not entitled to vote. (Article XV) In the Nineteenth Supplemental Indenture, the First Mortgage was modified, effective when none of the First Mortgage Bonds of any series issued prior to December 1976 are outstanding, so as to change the 80% voting requirements discussed above to 60%. Based on the series of First Mortgage Bonds outstanding at December 31, 1994, the 60% voting requirement will become effective on May 1, 2009. DEFEASANCE AND DISCHARGE The First Mortgage provides that the Company will be discharged from any and all obligations under the First Mortgage if the Company pays the principal and interest and premium, if any, due on all First Mortgage Bonds outstanding in accordance with the terms stipulated in each such Bond and if the Company has performed all other obligations under the First Mortgage. In the event of such discharge, the Company has agreed to continue to indemnify the First Mortgage Trustee from any liability arising out of the First Mortgage. (Article XVI) BOOK ENTRY SYSTEM The Depository Trust Company ("DTC") will act as securities depository for the New Bonds and the New Bonds initially will be issued solely in book-entry form to be held under DTC's book-entry-only system ("book entry system"), registered in the name of Cede & Co. (DTC's partnership nominee). One fully registered bond in the aggregate principal amount of the New Bonds will be deposited with DTC. 30 33 DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities that its participants ("Participants") deposit with DTC. DTC also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations ("Direct Participants"). DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as securities brokers and dealers, banks, and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). The rules applicable to DTC and its Participants are on file with the SEC. Purchases of the New Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the New Bonds on DTC's records. The ownership interest of each actual purchaser of each New Bond ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the New Bonds are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in New Bonds, except in the event that use of the book entry system for the New Bonds is discontinued. To facilitate subsequent transfers, all New Bonds deposited by Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. The deposit of New Bonds with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the New Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such New Bonds are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Redemption notices will be sent to Cede & Co. If less than all of the New Bonds are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. will consent or vote with respect to the New Bonds. Under its usual procedures, DTC mails an Omnibus Proxy to the First Mortgage Trustee as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the New Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Settlement for the New Bonds will be made by the Underwriters in immediately available funds. While the New Bonds are held under DTC's book entry system, principal and interest payments on the New Bonds will be made to DTC in immediately available funds. DTC's practice is to credit Direct Participants' accounts on the payable date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payment on the payable date. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name", and will be the responsibility of such Participant and not of DTC, the First Mortgage Trustee, or the Company, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to DTC is the 31 34 responsibility of the Company, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. Secondary trades in long-term bonds, notes and debentures of corporate issuers are generally settled in clearinghouse or next-day funds. In contrast, while the New Bonds are held under DTC's book entry system, the New Bonds will trade in DTC's same-day funds settlement system, and secondary market trading in the New Bonds will therefore be required by DTC to settle in immediately available funds. DTC may discontinue providing its services as securities depository with respect to the New Bonds at any time by giving reasonable notice to the Company or the First Mortgage Trustee, or the Company may remove DTC as the securities depository for the New Bonds. Under such circumstances, bond certificates are required to be delivered. The Beneficial Owners, upon registration of certificates held in the Beneficial Owners' names, will become the registered owners of the New Bonds. So long as Cede & Co. is the registered owner of the New Bonds, as nominee of DTC, references herein to the registered owners of the New Bonds will mean Cede & Co. and will not mean the Beneficial Owners. Under the First Mortgage, payments made by the Company to DTC or its nominee will satisfy the Company's obligations under the First Mortgage and the New Bonds, to the extent of the payments so made. Beneficial Owners will not be, and will not be considered by the Company or the First Mortgage Trustee to be, and will not have any rights as, holders of New Bonds under the First Mortgage. THE COMPANY, THE UNDERWRITERS AND THE FIRST MORTGAGE TRUSTEE WILL HAVE NO RESPONSIBILITY OR OBLIGATION TO ANY DIRECT PARTICIPANT, INDIRECT PARTICIPANT OR ANY BENEFICIAL OWNER OR ANY OTHER PERSON NOT SHOWN ON THE REGISTRATION BOOKS OF THE FIRST MORTGAGE TRUSTEE AS BEING A REGISTERED OWNER WITH RESPECT TO: (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT; (2) THE PAYMENT OF ANY AMOUNT DUE BY DTC TO ANY DIRECT PARTICIPANT OR BY ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL AMOUNT OF OR INTEREST OR ANY PREMIUM ON THE NEW BONDS; (3) THE DELIVERY OF ANY NOTICE BY DTC TO ANY DIRECT PARTICIPANT OR BY ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT TO ANY BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED TO BE GIVEN TO REGISTERED OWNERS UNDER THE TERMS OF THE FIRST MORTGAGE; (4) THE SELECTION OF THE BENEFICIAL OWNERS TO RECEIVE PAYMENT IN THE EVENT OF ANY PARTIAL REDEMPTION OF THE NEW BONDS; OR (5) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS REGISTERED OWNER. The Company, the First Mortgage Trustee and the Underwriters cannot and do not give any assurances that DTC will distribute payments of debt service on the New Bonds made to DTC or its nominee as the registered owner, or any redemption or other notices, to the Participants, or that the Participants or others will distribute such payments or notices to the Beneficial Owners, or that they will do so on a timely basis, or that DTC will serve and act in the manner described in this Prospectus. LEGAL OPINIONS Legal matters with respect to the securities offered hereby will be passed upon for the Company by Terrence G. Linnert, Mary E. O'Reilly or Kevin P. Murphy, counsel for the Company, and for the Underwriters by Baker & Hostetler, 3200 National City Center, Cleveland, Ohio 44114. EXPERTS The statements as to matters of law and legal conclusions under the headings "General Regulation", "Environmental Regulation", "Electric Rates", "Title to Property" and "Legal Proceedings" in the Form 10-K, under the heading "Description of New Bonds" in this Prospectus and under the heading "Indemnification of Directors and Officers" in the Registration Statement are made on the authority of Terrence G. Linnert, Mary E. O'Reilly or Kevin P. Murphy, as an expert. Mr. Linnert is Vice President of the Company and Centerior and Vice President-Legal & Governmental Affairs and General Counsel of the Service 32 35 Company, Mrs. O'Reilly is Managing Attorney of the Service Company and Mr. Murphy is Senior Corporate Counsel of the Service Company. The consolidated financial statements and schedule of the Company as of December 31, 1994 and 1993 and for each of the three years in the period ended December 31, 1994, included in the Form 10-K and included in or incorporated by reference in this Prospectus, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. Reference is made to said report which includes an explanatory paragraph that describes a change made in the method of accounting for postretirement benefits other than pensions in 1993, as discussed in Note 9 to the financial statements. UNDERWRITING Under the terms of and subject to the conditions contained in an Underwriting Agreement dated May 9, 1995, the Underwriters named below have severally agreed to purchase, and the Company has agreed to sell to each Underwriter, severally, the respective principal amount of the New Bonds set forth below.
PRINCIPAL UNDERWRITER AMOUNT - ----------------------------------------------------------------------------- ------------ Morgan Stanley & Co. Incorporated............................................ $180,000,000 Lehman Brothers Inc.......................................................... 120,000,000 ------------ Total................................................................ $300,000,000 ===========
The Underwriting Agreement provides that the several obligations of the Underwriters are subject to the approval by counsel of certain legal matters in connection with the New Bonds and to certain other conditions. The Underwriters are committed to take and pay for all of the New Bonds if any are taken. The Underwriters propose to offer part of the New Bonds directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price which represents a concession not in excess of .250% of the principal amount of the New Bonds. The Underwriters may allow, and such dealers may reallow, a concession not in excess of .125% of the principal amount of the New Bonds to certain other dealers. After the initial offering of the New Bonds, the offering price and other selling terms may from time to time be varied by the Underwriters. The Company has agreed to indemnify the Underwriters against certain liabilities under the Securities Act. The Company does not intend to apply for listing of the New Bonds on a national securities exchange, but has been advised by the Underwriters that they currently intend to make a market in the New Bonds, as permitted by applicable laws and regulations. The Underwriters are not obligated, however, to make a market in the New Bonds and any such market making, if initiated, may be discontinued at any time at the sole discretion of the Underwriters. Accordingly, no assurance can be given as to the liquidity of, or trading markets for, the New Bonds. 33 36 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Financial Statements for the Year Ended December 31, 1994 (Reprinted from the Company's Annual Report to Share Owners) Management's Financial Analysis.................................................. F-2 Income Statement................................................................. F-7 Retained Earnings................................................................ F-7 Cash Flows....................................................................... F-8 Balance Sheet.................................................................... F-9 Statement of Preferred Stock..................................................... F-11 Notes to the Financial Statements................................................ F-12 Report of Independent Public Accountants......................................... F-22 Financial and Statistical Review................................................. F-23
F-1 37 Management's Financial Analysis OUTLOOK STRATEGIC PLAN We made significant strides in achieving the objectives of the comprehensive strategic action plan announced in January 1994. Centerior Energy Corporation (Centerior Energy), along with The Cleveland Electric Illuminating Company (Company) and The Toledo Edison Company (Toledo Edison), created the strategic plan to strengthen their financial and competitive position through the year 2001. The Company and Toledo Edison are the two wholly owned electric utility subsidiaries of Centerior Energy. The plan's objectives relate to the combined operations of all three companies. The objectives are to achieve profitable revenue growth, become an industry leader in customer satisfaction, build a winning employee team, attain increasingly competitive power supply costs and maximize share owner return on Centerior Energy common stock. To achieve these objectives, we will continue to control expenditures and reduce our outstanding debt and preferred stock. In addition, we will increase revenues by finding new uses for existing assets and resources, implementing new marketing programs and restructuring rates when appropriate. We will also improve the operating performance of our generating plants and take other appropriate actions. During 1994, we made progress toward most of our long-term objectives. The Company and Toledo Edison initiated a marketing plan designed to increase total retail revenues (exclusive of fuel cost recovery revenues and weather influences) by 2-3% annually through 2001. Our new customer service activities are intended to raise our customer satisfaction rating. Our employees achieved enough of their established objectives for the year to receive a $500 per eligible employee incentive compensation award. The work undertaken during refueling outages at the Davis-Besse Nuclear Power Station (Davis-Besse) and Perry Nuclear Power Plant Unit 1 (Perry Unit 1) as well as the outage work at our fossil-fueled plants should help us achieve our long-term objective of reducing variable power costs to a more competitive level. Strong cash flow continued in 1994 and the Company's fixed-income obligations were reduced by $77 million. Also, the Company's total operation and maintenance expenses declined $71 million, exclusive of one-time charges in 1993. We are taking aggressive steps to increase revenues through our enhanced marketing plan and to control costs. The full impact of these efforts will take time. In the meantime, the Company and Toledo Edison must raise revenues by restructuring rates. Accordingly, the Company and Toledo Edison are preparing to file a request with The Public Utilities Commission of Ohio (PUCO) to be effective in 1996. Meaningful cost control and marketing strategies will mitigate the need for additional rate increases and help us meet competition. COMPETITION We are implementing strategies designed to create and enhance our competitive advantages and to overcome the competitive disadvantages that we face due to regulatory and tax constraints and our high retail cost structure. Currently our most pressing competition comes from two municipal electric systems in our service area. Our rates are generally higher than those of the two municipal systems due largely to their exemption from taxation, the lower cost financing available to them, the continued availability to them of lower cost power through short-term power purchases and their access to cheaper governmental power. We are seeking to address the tax disparity through the legislative process. In 1994, the Ohio Governor's Tax Commission recommended the replacement of the gross receipts and personal property taxes currently levied only on investor-owned utilities and collected through rates with a different tax collected from customers of all electric utilities, including municipal systems. Investor-owned utilities would reduce rates upon repeal of the existing taxes. We are now working to submit this proposal to the Ohio legislature. We face the threat that municipalities in our service area could establish new systems and continue expanding existing systems. We are responding with aggressive marketing programs and by emphasizing the value of our service and the risks of a municipal system: substantial, long-term debt; no guarantee of low-cost wholesale electricity; the difficulty of forecasting costs; and the uncertainty of market share as a result of our aggressive competition. Generally, these municipalities have determined that developing a system is not feasible or have agreed with us not to pursue development of a system at this time. Although some communities continue to be interested in municipalization, we believe that we offer the best value and most reliable source of electric service in our territory. The larger municipal system in our service area, Cleveland Public Power (CPP), is constructing new transmission and distribution facilities extending into eastern portions of Cleveland. CPP also plans to expand to western portions of Cleveland. CPP's expansion reduced our annual net income by about $4 million in 1993 and an additional $3 million in 1994. We estimate our net income will continue to be reduced by an additional $4 million to $5 million each year in the 1995-1999 period because of CPP's expansion. Despite CPP's expansion efforts, we have been successful in retaining most of the large industrial and commercial customers in the expansion areas by providing economic incentives in exchange for sole-supplier contracts. We have similar contracts F-2 38 with customers in other parts of our service area. Approximately 90% of our industrial revenues under contract will not be up for renewal until 1997 or later. As these contracts expire, we expect to renegotiate them and retain the customers. In addition, an increasing number of CPP customers are converting back to our service. The Energy Policy Act of 1992 will increase competition in the electric utility industry by allowing broader access to a utility's transmission system. It should not significantly increase the competitive threat to us since we have been required to wheel electricity to municipal systems in our service area since 1977 under operating licenses for our nuclear generating units. Further, the government could eventually require utilities to deliver power from other utilities or generation sources to their retail customers. To combat this threat, we are offering incentives such as energy-efficiency improvements and reductions in demand charges for increased electricity usage to our industrial and commercial customers in return for long-term commitments. RATE MATTERS Under the Rate Stabilization Program discussed in Note 7, we agreed to freeze base rates until 1996 and limit rate increases through 1998. In exchange, we are permitted to defer through 1995 and subsequently recover certain costs not currently recovered in rates and to accelerate the amortization of certain benefits. Amortization and recovery of the deferrals are expected to begin in 1996 with future rate recognition and will continue over the average life of the related assets, or between 17 and 30 years. The continued use of these regulatory accounting measures in 1995 will be dependent upon our continuing assessment and conclusion that there will be probable recovery of such deferrals in future rates. Our analysis leading to certain year-end 1993 financial actions and the strategic plan also included an evaluation of our regulatory accounting measures. See Regulatory Accounting below and Note 7. We decided that, once the deferral of expenses and acceleration of benefits under the Rate Stabilization Program are completed in 1995, we should no longer plan to use these measures to the extent we have in the past. REGULATORY ACCOUNTING As described in Notes 1(a) and 7, the Company complies with the provisions of Statement of Financial Accounting Standards (SFAS) 71. We continually monitor changes in market and regulatory conditions and consider the effects of such changes in assessing the continuing applicability of SFAS 71. Criteria that could give rise to discontinuation of the application of SFAS 71 include: (1) increasing competition which significantly restricts the Company's ability to establish rates to recover operating costs, return requirements and the amortization of regulatory assets and (2) a significant change in the manner in which rates are set by the PUCO from cost-based regulations to some other form of regulations. In the event we determine that the Company no longer meets the criteria for following SFAS 71, the Company would be required to record a before-tax charge to write off the regulatory assets shown in Note 7. In addition, we would be required to evaluate whether the changes in the competitive and regulatory environment which led to discontinuing the application of SFAS 71 would also result in an impairment of the net book value of the Company's property, plant and equipment. The Company's write-off in 1993 of the phase-in deferred operating expenses and carrying charges (phase-in deferrals) discussed in Note 7 resulted from our conclusion that projected revenues for the 1994-1998 period would not provide for recovery of such deferrals as scheduled by the PUCO order. This short time frame for recovery of the phase-in deferrals is a requirement under the accounting standard for phase-in plans of regulated enterprises, SFAS 92. The remaining recovery periods for all remaining regulatory assets are between 17 and 34 years. We believe the Company's rates will provide for recovery of these assets over the relevant periods and SFAS 71 continues to apply. NUCLEAR OPERATIONS The Company has interests in three nuclear generating units -- Davis-Besse, Perry Unit 1 and Beaver Valley Power Station Unit 2 (Beaver Valley Unit 2). Toledo Edison operates Davis-Besse and the Company operates Perry Unit 1. Davis-Besse and Beaver Valley Unit 2 have been operating extremely well, with each unit having a three-year availability average at year-end 1994 that exceeded the three-year industry average of 80% for similar reactors. However, the three-year availability average of Perry Unit 1 was below the three-year industry availability average for that reactor type. In 1994, Davis-Besse had an availability factor of 88%. Further, Davis-Besse completed the shortest refueling and maintenance outage in its history in 1994, returning to service just 46 days after shutting down. The Company is in the process of upgrading Perry Unit 1 to the same level. For seven months in 1994, Perry Unit 1 was out of service for its fourth refueling and maintenance outage. Work was also performed in connection with the comprehensive course of action developed in 1993 to improve the operating performance of Perry Unit 1. Work in connection with that course of action is ongoing. We externally fund the estimated costs for the future decommissioning of our nuclear units. In 1993 and 1994, we increased our decommissioning expense accruals because of revisions in our cost estimates. See Note 1(e). F-3 39 Our nuclear units may be impacted by activities or events beyond our control. Operating nuclear units have experienced unplanned outages or extensions of scheduled outages because of equipment problems or new regulatory requirements. A major accident at a nuclear facility anywhere in the world could cause the Nuclear Regulatory Commission to limit or prohibit the operation or licensing of any domestic nuclear unit. If one of our nuclear units is taken out of service for an extended period for any reason, including an accident at such unit or any other nuclear facility, we cannot predict whether regulatory authorities would impose unfavorable rate treatment. Such treatment could include taking our affected unit out of rate base, thereby not permitting us to recover our investment in and earn a return on it, or disallowing certain construction or maintenance costs. An extended outage coupled with unfavorable rate treatment could have a material adverse effect on our financial condition and results of operations. HAZARDOUS WASTE DISPOSAL SITES The Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended (Superfund) established programs addressing the cleanup of hazardous waste disposal sites, emergency preparedness and other issues. The Company has been named as a "potentially responsible party" (PRP) for three sites listed on the Superfund National Priorities List (Superfund List) and is aware of its potential involvement in the cleanup of several other sites. Allegations that the Company disposed of hazardous waste at these sites, and the amounts involved, are often unsubstantiated and subject to dispute. Superfund provides that all PRPs for a particular site can be held liable on a joint and several basis. If the Company were held liable for 100% of the cleanup costs of all of the sites referred to above, the cost could be as high as $350 million. However, we believe that the actual cleanup costs will be substantially lower than $350 million, that the Company's share of any cleanup costs will be substantially less than 100% and that most of the other PRPs are financially able to contribute their share. The Company has accrued a liability totaling $8 million at December 31, 1994 based on estimates of the costs of cleanup and its proportionate responsibility for such costs. We believe that the ultimate outcome of these matters will not have a material adverse effect on our financial condition or results of operations. COMMON STOCK DIVIDENDS Centerior Energy's common stock dividend has been funded in recent years primarily by common stock dividends paid by the Company. We expect this practice to continue for the foreseeable future. In 1994, Centerior Energy lowered its common stock dividend which reduced its cash outflow by over $110 million annually. This action, in turn, reduced the common stock cash dividend demand on the Company. The Company is using the increased retained cash to redeem debt and preferred stock more quickly than would otherwise be the case. This has helped improve the Company's capitalization structure and fixed charge coverage ratios. MERGER OF TOLEDO EDISON INTO THE COMPANY We continue to seek the necessary regulatory approvals to complete the merger of Toledo Edison into the Company which was announced in 1994. The Company and Toledo Edison plan to seek preferred stock share owner approval in mid-1995. The merger is expected to be effective in 1995. See Note 15. INFLATION Although the rate of inflation has eased in recent years, we are still affected by even modest inflation which causes increases in the unit cost of labor, materials and services. CAPITAL RESOURCES AND LIQUIDITY 1992-1994 CASH REQUIREMENTS We need cash for normal corporate operations, the mandatory retirement of securities and constructing and modifying facilities. Construction is needed to meet anticipated demand for electric service, comply with government regulations and protect the environment. Over the three-year period 1992-1994, construction and mandatory retirement needs totaled approximately $940 million. In addition, we exercised options to redeem and purchase approximately $470 million of our securities. We raised $989 million through security issues and term bank loans during the 1992-1994 period. The Company also utilized short-term borrowings to help meet its cash needs. The Company had $58 million of notes payable to affiliates at December 31, 1994. See Note 12. Although write-offs of the Company's Perry Nuclear Power Plant Unit 2 (Perry Unit 2) investment and phase-in deferrals in 1993 negatively affected earnings, they did not adversely affect cash flow. See Notes 4(b) and 7. 1995 AND BEYOND CASH REQUIREMENTS Estimated cash requirements for 1995-1999 for the Company are $802 million for construction and $832 million for the mandatory redemption of debt and preferred stock. The Company expects to finance externally about two-thirds of its 1995 cash requirements of approximately $451 million and about one-third of its 1996 cash requirements of approximately $320 million. The Company expects to meet nearly all of its 1997-1999 requirements through internal cash generation and current cash resources. If economical, additional securities may be redeemed under optional redemption provisions. We expect that the Company's continued strong cash flow F-4 40 will reduce borrowing requirements and outstanding debt and preferred stock during this period. Cash expenditures to comply with the Clean Air Act Amendments of 1990 (Clean Air Act) are estimated to be approximately $65 million over the 1995-1999 period. See Note 4(a). LIQUIDITY Additional first mortgage bonds may be issued by the Company under its mortgage on the basis of property additions, cash or refundable first mortgage bonds. If the applicable interest coverage test is met, the Company may issue first mortgage bonds on the basis of property additions and, under certain circumstances, refundable bonds. At December 31, 1994, the Company would have been permitted to issue approximately $487 million of additional first mortgage bonds. The Company also is able to raise funds through the sale of subordinated debt and preferred and preference stock. There are no restrictions on the Company's ability to issue preferred or preference stock. In 1995, the Company plans to raise funds through the sale of first mortgage bonds and the collateralization of accounts receivable. In addition, the Company expects to issue first mortgage bonds as collateral security for the sale by a public authority of tax-exempt bonds. The Company is a party to a $205 million revolving credit facility which runs through mid-1996. See Note 12. The Company had $66 million of cash and temporary cash investments at the end of 1994. The Company is unable to issue commercial paper because of its below investment grade commercial paper ratings. The foregoing financing resources are expected to be sufficient for the Company's needs over the next several years. However, the availability and cost of capital to meet the Company's external financing needs also depend upon such factors as financial market conditions and its credit ratings. Current credit ratings for the Company are as follows:
Standard Moody's & Poor's Investors Corporation Service, Inc. ----------- ------------- First mortgage bonds BB Ba2 Unsecured notes B+ Ba3 Preferred stock B b2
RESULTS OF OPERATIONS 1994 VS. 1993 Factors contributing to the 3% decrease in 1994 operating revenues are as follows:
Millions Increase (Decrease) in Operating Revenues of Dollars - ------------------------------------------------ ----------- KWH Sales Volume and Mix $ 2 Wholesale Revenues (48) Fuel Cost Recovery Revenues (13) Miscellaneous Revenues 6 ----- Total $ (53) -----
The Company experienced good retail kilowatt-hour sales growth in the commercial and industrial categories in 1994; the residential category was negatively impacted by weather conditions, particularly during the summer. The revenue decrease resulted primarily from milder weather conditions in 1994 and 53% lower wholesale sales. Weather reduced base rate revenues approximately $8 million from the 1993 amount. Although total sales decreased by 4.6%, commercial sales increased 2.4%. Industrial sales increased 0.7% on the strength of increased sales to large automotive manufacturers and the broad-based, smaller industrial customer group. This growth substantiated an economic resurgence in Northeastern Ohio. Residential sales declined 0.2% because of the weather factor. Other sales decreased by 42% because of the lower sales to wholesale customers attributable to expiration of a wholesale power agreement, softer wholesale market conditions and limited power availability for bulk power transactions at certain times because of generating plant outages. Lower 1994 fuel cost recovery revenues resulted from favorable changes in the fuel cost factors. The weighted average of these factors dropped by approximately 5%. For 1994, operating revenues were 31% residential, 32% commercial, 30% industrial and 7% other and kilowatt-hour sales were 24% residential, 29% commercial, 39% industrial and 8% other. The average prices per kilowatt-hour for residential, commercial and industrial customers were $.11, $.09 and $.06, respectively. Operating expenses were 15% lower in 1994. Operation and maintenance expenses for 1993 included $130 million of net benefit expenses related to an early retirement program, called the Voluntary Transition Program (VTP), and other charges totaling $35 million. The VTP benefit expenses in 1993 consisted of $102 million of costs for the Company plus $28 million for the Company's pro rata share of the costs for its affiliate, Centerior Service Company (Service Company). Two other significant reasons for lower operation and maintenance expenses in 1994 were a smaller work force and ongoing cost reduction measures. More nuclear generation and less coal-fired generation accounted for a large part of the lower fuel and purchased power expenses in 1994. Depreciation and amortization expenses increased primarily because of higher nuclear plant decommissioning expenses as discussed in Note 1(e). Deferred operating expenses were greater primarily because of the write-off of $117 million of phase-in deferred operating expenses in 1993 as discussed in Note 7. The 1993 deferrals also F-5 41 included $52 million of postretirement benefit curtailment cost deferrals related to the VTP. See Note 9(b). Federal income taxes increased as a result of higher pretax operating income. As discussed in Note 4(b), $351 million of our Perry Unit 2 investment was written off in 1993. Also, as discussed in Note 7, phase-in deferred carrying charges of $519 million were written off in 1993. The change in the federal income tax credit amounts for nonoperating income was attributable to these write-offs. 1993 VS. 1992 Factors contributing to the 0.5% increase in 1993 operating revenues are as follows:
Millions Increase (Decrease) in Operating Revenues of Dollars - ------------------------------------------------ ----------- KWH Sales Volume and Mix $ 27 Fuel Cost Recovery Revenues (13) Base Rates and Miscellaneous (10) Wholesale Sales 4 ----- Total $ 8 -----
The revenue increase resulted primarily from the different weather conditions and the changes in the composition of the sales mix among customer categories. Weather accounted for approximately $32 million of higher 1993 base rate revenues. Hot summer weather in 1993 boosted residential, commercial and wholesale kilowatt-hour sales. In contrast, the 1992 summer was the coolest in 56 years for Northeastern Ohio. Residential and commercial sales also increased as a result of colder late-winter temperatures in 1993 which increased electric heating-related demand. As a result, total sales increased 2.9% in 1993. Residential and commercial sales increased 4.4% and 3.1%, respectively. Industrial sales decreased 1%. Lower sales to large steel industry customers were partially offset by increased sales to large automotive manufacturers and the broad-based, smaller industrial customer group. Other sales increased 12% because of increased sales to wholesale customers. The decrease in 1993 fuel cost recovery revenues resulted from changes in the fuel cost factors. The weighted average of these factors decreased approximately 5%. Base rates and miscellaneous revenues decreased in 1993 primarily from lower revenues under contracts having reduced rates with certain large customers and a declining rate structure tied to usage. The contracts have been negotiated to meet competition and encourage economic growth. For 1993, operating revenues were 31% residential, 31% commercial, 29% industrial and 9% other and kilowatt-hour sales were 23% residential, 27% commercial, 37% industrial and 13% other. The average prices per kilowatt-hour for residential, commercial and industrial customers were $.11, $.10 and $.06, respectively. The changes from 1992 were not significant. Operating expenses increased 12% in 1993. The increase in total operation and maintenance expenses resulted from the $130 million of net benefit expenses related to the VTP, other charges totaling $35 million and an increase in other operation and maintenance expenses. The increase in other operation and maintenance expenses resulted from higher environmental expenses, power restoration and repair expenses following a July 1993 storm, and an increase in other postretirement benefit expenses. See Note 9 for information on retirement benefits. Deferred operating expenses decreased because of the write-off of the phase-in deferred operating expenses in 1993. Federal income taxes decreased as a result of lower pretax operating income. As mentioned above, $351 million of our Perry Unit 2 investment was written off in 1993. Credits for carrying charges recorded in nonoperating income decreased because of the write-off of the phase-in deferred carrying charges in 1993. The federal income tax credit for nonoperating income in 1993 resulted from the write-offs. F-6 42 Income Statement The Cleveland Electric Illuminating Company and Subsidiaries
For the years ended December 31, ---------------------------- 1994 1993 1992 ------ ------ ------ (millions of dollars) OPERATING REVENUES $1,698 $1,751 $1,743 ------ ------ ------ OPERATING EXPENSES Fuel and purchased power (1) 391 423 434 Other operation and maintenance 394 433 410 Generation facilities rental expense, net 56 56 55 Early retirement program expenses and other -- 165 -- ------ ------ ------ Total operation and maintenance 841 1,077 899 Depreciation and amortization 195 182 179 Taxes, other than federal income taxes 218 221 226 Deferred operating expenses, net (34) 27 (35) Federal income taxes 82 22 89 ------ ------ ------ 1,302 1,529 1,358 ------ ------ ------ OPERATING INCOME 396 222 385 ------ ------ ------ NONOPERATING INCOME (LOSS) Allowance for equity funds used during construction 4 4 1 Other income and deductions, net 6 (5) 8 Write-off of Perry Unit 2 -- (351) -- Deferred carrying charges, net 25 (487) 59 Federal income taxes -- credit (expense) (4) 270 (5) ------ ------ ------ 31 (569) 63 ------ ------ ------ INCOME (LOSS) BEFORE INTEREST CHARGES 427 (347) 448 ------ ------ ------ INTEREST CHARGES Debt interest 247 244 243 Allowance for borrowed funds used during construction (5) (4) -- ------ ------ ------ 242 240 243 ------ ------ ------ NET INCOME (LOSS) 185 (587) 205 PREFERRED DIVIDEND REQUIREMENTS 45 45 41 ------ ------ ------ EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK $ 140 $ (632) $ 164 ------ ------ ------ - --------------- (1) Includes purchased power expense of $111 million, $120 million and $130 million in 1994, 1993 and 1992, respectively, for all purchases from Toledo Edison.
Retained Earnings
For the years ended December 31, ------------------------- 1994 1993 1992 ----- ----- ----- (millions of dollars) RETAINED EARNINGS (DEFICIT) AT BEGINNING OF YEAR $(280) $ 545 $ 578 ----- ----- ----- ADDITIONS Net income (loss) 185 (587) 205 DEDUCTIONS Dividends declared: Common stock (122) (189) (195) Preferred stock (45) (48) (41) Other, primarily preferred stock redemption expenses -- (1) (2) ----- ----- ----- Net Increase (Decrease) 18 (825) (33) ----- ----- ----- RETAINED EARNINGS (DEFICIT) AT END OF YEAR $(262) $(280) $ 545 ----- ----- -----
The accompanying notes are an integral part of these statements. F-7 43 Cash Flows The Cleveland Electric Illuminating Company and Subsidiaries
For the years ended December 31, ------------------------- 1994 1993 1992 ----- ----- ----- (millions of dollars) CASH FLOWS FROM OPERATING ACTIVITIES (1) Net Income (Loss) $ 185 $(587) $ 205 ----- ----- ----- Adjustments to Reconcile Net Income (Loss) to Cash from Operating Activities: Depreciation and amortization 195 182 179 Deferred federal income taxes 50 (292) 66 Investment tax credits, net -- -- (8) Unbilled revenues 27 (6) (7) Deferred fuel (20) 4 6 Deferred carrying charges, net (25) 487 (59) Leased nuclear fuel amortization 55 47 70 Deferred operating expenses, net (34) 27 (35) Allowance for equity funds used during construction (4) (4) (1) Noncash early retirement program expenses, net -- 125 -- Write-off of Perry Unit 2 -- 351 -- Changes in amounts due from customers and others, net 10 5 6 Changes in inventories 2 17 (2) Changes in accounts payable (34) 18 7 Changes in working capital affecting operations 3 29 (4) Other noncash items 4 5 (11) ----- ----- ----- Total Adjustments 229 995 207 ----- ----- ----- Net Cash from Operating Activities 414 408 412 ----- ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES (2) Bank loans, commercial paper and other short-term debt -- (10) 10 Notes payable to affiliates 58 (11) (13) First mortgage bond issues 46 280 324 Secured medium-term note issues -- 35 90 Term bank loan -- 40 -- Preferred stock issues -- 100 74 Maturities, redemptions and sinking funds (116) (345) (481) Nuclear fuel lease obligations (60) (59) (65) Dividends paid (142) (232) (235) Premiums, discounts and expenses (1) (11) (7) ----- ----- ----- Net Cash from Financing Activities (215) (213) (303) ----- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES (2) Cash applied to construction (164) (167) (152) Interest capitalized as allowance for borrowed funds used during construction (5) (4) -- Contributions to nuclear plant decommissioning trusts (14) (5) (5) Other cash received (applied) (27) 24 (15) ----- ----- ----- Net Cash from Investing Activities (210) (152) (172) ----- ----- ----- NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (11) 43 (63) ----- ----- ----- CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF YEAR 77 34 97 ----- ----- ----- CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR $ 66 $ 77 $ 34 ----- ----- ----- - --------------- (1) Interest paid (net of amounts capitalized) was $208 million, $204 million and $205 million in 1994, 1993 and 1992, respectively. Income taxes paid were $15 million in 1994 and $28 million in both 1993 and 1992. (2) Increases in Nuclear Fuel and Nuclear Fuel Lease Obligations in the Balance Sheet resulting from the noncash capitalizations under nuclear fuel agreements are excluded from this statement.
The accompanying notes are an integral part of this statement. F-8 44 Balance Sheet
December 31, ---------------- 1994 1993 ------ ------ (millions of dollars) ASSETS PROPERTY, PLANT AND EQUIPMENT Utility plant in service $6,871 $6,734 Less: accumulated depreciation and amortization 2,014 1,889 ------ ------ 4,857 4,845 Construction work in progress 99 141 ------ ------ 4,956 4,986 Nuclear fuel, net of amortization 174 202 Other property, less accumulated depreciation 21 41 ------ ------ 5,151 5,229 ------ ------ CURRENT ASSETS Cash and temporary cash investments 66 77 Amounts due from customers and others, net 146 156 Amounts due from affiliates 5 5 Unbilled revenues 72 99 Materials and supplies, at average cost 95 93 Fossil fuel inventory, at average cost 16 20 Taxes applicable to succeeding years 180 179 Other 4 3 ------ ------ 584 632 ------ ------ DEFERRED CHARGES AND OTHER ASSETS Amounts due from customers for future federal income taxes 641 586 Unamortized loss on reacquired debt 58 60 Carrying charges and operating expenses 578 519 Nuclear plant decommissioning trusts 44 30 Other 95 103 ------ ------ 1,416 1,298 ------ ------ Total Assets $7,151 $7,159 ------ ------
The accompanying notes are an integral part of this statement. F-9 45 The Cleveland Electric Illuminating Company and Subsidiaries
December 31, ----------------- 1994 1993 ------ ------ (millions of dollars) CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shares, without par value: 105 million authorized; 79.6 million outstanding in 1994 and 1993 $1,241 $1,241 Other paid-in-capital 79 79 Retained earnings (deficit) (262) (280) ------ ------ Common stock equity 1,058 1,040 Preferred stock With mandatory redemption provisions 246 285 Without mandatory redemption provisions 241 241 Long-term debt 2,543 2,793 ------ ------ 4,088 4,359 ------ ------ CURRENT LIABILITIES Current portion of long-term debt and preferred stock 282 70 Current portion of nuclear fuel lease obligations 47 63 Accounts payable 88 122 Accounts and notes payable to affiliates 118 61 Accrued taxes 310 305 Accrued interest 62 60 Other 51 52 ------ ------ 958 733 ------ ------ DEFERRED CREDITS AND OTHER LIABILITIES Unamortized investment tax credits 192 235 Accumulated deferred federal income taxes 1,234 1,105 Unamortized gain from Bruce Mansfield Plant sale 327 343 Accumulated deferred rents for Bruce Mansfield Plant 84 77 Nuclear fuel lease obligations 132 151 Retirement benefits 59 52 Other 77 104 ------ ------ 2,105 2,067 ------ ------ Total Capitalization and Liabilities $7,151 $7,159 ------ ------
F-10 46 Statement of Preferred Stock The Cleveland Electric Illuminating Company and Subsidiaries
Current December 31, 1994 Shares Call Price ------------- Outstanding Per Share 1994 1993 ----------- ---------- ---- ---- (millions of dollars) Without par value, 4,000,000 preferred shares authorized Subject to mandatory redemption: $ 7.35 Series C 140,000 $ 101.00 $ 14 $ 15 88.00 Series E 18,000 1,019.13 18 21 Adjustable Series M 100,000 100.00 10 20 9.125 Series N 410,766 102.03 41 59 91.50 Series Q 75,000 -- 75 75 88.00 Series R 50,000 -- 50 50 90.00 Series S 75,000 -- 74 74 ---- ---- 282 314 Less: Current maturities 36 29 ---- ---- TOTAL PREFERRED STOCK, WITH MANDATORY REDEMPTION PROVISIONS $246 $285 ---- ---- Not subject to mandatory redemption: $ 7.40 Series A 500,000 101.00 $ 50 $ 50 7.56 Series B 450,000 102.26 45 45 Adjustable Series L 500,000 100.00 49 49 42.40 Series T 200,000 -- 97 97 ---- ---- TOTAL PREFERRED STOCK, WITHOUT MANDATORY REDEMPTION PROVISIONS $241 $241 ---- ----
The accompanying notes are an integral part of this statement. F-11 47 Notes to the Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) GENERAL The Company is an electric utility and a wholly owned subsidiary of Centerior Energy. The Company's financial statements have historically included the accounts of the Company's wholly owned subsidiaries, which in the aggregate were not material. During 1994, the Company transferred its investments in its three wholly owned subsidiaries to Centerior Energy at cost ($26 million) via property dividends. The Company follows the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC) and adopted by the PUCO. Rate-regulated utilities are subject to SFAS 71 which governs accounting for the effects of certain types of rate regulation. Pursuant to SFAS 71, certain incurred costs are deferred for recovery in future rates. See Note 7. The Company is a member of the Central Area Power Coordination Group (CAPCO). Other members are Toledo Edison, Duquesne Light Company, Ohio Edison Company and its wholly owned subsidiary, Pennsylvania Power Company. The members have constructed and operate generation and transmission facilities for their use. (B) RELATED PARTY TRANSACTIONS Operating revenues, operating expenses and interest charges include those amounts for transactions with affiliated companies in the ordinary course of business operations. The Company's transactions with Toledo Edison are primarily for firm power, interchange power, transmission line rentals and jointly owned power plant operations and construction. See Notes 2 and 3. The Service Company provides management, financial, administrative, engineering, legal and other services at cost to the Company and other affiliated companies. The Service Company billed the Company $136 million, $167 million and $150 million in 1994, 1993 and 1992, respectively, for such services. (C) REVENUES Customers are billed on a monthly cycle basis for their energy consumption based on rate schedules or contracts authorized by the PUCO. An accrual is made at the end of each month to record the estimated amount of unbilled revenues for kilowatt-hours sold in the current month but not billed by the end of that month. A fuel factor is added to the base rates for electric service. This factor is designed to recover from customers the costs of fuel and most purchased power. It is reviewed and adjusted semiannually in a PUCO proceeding. (D) FUEL EXPENSE The cost of fossil fuel is charged to fuel expense based on inventory usage. The cost of nuclear fuel, including an interest component, is charged to fuel expense based on the rate of consumption. Estimated future nuclear fuel disposal costs are being recovered through base rates. The Company defers the differences between actual fuel costs and estimated fuel costs currently being recovered from customers through the fuel factor. This matches fuel expenses with fuel-related revenues. Owners of nuclear generating plants are assessed by the federal government for the cost of decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy. The assessments are based upon the amount of enrichment services used in prior years and cannot be imposed for more than 15 years (to 2007). The Company has accrued a liability for its share of the total assessments. These costs have been recorded in a deferred charge account since the PUCO is allowing the Company to recover the assessments through its fuel cost factors. (E) DEPRECIATION AND AMORTIZATION The cost of property, plant and equipment is depreciated over their estimated useful lives on a straight-line basis. The annual straight-line depreciation provision for nonnuclear property expressed as a percent of average depreciable utility plant in service was 3.4% in 1994, 1993 and 1992. The annual straight-line depreciation rate for nuclear property is 2.5%. The Company accrues the estimated costs of decommissioning its three nuclear generating units. The accruals are required to be funded in an external trust. The PUCO requires that the expense and payments to the external trusts be determined on a levelized basis by dividing the unrecovered decommissioning costs in current dollars by the remaining years in the licensing period of each unit. This methodology requires that the net earnings on the trusts be reinvested therein with the intent of allowing net earnings to offset inflation. The PUCO requires that the estimated costs of decommissioning and the funding level be reviewed at least every five years. In 1994, the Company increased its annual decommissioning expense accruals to $13 million from the $4 million level in 1992. The accruals are reflected in current rates. The increased accruals were derived from recently updated, site-specific studies for each of the units. The revised estimates reflect the DECON method of decommissioning (prompt decontamination), and the locations F-12 48 and cost characteristics specific to the units, and include costs associated with decontamination, dismantlement and site restoration. The revised estimates for the units in 1993 and 1992 dollars and in dollars at the time of license expiration, assuming a 4% annual inflation rate, are as follows:
License Expiration Future Generating Unit Year Amount Amount - ------------------------------- ---------- ------ ------ (millions of dollars) Davis-Besse 2017 $178(1) $ 443 Perry Unit 1 2026 156(1) 554 Beaver Valley Unit 2 2027 63(2) 233 ------ ------ Total $397 $1,230 ------ ------ - --------------- (1) Dollar amounts in 1993 dollars. (2) Dollar amounts in 1992 dollars.
The updated estimates reflect substantial increases from the prior PUCO-recognized aggregate estimates of $142 million in 1987 and 1986 dollars. The classification, Accumulated Depreciation and Amortization, in the Balance Sheet at December 31, 1994 includes $53 million of decommissioning costs previously expensed and the earnings on the external trust funding. This amount exceeds the Balance Sheet amount of the external Nuclear Plant Decommissioning Trusts because the reserve began prior to the external trust funding. The trust earnings are recorded as an increase to the trust assets and the related component of the decommissioning reserve (included in Accumulated Depreciation and Amortization). The staff of the Securities and Exchange Commission has questioned certain of the current accounting practices of the electric utility industry, including those of the Company, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in the financial statements. In response to these questions, the Financial Accounting Standards Board is reviewing the accounting for removal costs, including decommissioning. If such current accounting practices are changed, the annual provision for decommissioning could increase; the estimated cost for decommissioning could be recorded as a liability rather than as accumulated depreciation; and trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense. (F) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at original cost less amounts ordered by the PUCO to be written off. Construction costs include related payroll taxes, retirement benefits, fringe benefits, management and general overheads and allowance for funds used during construction (AFUDC). AFUDC represents the estimated composite debt and equity cost of funds used to finance construction. This noncash allowance is credited to income. The AFUDC rate was 9.68% in 1994, 9.63% in 1993 and 10.56% in 1992. Maintenance and repairs for plant and equipment are charged to expense as incurred. The cost of replacing plant and equipment is charged to the utility plant accounts. The cost of property retired plus removal costs, after deducting any salvage value, is charged to the accumulated provision for depreciation. (G) DEFERRED GAIN FROM SALE OF UTILITY PLANT The sale and leaseback transaction discussed in Note 2 resulted in a net gain for the sale of the Bruce Mansfield Generating Plant (Mansfield Plant). The net gain was deferred and is being amortized over the term of leases. The amortization and the lease expense amounts are reported in the Income Statement as Generation Facilities Rental Expense, Net. (H) INTEREST CHARGES Debt Interest reported in the Income Statement does not include interest on obligations for nuclear fuel under construction. That interest is capitalized. See Note 6. Losses and gains realized upon the reacquisition or redemption of long-term debt are deferred, consistent with the regulatory rate treatment. See Note 7. Such losses and gains are either amortized over the remainder of the original life of the debt issue retired or amortized over the life of the new debt issue when the proceeds of a new issue are used for the debt redemption. The amortizations are included in debt interest expense. (I) FEDERAL INCOME TAXES The Company uses the liability method of accounting for income taxes in accordance with SFAS 109. See Note 8. This method requires that deferred taxes be recorded for all temporary differences between the book and tax bases of assets and liabilities. The majority of these temporary differences are attributable to property-related basis differences. Included in these basis differences is the equity component of AFUDC, which will increase future tax expense when it is recovered through rates. Since this component is not recognized for tax purposes, the Company must record a liability for its tax obligation. The PUCO permits recovery of such taxes from customers when they become payable. Therefore, the net amount due from customers through rates has been recorded as a deferred charge and will be recovered over the lives of the related assets. See Note 7. Investment tax credits are deferred and amortized over the lives of the applicable property as a reduction of depreciation expense. See Note 7 for a discussion of the F-13 49 amortization of certain unrestricted excess deferred taxes and unrestricted investment tax credits under the Rate Stabilization Program. (2) UTILITY PLANT SALE AND LEASEBACK TRANSACTIONS The Company and Toledo Edison are co-lessees of 18.26% (150 megawatts) of Beaver Valley Unit 2 and 6.5% (51 megawatts), 45.9% (358 megawatts) and 44.38% (355 megawatts) of Units 1, 2 and 3 of the Mansfield Plant, respectively, all for terms of about 29 1/2 years. These leases are the result of sale and leaseback transactions completed in 1987. Under these leases, the Company and Toledo Edison are responsible for paying all taxes, insurance premiums, operation and maintenance expenses and all other similar costs for their interests in the units sold and leased back. They may incur additional costs in connection with capital improvements to the units. The Company and Toledo Edison have options to buy the interests back at the end of the leases for the fair market value at that time or renew the leases. Additional lease provisions provide other purchase options along with conditions for mandatory termination of the leases (and possible repurchase of the leasehold interests) for events of default. These events include noncompliance with any of several financial covenants discussed in Note 11(d). As co-lessee with Toledo Edison, the Company is also obligated for Toledo Edison's lease payments. If Toledo Edison is unable to make its payments under the Beaver Valley Unit 2 and Mansfield Plant leases, the Company would be obligated to make such payments. No such payments have been made on behalf of Toledo Edison. Future minimum lease payments under the operating leases at December 31, 1994 are summarized as follows:
For For the Toledo Year Company Edison - ------------------------------------ --------- --------- (millions of dollars) 1995 $ 63 $ 103 1996 63 125 1997 63 102 1998 63 102 1999 70 108 Later Years 1,321 1,918 --------- --------- Total Future Minimum Lease Payments $ 1,643 $ 2,458 --------- ---------
Rental expense is accrued on a straight-line basis over the terms of the leases. The amount recorded in 1994, 1993 and 1992 as annual rental expense for the Mansfield Plant leases was $70 million. Amounts charged to expense in excess of the lease payments are classified as Accumulated Deferred Rents in the Balance Sheet. The Company is buying 150 megawatts of Toledo Edison's Beaver Valley Unit 2 leased capacity entitlement. Purchased power expense for this transaction was $108 million, $103 million and $108 million in 1994, 1993 and 1992, respectively. We anticipate that this purchase will continue indefinitely. The future minimum lease payments through the year 2017 associated with Beaver Valley Unit 2 aggregate $1.413 billion. F-14 50 (3) PROPERTY OWNED WITH OTHER UTILITIES AND INVESTORS The Company owns, as a tenant in common with other utilities and those investors who are owner-participants in various sale and leaseback transactions (Lessors), certain generating units as listed below. Each owner owns an undivided share in the entire unit. Each owner has the right to a percentage of the generating capability of each unit equal to its ownership share. Each utility owner is obligated to pay for only its respective share of the construction costs and operating expenses. Each Lessor has leased its capacity rights to a utility which is obligated to pay for such Lessor's share of the construction costs and operating expenses. The Company's share of the operating expenses of these generating units is included in the Income Statement. The Balance Sheet classification of Property, Plant and Equipment at December 31, 1994 includes the following facilities owned by the Company as a tenant in common with other utilities and Lessors:
In- Plant Construction Service Ownership Ownership Power in Work in Accumulated Generating Unit Date Share Megawatts Source Service Progress Depreciation - ------------------------------- ------- --------- --------- -------- ------- ------------ ----------- (millions of dollars) Seneca Pumped Storage 1970 80.00% 351 Hydro $ 66 $ -- $ 22 Eastlake Unit 5 1972 68.80 411 Coal 156 1 -- Davis-Besse 1977 51.38 454 Nuclear 664 2 190 Perry Unit 1 1987 31.11 371 Nuclear 1,774 5 314 Beaver Valley Unit 2 and Common Facilities (Note 2) 1987 24.47 201 Nuclear 1,276 2 250 ------- --- ----- Total $3,936 $ 10 $ 776
Depreciation for Eastlake Unit 5 has been accumulated with all other nonnuclear depreciable property rather than by specific units of depreciable property. (4) CONSTRUCTION AND CONTINGENCIES (A) CONSTRUCTION PROGRAM The estimated cost of the Company's construction program for the 1995-1999 period is $851 million, including AFUDC of $49 million and excluding nuclear fuel. The Clean Air Act requires, among other things, significant reductions in the emission of sulfur dioxide and nitrogen oxides by fossil-fueled generating units. Our strategy provides for compliance primarily through greater use of low-sulfur coal at some of our units and the use of emission allowances. Total capital expenditures from 1991 through 1994 in connection with Clean Air Act compliance amounted to $34 million. The plan will require additional capital expenditures over the 1995-2004 period of approximately $125 million for nitrogen oxide control equipment and plant modifications. In addition, higher fuel and other operation and maintenance expenses will be incurred. The anticipated rate increase associated with the capital expenditures and higher expenses would be about 1-2% in the late 1990s. The Company may need to install sulfur emission control technology at one of its generating plants after 2005 which could require additional expenditures at that time. (B) PERRY UNIT 2 Perry Unit 2, including its share of the facilities common with Perry Unit 1, was approximately 50% complete when construction was suspended in 1985 pending consideration of various options. We wrote off our investment in Perry Unit 2 at December 31, 1993 after we determined that it would not be completed or sold. The write-off totaled $351 million ($258 million after taxes) for the Company's 44.85% ownership share of the unit. See Note 14. (C) HAZARDOUS WASTE DISPOSAL SITES The Company is aware of its potential involvement in the cleanup of three sites listed on the Superfund List and several other waste sites not on such list. The Company has accrued a liability totaling $8 million at December 31, 1994 based on estimates of the costs of cleanup and its proportionate responsibility for such costs. We believe that the ultimate outcome of these matters will not have a material adverse effect on our financial condition or results of operations. See Management's Financial Analysis -- Outlook-Hazardous Waste Disposal Sites. (5) NUCLEAR OPERATIONS AND CONTINGENCIES (A) OPERATING NUCLEAR UNITS The Company's three nuclear units may be impacted by activities or events beyond our control. An extended outage of one of our nuclear units for any reason, coupled with any unfavorable rate treatment, could have a material adverse effect on our financial condition and results of operations. See the discussion of these risks in Management's Financial Analysis -- Outlook-Nuclear Operations. F-15 51 (B) NUCLEAR INSURANCE The Price-Anderson Act limits the public liability of the owners of a nuclear power plant to the amount provided by private insurance and an industry assessment plan. In the event of a nuclear incident at any unit in the United States resulting in losses in excess of the level of private insurance (currently $200 million), the Company's maximum potential assessment under that plan would be $85 million (plus any inflation adjustment) per incident. The assessment is limited to $11 million per year for each nuclear incident. These assessment limits assume the other CAPCO companies contribute their proportionate share of any assessment. The utility owners and lessees of Davis-Besse, Perry and Beaver Valley also have insurance coverage for damage to property at these sites (including leased fuel and cleanup costs). Coverage amounted to $2.75 billion for each site as of January 1, 1995. Damage to property could exceed the insurance coverage by a substantial amount. If it does, the Company's share of such excess amount could have a material adverse effect on its financial condition and results of operations. Under these policies, the Company can be assessed a maximum of $12 million during a policy year if the reserves available to the insurer are inadequate to pay claims arising out of an accident at any nuclear facility covered by the insurer. The Company also has extra expense insurance coverage. It includes the incremental cost of any replacement power purchased (over the costs which would have been incurred had the units been operating) and other incidental expenses after the occurrence of certain types of accidents at our nuclear units. The amounts of the coverage are 100% of the estimated extra expense per week during the 52-week period starting 21 weeks after an accident and 80% of such estimate per week for the next 104 weeks. The amount and duration of extra expense could substantially exceed the insurance coverage. (6) NUCLEAR FUEL Nuclear fuel is financed for the Company and Toledo Edison through leases with a special-purpose corporation. At December 31, 1994, $307 million ($182 million for the Company and $125 million for Toledo Edison) of nuclear fuel was financed ($157 million from intermediate-term notes and $150 million from bank credit arrangements). The intermediate-term notes mature in 1996 and 1997. The Company and Toledo Edison severally lease their respective portions of the nuclear fuel and are obligated to pay for the fuel as it is consumed in a reactor. The lease rates are based on various intermediate-term note rates, bank rates and commercial paper rates. The amounts financed include nuclear fuel in the Davis-Besse, Perry Unit 1 and Beaver Valley Unit 2 reactors with remaining lease payments for the Company of $67 million, $57 million and $14 million, respectively, at December 31, 1994. The nuclear fuel amounts financed and capitalized also included interest charges incurred by the lessors amounting to $7 million in 1994 and $9 million in both 1993 and 1992. The estimated future lease amortization payments based on projected consumption are $57 million in 1995, $52 million in 1996, $46 million in 1997, $43 million in 1998 and $36 million in 1999. (7) REGULATORY MATTERS The Company is subject to the provisions of SFAS 71. Regulatory assets represent probable future revenues to the Company associated with certain incurred costs, which it will recover from customers through the ratemaking process. Regulatory assets in the Balance Sheet are as follows:
December 31, --------------- 1994 1993 ------ ------ (millions of dollars) Amounts due from customers for future federal income taxes $ 641 $ 586 Unamortized loss on reacquired debt 58 60 Pre-phase-in deferrals* 341 351 Rate Stabilization Program deferrals 237 168 ------ ------ Total $1,277 $1,165 ------ ------ * Represent deferrals of operating expenses and carrying charges for Perry Unit 1 and Beaver Valley Unit 2 in 1987 and 1988 which are being amortized over the lives of the related property.
As of December 31, 1994, customer rates provide for recovery of all the above regulatory assets, except those related to the Rate Stabilization Program discussed below. The remaining recovery periods for all of the regulatory assets listed above range from 17 to 34 years. We continually assess the effects of competition and the changing industry and regulatory environment on operations and the Company's ability to recover the regulatory assets. In the event that we determine that future revenues would not be provided for recovery of any regulatory asset, such asset would be required to be written off. See Management's Financial Analysis -- Outlook-Regulatory Accounting. The Company will file a request with the PUCO to restructure rates to increase revenues to be effective in 1996 which will include provision for recovery of the Rate Stabilization Program deferrals. We believe that rates will be set at a level consistent with cost-based regulations and will provide revenues to recover the then-current operating costs, return requirements and amortization of all regulatory assets listed above. The Rate Stabilization Program that the PUCO approved in October 1992 was designed to encourage economic growth in the Company's service area by freezing the Company's base rates until 1996 and limiting subsequent F-16 52 rate increases to specified annual amounts not to exceed $216 million over the 1996-1998 period. As part of the Rate Stabilization Program, during the 1992-1995 period the Company is allowed to defer and subsequently recover certain costs not currently recovered in rates and to accelerate amortization of certain benefits. The continued use of these regulatory accounting measures will be dependent upon our continuing assessment and conclusion that there will be probable recovery of such deferrals in future rates. The regulatory accounting measures we are eligible to record through December 31, 1995 include the deferral of post-in-service interest carrying charges, depreciation expense and property taxes on assets placed in service after February 29, 1988. The cost deferrals recorded in 1994, 1993 and 1992 pursuant to these provisions were $66 million, $56 million and $52 million, respectively. The regulatory accounting measures also provide for the accelerated amortization of certain unrestricted excess deferred tax and unrestricted investment tax credit balances and interim spent fuel storage accrual balances for Davis-Besse. The total amount of such regulatory benefits recognized pursuant to these provisions was $28 million in both 1994 and 1993 and $7 million in 1992. The Rate Stabilization Program also authorized the Company to defer and subsequently recover the incremental expenses associated with the adoption of the accounting standard for postretirement benefits other than pensions (SFAS 106). In 1994 and 1993, we deferred $4 million and $60 million, respectively, pursuant to this provision. Amortization and recovery of these deferrals are expected to commence in 1996 and to be completed by no later than 2012. See Note 9(b). In 1993, upon completing a comprehensive study which led to our current strategic plan, we concluded that projected revenues would not provide for recovery of deferrals recorded pursuant to a phase-in plan approved by the PUCO in 1989. Such deferrals were scheduled to be recovered over the 1994 through 1998 period. The total phase-in deferred operating expenses and carrying charges written off at December 31, 1993 by the Company were $117 million and $519 million, respectively (totaling $433 million after taxes). See Note 14. Additionally, based on our assessment of business conditions, we concluded that, once the deferral of expenses and acceleration of benefits under our Rate Stabilization Program are completed in 1995, we should no longer plan to use regulatory accounting measures to the extent we have in the past. (8) FEDERAL INCOME TAX The components of federal income tax expense (credit) recorded in the Income Statement were as follows:
1994 1993 1992 ---- ----- ---- (millions of dollars) Operating Expenses: Current $ 53 $ 64 $ 47 Deferred 29 (42) 42 ---- ----- ---- Total Charged to Operating Expenses 82 22 89 ---- ----- ---- Nonoperating Income: Current (17) (20) (19) Deferred 21 (250) 24 ---- ----- ---- Total Expense (Credit) to Nonoperating Income 4 (270) 5 ---- ----- ---- Total Federal Income Tax Expense (Credit) $ 86 $(248) $ 94 ---- ----- ----
The deferred federal income tax expense results from the temporary differences that arise from the different years certain expenses are recognized for tax purposes as opposed to financial reporting purposes. Such temporary differences affecting operating expenses relate principally to depreciation and deferred operating expenses whereas those affecting nonoperating income principally relate to deferred carrying charges and the 1993 write-offs. Federal income tax, computed by multiplying income before taxes by the statutory rate (35% in 1994 and 1993 and 34% in 1992), is reconciled to the amount of federal income tax recorded on the books as follows:
1994 1993 1992 ---- ----- ---- (millions of dollars) Book Income (Loss) Before Federal Income Tax $271 $(835) $299 ---- ----- ---- Tax (Credit) on Book Income (Loss) at Statutory Rate $ 95 $(292) $102 Increase (Decrease) in Tax: Write-off of Perry Unit 2 -- 30 -- Write-off of phase-in deferrals -- 20 -- Depreciation 6 6 (3) Rate Stabilization Program (18) (20) (5) Other items 3 8 -- ---- ----- ---- Total Federal Income Tax Expense (Credit) $ 86 $(248) $ 94 ---- ----- ----
The Company joins in the filing of a consolidated federal income tax return with its affiliated companies. The method of tax allocation reflects the benefits and burdens realized by each company's participation in the consolidated tax return, approximating a separate return result for each company. For tax reporting purposes, the Perry Unit 2 abandonment was recognized in 1994 and resulted in a $187 million loss with a corresponding $65 million reduction in federal income tax liability. Because of the alternative minimum tax (AMT), $38 million of the $65 million was realized in 1994. The remaining $27 million will not be realized until 1999. Additionally, a repayment of approximately $32 million of previously allowed investment tax credits was recognized in 1994. F-17 53 In August 1993, the Revenue Reconciliation Act of 1993 was enacted. Retroactive to January 1, 1993, the top marginal corporate income tax rate increased to 35%. The change in tax rate did not materially impact the results of operations for 1993, but increased Accumulated Deferred Federal Income Taxes for the future tax obligation by approximately $61 million. Since the PUCO has historically permitted recovery of such taxes from customers when they become payable, the deferred charge, Amounts Due from Customers for Future Federal Income Taxes, also was increased by $61 million. Under SFAS 109, temporary differences and carryforwards resulted in deferred tax assets of $418 million and deferred tax liabilities of $1.652 billion at December 31, 1994 and deferred tax assets of $426 million and deferred tax liabilities of $1.531 billion at December 31, 1993. These are summarized as follows:
December 31, --------------- 1994 1993 ------ ------ (millions of dollars) Property, plant and equipment $1,429 $1,311 Deferred carrying charges and operating 132 127 expenses Net operating loss carryforwards (88) (69) Investment tax credits (105) (128) Sale and leaseback transactions (125) (126) Other (9) (10) ------ ------ Net deferred tax liability $1,234 $1,105 ------ ------
For tax purposes, net operating loss (NOL) carryforwards of approximately $252 million are available to reduce future taxable income and will expire in 2003 through 2009. The 35% tax effect of the NOLs is $88 million. Additionally, AMT credits of $99 million that may be carried forward indefinitely are available to reduce future regular tax. (9) RETIREMENT BENEFITS (A) RETIREMENT INCOME PLAN Centerior Energy sponsors jointly with its subsidiaries a noncontributing pension plan (Centerior Pension Plan) which covers all employee groups. The amount of retirement benefits generally depends upon the length of service. Under certain circumstances, benefits can begin as early as age 55. The funding policy is to comply with the Employee Retirement Income Security Act of 1974 guidelines. In 1993, eligible employees were offered the VTP, an early retirement program. Operating expenses for Centerior Energy and its subsidiaries in 1993 included $205 million of pension plan accruals to cover enhanced VTP benefits and an additional $10 million of pension costs for VTP benefits paid to retirees from corporate funds. The $10 million is not included in the pension data reported in the following table. A credit of $81 million resulting from a settlement of pension obligations through lump sum payments to almost all the VTP retirees partially offset the VTP expenses. Pension and VTP costs (credits) for Centerior Energy and its subsidiaries for 1992 through 1994 were comprised of the following components:
1994 1993 1992 ---- ---- ---- (millions of dollars) Pension Costs (Credits): Service cost for benefits earned during the period $ 13 $ 15 $ 15 Interest cost on projected benefit obligation 26 37 38 Actual return on plan assets (2) (65) (24) Net amortization and deferral (34) 4 (45) ---- ---- ---- Net pension costs (credits) 3 (9) (16) VTP cost -- 205 -- Settlement gain -- (81) -- ---- ---- ---- Net costs (credits) $ 3 $115 $(16) ---- ---- ----
Pension and VTP costs (credits) for the Company and its pro rata share of the Service Company's costs were $2 million, $62 million and $(16) million for 1994, 1993 and 1992, respectively. The following table presents a reconciliation of the funded status of the Centerior Pension Plan. The Company's share of the Centerior Pension Plan's total projected benefit obligation approximates 50%.
December 31, ------------- 1994 1993 ---- ---- (millions of dollars) Actuarial present value of benefit obligations: Vested benefits $278 $333 Nonvested benefits 2 37 ---- ---- Accumulated benefit obligation 280 370 Effect of future compensation levels 37 53 ---- ---- Total projected benefit obligation 317 423 Plan assets at fair market value 362 386 ---- ---- Funded status 45 (37) Unrecognized net loss (gain) from variance between assumptions and experience (79) 11 Unrecognized prior service cost 10 10 Transition asset at January 1, 1987 being amortized over 19 years (39) (43) ---- ---- Net accrued pension liability $(63) $(59) ---- ----
A September 30, 1994 measurement date was used for 1994 reporting. At December 31, 1994, the settlement (discount) rate and long-term rate of return on plan assets assumptions were 8.5% and 10%, respectively. The long-term rate of annual compensation increase assumption was 3.5% for 1995 and 1996 and 4% thereafter. At December 31, 1993, the settlement rate and long-term rate of return on plan assets assumptions were 7.25% and 8.75%, respectively. The long-term rate of annual compensation increase assumption was 4.25%. At December 31, 1994 and 1993, the Company's net prepaid pension cost included in Deferred Charges and Other F-18 54 Assets -- Other in the Balance Sheet was $7 million and $9 million, respectively. Plan assets consist primarily of investments in common stock, bonds, guaranteed investment contracts, cash equivalent securities and real estate. (B) OTHER POSTRETIREMENT BENEFITS Centerior Energy sponsors jointly with its subsidiaries a postretirement benefit plan which provides all employee groups certain health care, death and other postretirement benefits other than pensions. The plan is contributory, with retiree contributions adjusted annually. The plan is not funded. The Company adopted SFAS 106, the accounting standard for postretirement benefits other than pensions, effective January 1, 1993. The standard requires the accrual of the expected costs of such benefits during the employees' years of service. Prior to 1993, the costs of these benefits were expensed as paid, which was consistent with ratemaking practices. The components of the total postretirement benefit costs for 1994 and 1993 were as follows:
1994 1993 ---- ---- (millions of dollars) Service cost for benefits earned during the period $ 1 $ 2 Interest cost on accumulated postretirement benefit obligation 11 10 Amortization of transition obligation at January 1, 1993 of $104 million over 20 years 5 5 VTP curtailment cost (includes $10 million transition obligation adjustment) -- 52 ---- ---- Total costs $17 $69 ---- ----
These amounts included costs for the Company and its pro rata share of the Service Company's costs. In 1994 and 1993, the Company deferred incremental SFAS 106 expenses (in excess of the amounts paid) of $4 million and $60 million, respectively, pursuant to a provision of the Rate Stabilization Program. See Note 7. The accumulated postretirement benefit obligation and accrued postretirement benefit cost for the Company and its share of the Service Company's obligation are as follows:
December 31, ------------- 1994 1993 ----- ----- (millions of dollars) Accumulated postretirement benefit obligation attributable to: Retired participants $(124) $(141) Fully eligible active plan participants (1) (1) Other active plan participants (14) (19) ----- ----- Accumulated postretirement benefit obligation (139) (161) Unrecognized net loss (gain) from variance between assumptions and experience (16) 9 Unamortized transition obligation 84 89 ----- ----- Accrued postretirement benefit cost $ (71) $ (63) ----- -----
The Balance Sheet classification of Retirement Benefits at December 31, 1994 and 1993 includes only the Company's accrued postretirement benefit cost of $59 million and $52 million, respectively, and excludes the Service Company's portion since the Service Company's total accrued cost is carried on its books. A September 30, 1994 measurement date was used for 1994 reporting. At December 31, 1994 and 1993, the settlement rate and the long-term rate of annual compensation increase assumptions were the same as those discussed for pension reporting in Note 9(a). At December 31, 1994, the assumed annual health care cost trend rates (applicable to gross eligible charges) are 8.5% for medical and 8% for dental in 1995. Both rates reduce gradually to a fixed rate of 4.75% by 2003. Elements of the obligation affected by contribution caps are significantly less sensitive to the health care cost trend rate than other elements. If the assumed health care cost trend rates were increased by one percentage point in each future year, the accumulated postretirement benefit obligation as of December 31, 1994 would increase by $3 million and the aggregate of the service and interest cost components of the annual postretirement benefit cost would increase by $0.3 million. (10) GUARANTEES The Company has guaranteed certain loan and lease obligations of two coal suppliers under two long-term coal supply contracts. At December 31, 1994, the principal amount of the loan and lease obligations guaranteed by the Company under both contracts was $50 million. In addition, the Company may be responsible for mine closing costs when one of the contracts is terminated. At December 31, 1994, the unfunded costs of closing this mine as estimated by the supplier were $54 million. The prices under both contracts which include certain minimum payments are sufficient to satisfy the loan and lease obligations and mine closing costs over the lives of the contracts. If either contract is terminated early for any reason, the Company would attempt to reduce the termination charges and would ask the PUCO to allow recovery of such charges from customers through the fuel factor. F-19 55 (11) CAPITALIZATION (A) CAPITAL STOCK TRANSACTIONS Preferred stock shares sold and retired during the three years ended December 31, 1994 are listed in the following table.
1994 1993 1992 ---- ----- ----- (thousands of shares) Subject to Mandatory Redemption: Sales $90.00 Series S -- -- 75 Retirements $ 7.35 Series C (10) (10) (10) 88.00 Series E (3) (3) (3) Adjustable Series M (100) (100) (100) 9.125 Series N (189) (150) -- Not Subject to Mandatory Redemption: Sales $42.40 Series T -- 200 -- Retirements Remarketed Series P -- -- (1) ---- ----- ----- Net (Decrease) (302) (63) (39) ---- ----- -----
(B) EQUITY DISTRIBUTION RESTRICTIONS Federal law prohibits the Company from paying dividends out of capital accounts. However, the Company may pay preferred and common stock dividends out of appropriated retained earnings and current earnings. At December 31, 1994, the Company had $144 million of appropriated retained earnings for the payment of preferred and common stock dividends. (C) PREFERRED AND PREFERENCE STOCK Amounts to be paid for preferred stock which must be redeemed during the next five years are $36 million in 1995, $30 million in both 1996 and 1997, $15 million in 1998 and $33 million in 1999. The annual preferred stock mandatory redemption provisions are as follows:
Shares Price To Be Beginning Per Redeemed in Share -------- --------- ------ $ 7.35 Series C 10,000 1984 $ 100 88.00 Series E 3,000 1981 1,000 Adjustable Series M 100,000 1991 100 9.125 Series N 150,000 1993 100 91.50 Series Q 10,714 1995 1,000 88.00 Series R 50,000 2001* 1,000 90.00 Series S 18,750 1999 1,000 * All outstanding shares to be redeemed on December 1, 2001.
In 1993, the Company issued $100 million principal amount of Serial Preferred Stock, $42.40 Series T. The Series T stock was deposited with an agent which issued Depositary Receipts, each representing 1/20 of a share of the Series T stock. The annualized preferred dividend requirement at December 31, 1994 was $44 million. The preferred dividend rates on the Company's Series L and M fluctuate based on prevailing interest rates and market conditions. The dividend rates for these issues averaged 7.17% and 7.01%, respectively, in 1994. Preference stock authorized for the Company is 3,000,000 shares without par value. No preference shares are currently outstanding. With respect to dividend and liquidation rights, the Company's preferred stock is prior to its preference stock and common stock, and its preference stock is prior to its common stock. (D) LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS Long-term debt, less current maturities, was as follows:
Actual or Average Interest Rate at December 31, December 31, --------------- Year of Maturity 1994 1994 1993 - -------------------------------- ------------ ------ ------ (millions of dollars) First mortgage bonds: 1996-1999 13.75% $ 17 $ 21 1996-1999 7.00 3 4 1997-1999 10.88 18 18 1999 6.20 2 2 2000-2004 7.92 396 400 2005-2009 8.33 202 202 2010-2014 8.50 365 365 2015-2019 8.00 459 459 2020-2023 8.75 518 518 ------ ------ 1,980 1,989 Secured medium term notes due 1996-2021 8.68 516 713 Term bank loans due 1996 8.50 2 45 Pollution control notes due 1996-2012 6.82 52 53 Other -- net -- (7) (7) ------ ------ Total Long-Term Debt $2,543 $2,793 ------ ------
Long-term debt matures during the next five years as follows: $246 million in 1995, $151 million in 1996, $55 million in 1997, $78 million in 1998 and $159 million in 1999. The Company issued $125 million aggregate principal amount of secured medium-term notes in 1992 and 1993. The notes are secured by first mortgage bonds. The Company's mortgage constitutes a direct first lien on substantially all property owned and franchises held by the Company. Excluded from the lien, among other things, are cash, securities, accounts receivable, fuel and supplies. An unsecured loan agreement of the Company contains covenants relating to capitalization ratios, fixed charge coverage ratios and limitations on secured financing other than through first mortgage bonds or certain other transactions. Two reimbursement agreements relating to separate letters of credit issued in connection with the sale F-20 56 and leaseback of Beaver Valley Unit 2 contain several financial covenants affecting the Company, Toledo Edison and Centerior Energy. Among these are covenants relating to fixed charge coverage ratios and capitalization ratios. The write-offs recorded at December 31, 1993 caused the Company, Toledo Edison and Centerior Energy to violate certain covenants contained in the loan agreement and the two reimbursement agreements. The affected creditors waived those violations in exchange for a subordinate mortgage security interest on the properties of the Company and Toledo Edison. The Company provided the same security interest to certain other creditors because their agreements require equal treatment. At December 31, 1994, the Company provided subordinate mortgage collateral for $45 million of unsecured debt, $228 million of bank letters of credit and a $205 million revolving credit facility. The bank letters of credit are joint and several obligations of the Company and Toledo Edison and the revolving credit facility is an obligation of Centerior Energy that is jointly and severally guaranteed by the Company and Toledo Edison. (12) SHORT-TERM BORROWING ARRANGEMENTS Centerior Energy has a $205 million revolving credit facility through May 1996. Centerior Energy and the Service Company may borrow under the facility, with all borrowings jointly and severally guaranteed by the Company and Toledo Edison. Centerior Energy plans to transfer any of its borrowed funds to the Company and Toledo Edison. The facility agreement as amended provides the participating banks with a subordinate mortgage security interest on the properties of the Company and Toledo Edison. The banks' fee is 0.625% per annum payable quarterly in addition to interest on any borrowings. There were no borrowings under the facility at December 31, 1994. The facility agreement contains covenants relating to capitalization and fixed charge coverage ratios for the Company, Toledo Edison and Centerior Energy. Short-term borrowing capacity authorized by the PUCO annually is $300 million for the Company. The Company and Toledo Edison are authorized by the PUCO to borrow from each other on a short-term basis. At December 31, 1994, the Company had total short-term borrowings of $58 million from its affiliates with a weighted average interest rate of 6.14%. (13) FINANCIAL INSTRUMENTS Except for the Nuclear Plant Decommissioning Trusts at December 31 1994, as discussed below, the estimated fair values at December 31, 1994 and 1993 of financial instruments that do not approximate their carrying amounts in the Balance Sheet are as follows:
December 31, ---------------------------------- 1994 1993 ---------------- ---------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ------ -------- ------ (millions of dollars) Assets: Nuclear Plant Decommissioning Trusts $ 44 $ 44 $ 30 $ 32 Capitalization and Liabilities: Preferred Stock, with Mandatory Redemption Provisions (including current portion) 282 245 314 307 Long-Term Debt (including current portion) 2,795 2,503 2,841 2,946
The Nuclear Plant Decommissioning Trusts at December 31, 1994 included $25 million of federal governmental securities and $17 million of municipal securities. The securities had the following maturities: $11 million due within one year; $8 million due in one to five years; $10 million due in six to 10 years; and $13 million due after 10 years. The fair value of these trusts is estimated based on the quoted market prices for the investment securities. As a result of adopting the new accounting standard for certain investments in debt and equity securities, SFAS 115, in 1994, the carrying amount of these trusts is equal to the fair value. The fair value of the Company's preferred stock, with mandatory redemption provisions, and long-term debt is estimated based on the quoted market prices for the respective or similar issues or on the basis of the discounted value of future cash flows. The discounted value used current dividend or interest rates (or other appropriate rates) for similar issues and loans with the same remaining maturities. The estimated fair values of all other financial instruments approximate their carrying amounts in the Balance Sheet at December 31, 1994 and 1993 because of their short-term nature. (14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the unaudited quarterly results of operations for the two years ended December 31, 1994.
Quarters Ended ---------------------------------------- March 31, June 30, Sept. 30, Dec. 31, --------- -------- --------- -------- (millions of dollars) 1994 Operating Revenues $ 408 $415 $ 474 $ 401 Operating Income 86 91 132 88 Net Income 33 38 79 35 Earnings Available for Common Stock 21 27 68 24 1993 Operating Revenues $ 421 $417 $ 507 $ 406 Operating Income (Loss) 82 85 89 (32) Net Income (Loss) 33 30 39 (689) Earnings (Loss) Available for Common Stock 23 19 27 (701)
F-21 57 Earnings for the quarter ended September 30, 1993 were decreased by $46 million as a result of the recording of $71 million of VTP pension-related benefits. Earnings for the quarter ended December 31, 1993 were decreased as a result of year-end adjustments for the $351 million write-off of Perry Unit 2 (see Note 4(b)), the $636 million write-off of the phase-in deferrals (see Note 7) and $38 million of other charges. These adjustments decreased quarterly earnings by $716 million. (15) PENDING MERGER OF TOLEDO EDISON INTO THE COMPANY In March 1994, Centerior Energy announced a plan to merge Toledo Edison into the Company. Since the Company and Toledo Edison affiliated in 1986, efforts have been made to consolidate operations and administration as much as possible to achieve maximum cost savings. Various aspects of the merger are subject to the approval of the FERC and other regulatory authorities. The PUCO and the Pennsylvania Public Utility Commission have approved the merger. In addition, the merger must be approved by share owners of Toledo Edison's preferred stock. Share owners of the Company's preferred stock must approve the authorization of additional shares of preferred stock. When the merger becomes effective, share owners of Toledo Edison's preferred stock will exchange their shares for preferred stock shares of the Company having substantially the same terms. Debt holders of the merging companies will become debt holders of the Company. The merging companies plan to seek preferred stock share owner approval in mid-1995. The merger is expected to be effective in 1995. For the merging companies, the combined pro forma operating revenues were $2.422 billion, $2.475 billion and $2.439 billion and the combined pro forma net income (loss) was $268 million, $(876) million and $276 million for the years 1994, 1993 and 1992, respectively. The pro forma data is based on accounting for the merger on a method similar to a pooling of interests. The pro forma data is not necessarily indicative of the results of operations which would have been reported had the merger been in effect during those years or which may be reported in the future. The pro forma data should be read in conjunction with the audited financial statements of both the Company and Toledo Edison. Report of Independent Public Accountants To the Share Owners and Board of Directors of The Cleveland Electric Illuminating Company: We have audited the accompanying consolidated balance sheet and consolidated statement of preferred stock of The Cleveland Electric Illuminating Company (a wholly owned subsidiary of Centerior Energy Corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Cleveland Electric Illuminating Company and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed further in Note 9, a change was made in the method of accounting for postretirement benefits other than pensions in 1993. Arthur Andersen LLP Cleveland, Ohio February 17, 1995 F-22 58 Financial and Statistical Review OPERATING REVENUES (millions of dollars)
Total Total Total Steam Operating Year Residential Commercial Industrial Other Retail Wholesale Electric Heating Revenues - ------------------------------------------------------------------------------------------------------------------------------------ 1994 $ 531 541 508 98 1 678 20 1 698 -- $ 1 698 1993 539 536 510 98 1 683 68 1 751 -- 1 751 1992 517 531 530 101 1 679 64 1 743 -- 1 743 1991 547 540 547 117 1 751 75 1 826 -- 1 826 1990 495 494 544 123 1 656 35 1 691 -- 1 691 1984 376 339 441 44 1 200 6 1 206 15 1 221 - ------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES (millions of dollars)
Other Generation Deferred Fuel & Operation Facilities Depreciation Taxes, Operating Federal Total Purchased & Rental & Other Than Expenses, Income Operating Year Power Maintenance Expense, Net Amortization FIT Net Taxes Expenses - ------------------------------------------------------------------------------------------------------------------------------------ 1994 $ 391 394 56 195 218 (34) 82 $ 1 302 1993 423 598(a) 56 182 221 27(b) 22 1 529 1992 434 410 55 179 226 (35) 89 1 358 1991 455 414 56 171(c) 216 (7) 106 1 411 1990 412 460 54 170 197 (24) 75 1 344 1984 319 281 -- 95 132 -- 131 958 - ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) (millions of dollars)
Federal Income Other Deferred Income (Loss) Income & Carrying Taxes-- Before Operating AFUDC-- Deductions, Charges, Credit Interest Year Income Equity Net Net (Expense) Charges - ---------------------------------------------------------------------------------------------- 1994 $ 396 4 6 25 (4) $ 427 1993 222 4 (356)(d) (487)(b) 270 (347) 1992 385 1 8 59 (5) 448 1991 415 8 6 88 (24) 493 1990 347 5 1 162 (20) 495 1984 263 130 3 -- 35 431 - ----------------------------------------------------------------------------------------------
INCOME (LOSS) (millions of dollars)
Preferred Earnings & (Loss) Net Preference Available for Debt AFUDC-- Income Stock Common Year Interest Debt (Loss) Dividends Stock - -------------------------------------------------------------------------------- 1994 $247 (5) 185 45 $ 140 1993 244 (4) (587) 45 (632) 1992 243 -- 205 41 164 1991 251 (4) 246 36 210 1990 255 (3) 243 37 206 1984 181 (41) 291 43 248 - -------------------------------------------------------------------------------- (a) Includes early retirement program expenses and other charges of $165 million in 1993. (b) Includes write-off of phase-in deferrals of $636 million in 1993, consisting of $117 million of deferred operating expenses and $519 million of deferred carrying charges. (c) In 1991, a change in accounting for nuclear plant depreciation was adopted, changing from the units-of-production method to the straight-line method at a 2.5% rate.
F-23 59 The Cleveland Electric Illuminating Company and Subsidiaries
ELECTRIC SALES (millions of KWH) ELECTRIC CUSTOMERS (year end) Industrial Year Residential Commercial Industrial Wholesale Other Total Residential Commercial & Other Total - ------------------------------------------------------------------------------ ---------------------------------------------- 1994 4 924 5 770 7 970 1 073 575 20 312 668 346 71 609 7 401 747 35 1993 4 934 5 634 7 911 2 290 532 21 301 669 118 70 442 8 149 747 70 1992 4 725 5 467 7 988 1 989 533 20 702 669 800 70 943 8 375 749 11 1991 4 940 5 493 8 017 2 442 565 21 457 667 495 70 405 8 398 746 29 1990 4 716 5 234 8 551 1 607 463 20 571 665 000 68 700 8 351 742 05 1984 4 446 4 396 7 997 142 431 17 412 644 904 61 934 7 930 714 76 - --------------------------------------------------------------------------------------------------------------------------------- RESIDENTIAL USAGE Average Average Average Price Revenue KWH Per Per Per Year Customer KWH Customer - ------------------------------------------- 1994 7 370 10.79(c) $795.11 1993 7 373 10.93 805.68 1992 7 071 10.94 773.77 1991 7 170 11.08 797.25 1990 6 867 10.53 723.15 1984 6 646 8.48 563.60 - -------------------------------------------
LOAD (MW & %) ENERGY (millions of KWH) FUEL Net Company Generated Efficiency- Seasonal Peak Capacity Load ------------------------------ Purchased Fuel Cost BTU Per Year Capability Load Margin Factor Fossil Nuclear Total Power Total Per KWH KWH - -------------------------------------------------- ------------------------------------------------------- ------------------ < 1994 4 497 3 740 16.8% 62.4% 12 986 6 405 19 391 2 022 21 413 1.35(c) 10 538 1993 4 497 3 862 14.1 59.9 15 557 5 644 21 201 1 454 22 655 1.37 10 339 1992 4 701 3 605 23.3 63.0 12 715 7 521 20 236 1 649 21 885 1.47 10 456 1991 4 701 3 886 17.3 61.8 13 193 7 451 20 644 2 144 22 788 1.49 10 503 1990 4 686 3 778 19.4 63.3 15 579 5 262 20 841 964 21 805 1.52 10 417 1984 3 696 3 371 8.8 64.5 14 749 2 212 16 961 1 770 18 731 1.70 10 416 - -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT (millions of dollars) Construction Utility Work In Total Plant Accumulated Progress Nuclear Property, Utility In Depreciation & Net & Perry Fuel and Plant and Plant Total Year Service Amortization Plant Unit 2 Other Equipment Additions Assets - ----------------------------------------------------------------------------------------------- --------- ------- 1994 $6 871 2 014 4 857 99 195 $ 5 151 $ 156 $7 151 1993 6 734 1 889 4 845 141 243 5 229 175 7 159 1992 6 602 1 728 4 874 501 261 5 636 156 8 123 1991 6 196 1 565 4 631 545 305 5 481 150 7 942 1990 6 032 1 398 4 634 572 344 5 550 165 7 821 1984 2 909 799 2 110 2 114 289(e) 4 513 582 5 120 - ------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION (millions of dollars & %) Preferred & Preference Preferred Stock, with Stock, without Mandatory Mandatory Common Stock Redemption Redemption Year Equity Provisions Provisions Long-Term Debt Total - ------------------------------------------------------------------------------------------------------- 1994 $1 058 26% 246 6% 241 6% 2 543 62% $4 088 1993 1 040 24 285 7 241 5 2 793 64 4 359 1992 1 865 39 314 6 144 3 2 515 52 4 838 1991 1 898 38 268 5 217 4 2 683 53 5 066 1990 1 884 38 171 3 217 4 2 632 55 4 904 1984 1 593 41 293 7 144 4 1 884 48 3 914 - ------------------------------------------------------------------------------------------------------- (d) Includes write-off of Perry Unit 2 of $351 million in 1993. (e) Restated for effects of capitalization of nuclear fuel lease and financing arrangements pursuant to Statement of Financial Accounting Standards 71.
F-24 60 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION *Printing............................................................ $ 20,000.00 *Rating Agencies' Fees............................................... 127,500.00 *Accountants' Fee.................................................... 15,000.00 *Registrar's and Trustee's Fees...................................... 7,000.00 Securities and Exchange Commission Registration Fee................. 103,449.00 NASD Filing Fee..................................................... 30,500.00 *Title Search........................................................ 5,000.00 *Blue Sky Fees and Expenses.......................................... 6,000.00 *Miscellaneous....................................................... 2,551.00 ----------- TOTAL...................................................... $317,000.00 *Estimated
16 EXHIBITS See Exhibit Index and exhibit following. II-1 61 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT FILE NO. 33-58293 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF INDEPENDENCE, STATE OF OHIO, ON THE 9TH DAY OF MAY, 1995. THE CLEVELAND ELECTRIC ILLUMINATING COMPANY Registrant By JANIS T. PERCIO, Secretary PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT FILE NO. 33-58293 HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE ----------------------------------------------------------------- ----------------------- (i) Principal executive officer: *ROBERT J. FARLING Chairman of the Board and Chief Executive Officer (ii) Principal financial officer: *GARY R. LEIDICH Vice President & Chief Financial Officer
May 9, 1995 (iii) Principal accounting officer: *E. LYLE PEPIN Controller (iv) Directors: *ROBERT J. FARLING Director *MURRAY R. EDELMAN Director *FRED J. LANGE, JR. Director *By JANIS T. PERCIO Janis T. Percio, Attorney-in-fact
II-2 62 EXHIBIT INDEX Exhibits Filed Herewith The following exhibit is filed herewith and made a part hereof:
EXHIBIT NUMBER DESCRIPTION - -------------- -------------------------------------------- 1(a) Form of Underwriting Agreement.
II-3 EX-1.A 2 CLEVELAND ELECTRIC ILLUMINATING S-2/A EXHIBIT 1(A) 1 $300,000,000 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY FIRST MORTGAGE BONDS, ______% DUE 2005-B UNDERWRITING AGREEMENT May _, 1995 2 May _, 1995 Morgan Stanley & Co. Incorporated Lehman Brothers Inc. 1251 Avenue of the Americas New York, New York 10020 Dear Sirs: The Cleveland Electric Illuminating Company, an Ohio corporation (the "Company"), proposes to issue and sell to the several Underwriters named in Schedule I hereto (the "Underwriters") $300,000,000 principal amount of its First Mortgage Bonds, _______% Series due 2005-B (the "Securities") to be issued as a series of the Company's First Mortgage Bonds ("First Mortgage Bonds") under the Mortgage and Deed of Trust, dated July 1, 1940, from the Company to Guaranty Trust Company of New York, as trustee, under which The Chase Manhattan Bank (National Association) is successor trustee ("First Mortgage Trustee"), as supplemented and modified by sixty-eight supplemental indentures and as to be further supplemented by a Sixty-Ninth Supplemental Indenture to be dated as of May 1, 1995 and by a Seventieth Supplemental Indenture to be dated as of May 2, 1995 (the "Supplemental Indenture"; together called the "First Mortgage"). The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, including a prospectus, relating to the Securities. The registration statement, including any information deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A (if applicable) under the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter referred to as the Registration Statement; the prospectus in the form first used to confirm sales of Securities is hereinafter referred to as the Prospectus. I. The Company represents and warrants to and agrees with each of the Underwriters that: (a) The Registration Statement has become effective or will become effective not later than 10:00 a.m. on the day after the date hereof; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or, to the knowledge of the Company, threatened by the Commission. 3 (b)(i) Each document, if any, filed pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and incorporated by reference in the Prospectus complied when so filed in all material respects with the Exchange Act and the applicable rules and regulations of the Commission thereunder, (ii) each part of the Registration Statement, when such part became effective, did not contain, and each such part, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (iii) the Registration Statement and the Prospectus comply, and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iv) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph I(b) do not apply (A) to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein or (B) to that part of the Registration Statement that constitutes the Statement of Eligibility (Form T-1) under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), of the First Mortgage Trustee. (c) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (d) The Company has no subsidiaries. (e) This Underwriting Agreement has been duly authorized, executed and delivered by the Company. (f) The First Mortgage has been duly qualified under the Trust Indenture Act, the Supplemental Indenture has been duly authorized and, at the Closing Date (as hereinafter defined), the Supplemental Indenture will be duly executed and delivered by the Company and the First Mortgage will be a valid and binding agreement of the Company, enforceable in accordance with its terms except as (i) the enforceability thereof may be limited by -2- 4 bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. (g) The Securities have been duly authorized and, when executed and authenticated in accordance with the provisions of the First Mortgage and delivered to and paid for by the Underwriters in accordance with the terms of this Underwriting Agreement, will be entitled to the benefits of the First Mortgage and will be valid and binding obligations of the Company, enforceable in accordance with their terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. (h) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Underwriting Agreement, the Supplemental Indenture, the First Mortgage and the Securities will not contravene any provision of applicable law or the articles of incorporation or regulations of the Company or any agreement or other instrument binding upon the Company that is material to the Company, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Underwriting Agreement, the First Mortgage or the Securities, except such as have been obtained from The Public Utilities Commission of Ohio (the "PUCO") and under the Securities Act or as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities. (i) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company from that set forth in or contemplated by the Prospectus. (j) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened to which the Company is a party or to which any of the properties of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (k) The Company has good title to substantially all the properties referred to or described in the Prospectus and in -3- 5 the granting clauses of the First Mortgage, subject only to the conditions and exceptions set forth in the Prospectus, none of which conditions and exceptions materially impairs the use of the property affected thereby in the operation of the business of the Company. The First Mortgage constitutes a valid and perfected first lien on said property, subject to said conditions and exceptions. (l) The Company is a "subsidiary" of Centerior Energy Corporation, which is a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. Centerior Energy Corporation is exempt from regulation under such Act pursuant to Section 3(a)(1) thereof and the rules and regulations thereunder promulgated by the Commission and, therefore, the Company is also exempt from such regulation. (m) The Company possesses such certificates, authorities or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies, including, without limitation, the PUCO, as are necessary to conduct the business now operated by it. The Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the Company. (n) The Company is not an "investment company" or an entity controlled by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. (o) The Company does not do business with the government of Cuba or with any person or affiliate located in Cuba. II. The Company hereby agrees to sell to the several Underwriters, and the Underwriters, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agree, severally and not jointly, to purchase from the Company the respective principal amounts of Securities set forth in Schedule I hereto opposite their names at _____% of their principal amount -- the purchase price -- plus accrued interest, if any, from May _, 1995 to the date of delivery. III. The Company is advised by you that the Underwriters propose to make a public offering of their respective portions of the Securities an soon after the Registration Statement and this Underwriting Agreement have become effective as in your judgment is advisable. The Company is further advised by you that the -4- 6 Securities are to be offered to the public initially at _____% of their principal amount -- the public offering price -- plus accrued interest, if any, and to certain dealers selected by you at a price that represents a concession not in excess of ___% of their principal amount under the public offering price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of ___% of their principal amount, to any underwriter or to certain other dealers. IV. Payment for the Securities shall be made by wire transfer of same-day funds to the Company, and the closing of the transactions contemplated hereby shall occur at the office of Morgan Stanley & Co. Incorporated, 1251 Avenue of the Americas, New York, New York, at 10:00 A.M., local time, on May _, 1995, or at such other place or at such other time on the same or such other date, not later than _______, 1995, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the Closing Date. Payment for the securities shall be made against delivery to you for the respective accounts of the several Underwriters of the Securities registered in such names and in such denominations as you shall request in writing not less than two full business days prior to the date of delivery, with any transfer taxes payable in connection with the transfer of the Securities to the Underwriters duly paid. V. The obligations of the Company and the several obligations of the Underwriters hereunder are subject to the condition that the Registration Statement shall have become effective not later than 10:00 a.m. on the day after the date hereof, that the Company shall have received the approval by the PUCO of the issuance, sale and delivery of the Securities on terms consistent with those described in the Registration Statement, and that such approval shall not have been withdrawn. The several obligations of the Underwriters hereunder are subject to the following further conditions: (a) Subsequent to the execution and delivery of this Underwriting Agreement and prior to the Closing Date, (i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the Company's debt securities by any "nationally recognized statistical rating organization," as such -5- 7 term is defined for purposes of Rule 436(g)(2) under the Securities Act; (ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company from that set forth in or contemplated by the Prospectus, that, in your reasonable judgment, is material and adverse and that makes it, in your reasonable judgment, impracticable to market the Securities on the terms and in the manner contemplated in the Prospectus; and (iii) there shall not have occurred any (A) suspension or material limitation of trading generally on or by, as the case may be, the New York Stock Exchange, the American Stock Exchange or the National Association of Securities Dealers, Inc., (B) suspension of trading of any securities of the Company on any exchange or in any over-the-counter market (other than any such suspension with respect to any debt security of the Company resulting solely from the maturity or the redemption or the announcement of redemption of such debt security), (C) declaration of a general moratorium on commercial banking activities in New York by either Federal or New York State authorities or (D) any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your reasonable judgment, is material and adverse and, in the case of any of the events described in clauses (iii)(A) through (D), such event, singly or together with any other such event, makes it impracticable for you to market or hold the Securities on the terms and in the manner contemplated by the Prospectus. (b) You shall have received on the Closing Date a certificate, dated the Closing Date and signed by an officer of the Company, to the effect set forth in clause (a)(i) above and to the effect that the representations and warranties of the Company contained in this Underwriting Agreement are true and correct as of the Closing Date and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his knowledge as to proceedings threatened. (c) You shall have received on the Closing Date an opinion of Terrence G. Linnert, Mary E. O'Reilly or Kevin P. Murphy, counsel for the Company (or other such counsel reasonably satisfactory to you), dated the Closing Date, to the effect that (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as -6- 8 described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company; (ii) the Company has no subsidiaries; (iii) this Underwriting Agreement has been duly authorized, executed and delivered by the Company; (iv) the First Mortgage has been duly qualified under the Trust Indenture Act, the Supplemental Indenture has been duly authorized, executed and delivered by the Company and the First Mortgage is a valid and binding agreement of the Company, enforceable in accordance with its terms except as (A) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (B) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; (v) the Securities have been duly authorized and executed and, when authenticated in accordance with the provisions of the First Mortgage and delivered to and paid for by the Underwriters in accordance with the terms of this Underwriting Agreement, will be entitled to the benefits of the First Mortgage and will be valid and binding obligations of the Company, enforceable in accordance with their terms except as (A) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (B) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; (vi) the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Underwriting Agreement, the Supplemental Indenture, the Securities and the First Mortgage will not contravene any provision of applicable law or the articles of incorporation or regulations of the Company or, to the best of such counsel's knowledge, any agreement or other instrument binding upon the Company that is material to the Company, or, to the best of such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company, and no consent, approval, authorization or order of, or qualification with, any governmental order or agency is required for the performance by the Company of its obligations under this Underwriting Agreement, the Securities and the First Mortgage, except such as have been obtained from the PUCO and under the Securities Act or as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities; -7- 9 (vii) the statements (A) in the Prospectus under the caption "Description of New Bonds," (B) in the Registration Statement under Item 15 and (C) under the captions "General Regulation," "Environmental Regulation," "Electric Rates," "Title to Property," and "Legal Proceedings" of the Company's most recent annual report on Form 10-K incorporated by reference in the Prospectus, in each case insofar as such statements constitute summaries of the legal matters, documents and proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein; (viii) after due inquiry, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company is a party or to which any of the properties of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (ix) the Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended; (x) the Company has good title to substantially all the properties referred to or described in the Prospectus and in the granting clauses of the First Mortgage, subject only to the conditions and exceptions set forth in the Prospectus, none of which materially impairs the use of the property affected thereby in the operation of the business of the Company; (xi) the First Mortgage and all financing statements have been duly filed and recorded in all places where such filing or recording is necessary for the perfection or preservation of the lien of the First Mortgage, and the First Mortgage constitutes a valid and perfected first lien on all of the property referred to in subparagraph (x), subject only to the conditions and exceptions referred to therein, and, under current law, all property acquired by the Company hereafter, other than property excepted by the express terms of the First Mortgage from the lien of the First Mortgage, will become subject to the lien thereof upon acquisition; (xii) except as may be set forth in the Prospectus, the Company has statutory authority, franchises and consents free from burdensome restrictions and adequate for the conduct of the business in which it is engaged; (xiii) the Company is a "subsidiary" of Centerior Energy Corporation, which is a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as -8- 10 amended. Centerior Energy Corporation is exempt from regulation under such Act pursuant to Section 3(a)(1) thereof and the rules and regulations thereunder promulgated by the Commission and, therefore, the Company is also exempt from such regulation; (xiv) such counsel is of the opinion that each document, if any, filed pursuant to the Exchange Act and incorporated by reference in the Prospectus (except for financial statements and schedules included therein as to which such counsel need not express any opinion) complied when so filed in all material respects with the Exchange Act and the applicable rules and regulations of the Commission thereunder; and (xv) such counsel (A) is of the opinion that the Registration Statement and Prospectus (except for financial statements and schedules included therein as to which such counsel need not express any opinion) comply as to form in all material respects with the Securities Act and the rules and regulations of the Commission thereunder, (B) believes that (except for financial statements and schedules as to which such counsel need not express any belief and except for that part of the Registration Statement that constitutes the Form T-1 heretofore referred to) the Registration Statement and the Prospectus included therein at the time the Registration Statement became effective did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (C) believes that (except for financial statements and schedules as to which such counsel need not express any belief) the Prospectus as of the Closing Date does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) You shall have received on the Closing Date an opinion of Baker & Hostetler, counsel for the Underwriters, dated the Closing Date, covering the matters referred to in subparagraphs (iii), (iv), (v), (vii) (but only as to the statements in the Prospectus under "Description of New Bonds" and "Underwriters"), (ix) and (xv) of paragraph (c) above. With respect to subparagraph (xiv) of paragraph (c) above, Terrence G. Linnert, Mary E. O'Reilly or Kevin P. Murphy may state that his or her opinion and belief are based upon his or her participation in the preparation of these documents and review and discussion of the contents thereof. With respect to subparagraph (xv) of paragraph (c) above, Terrence G. Linnert, Mary E. O'Reilly or Kevin P. Murphy, and Baker & Hostetler, may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or -9- 11 supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. The opinion of Terrence G. Linnert, Mary E. O'Reilly or Kevin P. Murphy, described in paragraph (c) above, shall be rendered to you at the request of the Company and shall so state therein. (e) You shall have received, on the Closing Date, a letter dated the Closing Date, in form and substance satisfactory to you, from Arthur Andersen LLP, independent public accountants for the Company, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. VI. In further consideration of the agreements of the Underwriters herein contained, the Company covenants as follows: (a) To furnish to you, without charge, three signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and, during the period mentioned in paragraph (c) below, as many copies of the Prospectus, any documents incorporated by reference therein and any supplements and amendments thereto or to the Registration Statement as you may reasonably request. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object. (c) If, during such period after the first day of the public offering of the Securities as in the opinion of counsel for the Underwriters the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with the law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to -10- 12 the Company) to which Securities may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with the law. (d) To endeavor to qualify the Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request and to pay all expenses (including reasonable fees and disbursements of counsel) in connection with such qualification and in connection with (i) the determination of the eligibility of the Securities for investment under the laws of such jurisdictions as you may designate and (ii) any review of the offering of the Securities by the National Association of Securities Dealers, Inc. (e) To make generally available to the Company's security holders and to you as soon as practicable an earning statement covering the twelve-month period ending June 30, 1996 that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (f) During the period beginning on the date hereof and continuing to and including the Closing Date, not to offer, sell, contract to sell or otherwise dispose of any debt securities of the Company or warrants to purchase debt securities of the Company substantially similar to the Securities (other than (i) the Securities and (ii) commercial paper issued in the ordinary course of business), without your prior written consent. VII. The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls such Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred by any Underwriter or any such controlling person in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the -11- 13 statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Underwriter, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such person (the "Indemnified Party") shall promptly notify the person against whom such indemnity may be sought (the "Indemnifying Party") in writing and the Indemnifying Party, upon request of the Indemnified Party, shall retain counsel reasonably satisfactory to the Indemnified Party to represent the Indemnified Party and any others the Indemnifying Party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (a) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (b) the named parties to any such proceeding (including any impleaded parties) include both the Indemnifying Party and the Indemnified Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Indemnifying Party shall not, in respect of the legal expenses of any Indemnified Party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such Indemnified Parties and that all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by Morgan Stanley & Co. Incorporated, in the case of parties indemnified pursuant to the second preceding paragraph, and by the Company, in the case of parties indemnified pursuant to the first preceding paragraph. The Indemnifying Party shall not be liable for any settlement of any proceeding affected without its written consent, but if settled with such consent or if there be -12- 14 a final judgment for the plaintiff, the Indemnifying Party agrees to indemnify the Indemnified Party from and against any loss or liability by reason of such settlement of judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified Party shall have requested an Indemnifying Party to reimburse the Indemnified Party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the Indemnifying Party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (a) such settlement is entered into more than 30 days after receipt by such Indemnifying Party of the aforesaid request and (b) such Indemnifying Party shall not have reimbursed the Indemnified Party in accordance with such request prior to the date of such settlement. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such proceeding. To the extent the indemnification provided for in the first or second paragraph of this Article VII is unavailable to an Indemnified Party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Party under such paragraph, in lieu of indemnifying such Indemnified Party thereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (a) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Securities or (b) if the allocation provided by clause (a) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (a) above but also the relative fault of the Company on the one hand and of the Underwriters on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering of the Securities shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Securities (before deducting expenses) received by the Company and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate public offering price of the Securities. The relative fault of the Company on the one hand and of the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact -13- 15 relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Article VII are several in proportion to the respective principal amounts of Securities they have purchased hereunder, and not joint. The Company and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Article VII were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Article VII, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Article VII are not exclusive and shall not limit any rights or remedies which may otherwise be available to any Indemnified Party at law or in equity. The indemnity and contribution provisions contained in this Article VII and the representations and warranties of the Company contained in this Underwriting Agreement shall remain operative and in full force and effect regardless of (a) any termination of this Underwriting Agreement, (b) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of the Company, its officers or directors or any person controlling the Company and (c) acceptance of and payment for any of the Securities. VIII. This Underwriting Agreement shall be subject to termination by notice given by you to the Company, if (a) after the execution and delivery of this Underwriting Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange or -14- 16 the National Association of Securities Dealers, Inc., (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market (other than any such suspension with respect to any debt security of the Company resulting solely from the maturity or the redemption or the announcement of redemption of such debt security), (iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your reasonable judgment, is material and adverse and (b) in the case of any of the events specified in clauses (a)(i) through (iv), such event singly or together with any other such event makes it, in your reasonable judgment, impracticable to market the Securities on the terms and in the manner contemplated in the Prospectus. IX. This Underwriting Agreement shall become effective upon the latter of (x) execution and delivery hereof by the parties hereto and (y) notification of the effectiveness of the Registration Statement by the Commission. If, on the Closing Date, any one or more of the Underwriters shall fail or refuse to purchase Securities that it or they have agreed to purchase hereunder on such date, and the aggregate principal amount of Securities which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate principal amount of the Securities to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the principal amount of Securities set forth opposite their respective names in Schedule I bears to the principal amount of Securities set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Securities which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the principal amount of Securities that any Underwriter has agreed to purchase pursuant to Article II be increased pursuant to this Article IX by an amount in excess of one-ninth of such principal amount of Securities without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Securities and the aggregate principal amount of Securities with respect to which such default occurs is more than one-tenth of the aggregate principal amount of Securities to be purchased on such date, and arrangements satisfactory to you and the Company for the purchase of such Securities are not made within 36 hours after such default, this Underwriting Agreement shall terminate without -15- 17 liability on the part of any non-defaulting Underwriter or the Company. In any such case either you or the Company shall have the right to postpone the Closing Date but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Underwriting Agreement. If this Underwriting Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Underwriting Agreement, or if for any reason the Company shall be unable to perform its obligations under this Underwriting Agreement, the Company will reimburse the Underwriters or such Underwriters as have so terminated this Underwriting Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the reasonable fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Underwriting Agreement or the offering contemplated hereunder. This Underwriting Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Underwriting Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. Very truly yours, THE CLEVELAND ELECTRIC ILLUMINATING COMPANY By: ______________________________ Title Accepted May _, 1995 MORGAN STANLEY & CO. INCORPORATED LEHMAN BROTHERS INC. Acting severally By: MORGAN STANLEY & CO. INCORPORATED By: ___________________________ -16- 18 SCHEDULE I Principal Amount of Securities Underwriters: To Be Purchased - ------------ ---------------- Morgan Stanley & Co. Incorporated $ Lehman Brothers Inc. ------------ Total............. $300,000,000
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